The second version of Clause 30.1 (Permitted Debt Purchase Transactions) permits Debt
Purchase Transactions to a limited extent. It envisages that Borrowers will be permitted to purchase participations in fully drawn Term Facilities by way of assignment on the specified terms. The terms include that the price is at a discount to par, that no Default is continuing and that the purchase is financed out of Excess Cashflow which is not required for prepayment or out of New Shareholder Injections (i.e. additional equity contributions).
The purchase can be effected by two methods. The first, the “Solicitation Process” entitles the
Lenders, if requested, to make offers to the Borrower as to the price and the proportion of their participation that they are willing to assign. The Parent can choose the amounts and offers it accepts, but must accept the lowest offers in relation to a particular Term Facility first, and accept offers pro rata in the event of two identical offers. The second method, the “Open Order Process” involves the Borrower communicating to the Lenders that it wishes to purchase
participations in the Term Facilities of a set aggregate amount at a set price. The offers of Lenders willing to accept the offer (if more than one accepts) will be accepted pro rata.
The provision then seeks to disapply the other provisions of the Agreement that might operate to prevent a permitted Debt Purchase Transaction by a Borrower. The Clause states that the Debt Purchase Transaction will extinguish the purchased debt, and that it shall not constitute prepayment nor a breach of relevant undertakings (which will need to be inserted as applicable). Additionally, Clause 34 (Sharing Amongst Lenders) shall not apply.
Borrower Notes
This provision is very likely to be the subject of detailed review by Borrowers and their advisers as the market gets to grips with the concept of Debt Purchase Transactions being expressly permitted in facility documentation. Some preliminary examples that occur to us, of some of the issues Borrowers might wish to think about, include the following:
• This provision is limited to Debt Purchase Transactions by Borrowers. It does not permit any member of the Group which is not a Borrower to enter into Debt Purchase Transactions. Additionally, the Debt Purchase Transaction can only be effected out of Excess Cashflow or New Shareholder Injections.
• If the Debt Purchase Transaction is to be effected out of Excess Cashflow, those members of the Group who have Excess Cashflow must be permitted to lend or otherwise make that Excess Cashflow available to a Borrower. Borrowers may need to ensure that this is permitted pursuant to the terms of the undertakings in the Facilities Agreement and the terms of the Intercreditor Agreement.
• Sub-paragraph (b)(iv) contains optional wording restricting Excess Cashflow available for this purpose to Excess Cashflow arising in the previous financial year of the Parent. This (as is noted in a footnote) effectively prevents purchases taking place during the period from the end of one financial year until the annual accounts for that financial year are delivered. Borrowers may wish to resist this wording and/or amend it so as to permit purchases during such period subject (perhaps) to an undertaking to procure New Shareholder Injections in the event that insufficient Excess Cashflow is available according to the annual accounts when delivered.
• As the debt purchase mechanism in this provision only contemplates repurchase by the Borrower and the debt thereby being extinguished, the provision effectively prevents Borrowers from investing in their own debt and holding it with the intention of realising further value (e.g. as a result of the secondary market value of the debt becoming further discounted). In circumstances where discounting is the result of liquidity rather than credit concerns, some Borrowers may seek more flexibility, perhaps on the basis that they are treated as Sponsor Affiliates for voting purposes (see Clause 30.2 below).
• Debt Purchase Transactions are only permitted at a discount to the par value of the debt. Many of the debt buyback transactions to date effected on the European market have arisen out of the relevant debt trading at a discount to par on the secondary market as a result of the liquidity squeeze rather than as a reflection of underlying credit concerns. If the practice becomes more developed, some Borrowers may not wish to restrict themselves to purchase at a discount, for example, purchasing debt carrying call protection or prepayment premia at par might equally present an opportunity for Borrowers to realise value and be of interest to Lenders seeking liquidity.
• The LMA does not envisage that Borrowers will be permitted to purchase participations in Revolving Facilities or term facilities which may be only partially drawn, for example, capital expenditure or acquisition facilities. There may be circumstances where Borrowers may wish to purchase such Facilities, e.g. if they are to be cancelled or are close to termination and no further drawings will be required. It is possible that some Borrowers may seek more
flexibility in the application of these provisions.
• Sub-paragraph (f)(i) provides that on completion of the assignment, the portions of the Term Loans to which it relates shall be extinguished. Borrowers may wish further to clarify that they will be under no obligation as Lender in relation to the Facilities upon completion of the assignment.
• This is most likely a drafting issue, but it is not entirely clear whether the LMA contemplates that the assignment procedure in Clause 29 is intended to apply to assignments to Borrowers. Sub-paragraph (f)(ii) provides that a Borrower which is an assignee shall be deemed to be an entity which fulfils the requirements of Clause 29.1 (Assignments and Transfers by the Lenders) to be a New Lender. Borrowers may wish to amend this Clause
to clarify that the remainder of Clause 29 shall be deemed to have been complied with (or shall not apply).
Clause 30.2: Disenfranchisement on Debt Purchase Transactions entered into by