20.5 Debt 565These new debt investors are looking for a higher margin for a longer term than
that sought by traditional bank debt providers in the market.^60
Fourth, the availability of more debt and the chances of acquirers to separate
control and risk have driven prices higher. (During the financial crisis which be-
gan in 2007, access to debt was reduced. This reduced the leverage of LBOs.)
Fifth, the emergence of private equity funds has had a similar effect for vari-
ous reasons. Private equity funds have increased demand for companies. The
structure of private equity funds (section 5.6.4) and the fee structure of fund
managers (see also Volume II) have given fund managers an incentive to pay
higher prices for companies. Furthermore, private equity funds will exit the tar-
get company after a few years. This has made it easier for them to load the tar-
get company with debt.
Sources of debt. While small acquisitions tend to be financed locally, large lev-
eraged buy-outs are financed from international capital markets.^61 In a large acqui-
sition, the debt package typically consists of different types of loan facilities. (a)
Traditional banks provide senior debt. In larger acquisitions, it is not uncommon
for the debt finance to be by way of syndicated loan.^62 (b) New types of investors
typically provide bullet facilities with longer maturities for higher margins. The
debt holder has typically an option to reject early prepayment if the senior loan fa-
cility remains outstanding. (c) The margins are expected to be higher in mezzanine
loan facilities and high-yield (junk) bond issues. As a result, there is demand for
such instruments from various kinds of funds provided that the instruments are
sufficiently liquid. Mezzanine loan instruments are always subordinated pursuant
to the intercreditor agreement and in many cases even structurally subordinated.
As some of the investment parameters of some funds require them to invest only
in senior debt, the subordination of collateral and second lien instruments are
sometimes used instead of the subordination of debt (sections 6.3.5 and 6.3.6). (d)
Less frequently, payment-in-kind (PIK) notes may be issued (see below and Vol-
ume II).^63
Structure of an LBO. This can lead to a complicated LBO structure in a share
deal.
(^60) Sharples R, United Kingdom: How Europe is stretching debt packages, The IFLR guide
to Mergers and Acquisitions 2005.
(^61) See Diem A, op cit, § 6 numbers 1–6.
(^62) See Gayle C, Acquisition Finance – Syndication Best Practice, Int Comp Comm L R
13(8) (2002) p 300.
(^63) See, for example, Sharples R, op cit.