The Rise of Corporate Borrower Lead Transactions

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By Peter Kennedy, Partner and Nicholas Arndt, Lawyer

Prior to COVID, Australia enjoyed consecutive 27 years of economic growth, creating a climate which saw many organisations outgrow the SME sector.

However, not all of them chose continuity in their traditional banking relationships. Some high growth corporates, either because of organic growth or mergers, outgrew their banking relationships, giving rise to borrower lead debt funding transactions to fund those acquisitions or to pursue further growth.

Why did this occur? The principal drivers were often a realisation on the part of the customer that they had outgrown their bank’s appetite for the provision of further funding, or a sense that they were on ‘set and forget’ and were weighed down with out of market pricing and inflexible covenants.

So what does a borrower lead transaction look like?

It begins with a borrower prepared term sheet specifying the commercial terms and covenants the borrower wishes to mandate for the transaction. Many borrowers will seek the assistance of a debt arranger to prepare such a document.

A decision can then be made as to whether any existing bank relationship is to continue and whether that bank may be asked to lead a club or syndicate, or be refinanced out.

Engaging legal advisers at the term sheet stage is also wise as the lenders in any club or syndicate and their lawyers will seek to ensure that the term sheet is strictly adhered to when finance documents are being prepared. Accordingly, care should be taken at this early stage to ensure there is minimal ‘wriggle room’ in the terms summarised in the term sheet.

The arranger may then conduct a series of meetings or ‘beauty parades’ with the selected banks to test appetite and interest in participating.

Credit approval of the transaction on those terms can then be sought by the members of the club or syndicate approved by the borrower.

Typically a borrower lead transaction will be structured as a club deal (rather than as a syndicated loan) to ensure independence of pricing and fees.

Proceeding with a borrower approved term sheet has a number of potential advantages including the adoption of terms which are tailored to provide greater flexibility and attractiveness to the borrower and its group entities. For example, financial covenants and undertakings such as permitted acquisitions, disposals and incurring other financial indebtedness. Terms which may commonly be specified by lenders as pre-closing conditions (conditions precedent) may instead be drafted as conditions to be met after financial close (conditions subsequent) to facilitate a quick closing. This may be necessary for example where securities are required to be provided by offshore entities of the borrower group.

It may also be possible for the borrower’s lawyer to prepare the first cut of the finance documents, such as a common terms deed or syndicated facility agreement.

We act for various banks and non-bank lenders and we draw on this experience to assist corporate borrowers to arrange terms which provide them with the maximum protections and flexibility within the boundaries of market tolerances.

For further information, please do not hesitate to contact us.

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