The Law of Corporate Finance: General Principles and EU Law: Volume III: Funding, Exit, Takeovers

566 20 Acquisition Finance

Table 20.5 LBO Structure (Deutsche Bundesbank 2007)^64

Acquisition

Funding (with an increasing seniority of

debt)

Financial investors:

capital investment in parent company.

Parent company:

passes on funds to sub-holding company.

← Target shareholders can grant a loan.

Sub-holding company:

passes on funds to acquisition vehicle.

← Target shareholders can grant payment

time.

← Mezzanine creditors can provide loans.

Acquisition vehicle:

acquires the target company.

← Second lien creditors can provide loans.

← Senior lenders can provide term loans.

Target company:

makes distributions to shareholders.

Senior loans are granted to the acquisition vehicle in order to reduce structural
subordination and to make it easier to gain access to the target’s cash flows and
collateral. Within the category of senior loans, the most senior tranche (say, A) is
usually repaid on a regular basis according to a repayment schedule. Other senior
tranches can be bullet loans repaid at maturity. Second lien loans entitle their
holders only to subordinated claims to collateral. Mezzanine loans provided to the
sub-holding company will be structurally subordinated. The following is an exam-
ple of how the debt mix of a major LBO might look.

Table 20.6 Debt Mix of an LBO (Deutsche Bundesbank 2007)^65

Tranche % Spread

(basis points)

Maturity

Term loan A

Term loan B

Term loan C

11

11

31

200

250

300

7 years, repayments

8 years, bullet

9 years, bullet

Senior debt

Second lien

73

11

(see above)

475

(see above)

9.5 years, bullet

Senior and second lien

Mezzanine

84

16

(see above)

9% cash/PIK

(see above)

10 years, bullet

Total debt 100 (see above) (see above)

Particular legal aspects. Typically, at least four things give rise to particular legal
concerns in addition to the general legal characteristics of acquisition finance and
debt finance (see above):

• Generally, the acquirer should ensure that the legal framework of the acquisi-
  tion and the legal framework of the loan facility are mutually coherent.

(^64) Compare Deutsche Bundesbank, Leveraged buyouts: the role of financial intermediaries
and aspects of financial stability. In: Monthly Report, April 2007 p 16.
(^65) Ibid, p 17.