20.5 Debt 575needs in mind when negotiationg the acquisition loan facility agreement, because
the normal terms of loan agreements typically restrict the raising of new debt and
unusual transactions without the consent of the lenders.^103
Debt can also be replaced with shareholders’ capital. In private equity, the pur-
pose of refinancing is, in contrast, to maximise the amount of distributable assets
and distribute them to the private equity fund as soon as possible. Typically, this
will be done by asset-stripping and by loading the target company with debt after
the merger (see below).
Case: Private Equity and Refinancing
In practice, the legal ways to provide financial assistance are key components of
the business model of private-equity firms. Their business model consists of a
highly leveraged buy-out (LBO) combined with refinancing and exit.^104
Refinancing. Perfected by private-equity firms, refinancing is increasingly be-
ing employed by non-financial firms in acquisitions. Refinancing serves two main
purposes. First, refinancing enables the acquirer to finance the takeover with the
assets of the target. Second, refinancing enables the acquirer to release capital af-
ter the takeover and distribute assets to investors.
In order to distribute assets to investors, the target company may incur more
debt.^105 Because of the originally high leverage of the LBO, investors can earn a
high return on the capital that they have invested – at least in the short term and
provided that everything goes according to plan (see section 2.5).
Steps of refinancing, legal aspects, distributions, financial assistance. The steps
of refinancing and its legal aspects have been discussed in the context of exit (sec-
tion 10.5). It is important to keep in mind that there are restrictions on distribu-
tions to shareholders. Some legal constraints are based on provisions of company
and insolvency law restricting payments by near-insolvent companies. On the
other hand, refinancing is a way to circumvent the prohibition of financial assis-
tance by the target company.^106
Liability of banks. Where refinancing involves the sale of a debt to other debt
investors, the arranging banks have disclosure duties (sections 4.5 and 4.7; for
syndicated loans, see also Volume II; for information analyst, see Volume I).
(^103) Ibid, § 3 number 21.
(^104) Locust versus locust, The Economist, May 2005: “In January, Blackstone listed a new
parent company, Celanese Corporation, on the New York Stock Exchange, floating
38%. The proceeds, plus dividends and one-off fees, have so far netted Blackstone and
its investors around €3.1 billion. Not bad for a capital investment last year of around
€650m.”
(^105) See Deutsche Bundesbank, Leveraged buyouts: the role of financial intermediaries and
aspects of financial stability. In: Monthly Report, April 2007 p 20.
(^106) Article 23(1) of Directive 77/91/EEC (Second Company Law Directive).