December 21, 2023

Heightened Antitrust Scrutiny Impacting M&A Financing

We’ve written extensively about the FTC and DOJ’s aggressive approach to antitrust enforcement — from the cases pursued to the expanded premerger notification rules to the final Merger Guidelines announced just this week — and its potential impact on M&A activity. This recent Weil alert notes that these trends chill M&A activity in another way — by making it more difficult for buyers to obtain “underwritten debt commitments to support acquisitions” and increasing the costs to do so. Here’s an excerpt from the alert regarding ticking fee provisions:

Ticking fee provisions play the most obvious role in increasing costs for debt financings with lengthy commitment periods. A ticking fee at its core is a fee that kicks in after a certain period of time to compensate the syndicate lenders for holding unfunded exposure for longer than usual through closing.

The timeline for when financing sources will expect a ticking fee to commence is a negotiated point. Typically, there will be an initial holiday period during which no ticking fee is payable. In many deals, that holiday period averages around 4 months (120 days), but there are also deals on either side of the spectrum driven by market dynamics. There are certain deals where lenders have been willing to provide 6+-month debt commitments with no ticking fee payable at all and, on the extreme flip side, deals where lenders have required a ticking fee after as little as 35 days. The structure of ticking fees varies from deal to deal but often will include step-ups after delineated periods of time measured from either the signing date or allocation date (or the earlier of a fixed date after signing and the date of allocation) in a syndicated financing. […]

Another issue to consider is whether such ticking fees are payable if the borrower terminates the debt commitment letter. In the U.S. leveraged loan market, the ticking fee is commonly structured such that if the acquisition and related debt financing do not close, then no ticking fee is payable – no deal, no fee.

However, there are also deals where lenders have requested that the ticking fee be payable on the earlier of (y) termination of the commitment letter and (y) the closing date, such that the lenders are entitled to compensation for holding the commitment to purchase the loans even if the debt commitment letter is terminated.

The alert discusses other issues, including duration-based market flex provisions and alternate transaction fees. But it also describes a creative solution recently trending:

We have also seen a trend in transactions with long regulatory approval timelines to, in lieu of seeking new debt commitments, agree to amend the target’s existing debt to permit the change of control with the goal of then launching a best efforts refinancing after the transaction closes. This approach avoids having to pay a ticking fee on a long commitment and provides the company greater flexibility in deciding when to raise additional debt based on market conditions.

Programming Note: We will take a break from blogging here for the holidays and return in January. Happy New Year to all!

Meredith Ervine