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LEVERAGED FINANCE SPECIAL(2)

Michael Nicklin and Emma Malkin report on a painful novelty for lenders – the so-called ‘reverse staple’.

It has long been a fundamental of acquisition finance that a change of control constitutes an event of default which triggers repayment and therefore new financing must be arranged. No longer. A new strategy we are seeing is to amend the existing facilities to provide for them to continue even following a secondary sale. Retaining the existing commitments is a very attractive option because large debt packages are now both hard to obtain and difficult to syndicate. So arrangers are starting to think creatively to offer amended debt packages tied to an agreement to waive the change of control provision. The idea is similar to stapled finance for acquisition, hence the “reverse staple” label.

In a number of private equity transactions last year we saw arrangers aiming to achieve a waiver of the change of control provision to reduce pre-payment fees. Since the credit crunch, this tactic has been used to avoid the unpalatable option of going to the market for fresh facilities. In October, 3i financed its €370 million ($585 million) buyout of Global Garden Products by adopting the existing facilities arranged by ABN Amro. In another European deal late last year, RBS arranged a reverse staple for Candover's acquisition of ACG Holding from Apax, with the amendment conditioned on a fee for investors together with improvements to the terms of the €540 million facilities.

Likewise in the US, JPMorgan successfully achieved an amendment in connection with the sale of MARK IV from BC Partners to Sun Capital by offering different tailored options to investors, including a fee, a reduction in commitment and an increased margin.

In January, Credit Suisse arranged an aggressively structured reverse staple for Intelsat when the satellite operator was acquired by BC Partners and Silver Lake Partners. Under the “carrot and stick” offer, the first 50.1 percent to agree the amendment (the required majority) would get a 500bp fee, the remainder would get only 100bps. On the one hand the strategy worked, as agreement was achieved within hours; but, on the other hand, it came at the cost of damaged investor relationships. A number of lenders, particularly those responding too late to earn the higher fee, felt that they had been bullied into a quick agreement. To repair the relationships, Credit Suisse gave all the consenting lenders the higher fee and made other alterations to sweeten the deal: additional covenants were imposed, some margins were improved, the commitment on revolving facilities was reduced and call protection was added.

In March, Bank of America arranged a reverse staple in relation to the (as yet uncompleted) sale of Cumulus Media to the company's CEO and Merrill Lynch Global Private Equity Partners. Investors agreed the amendment (and an increase of $180 million in facilities) in return for a 200bp upfront fee and an increase in term loan margin from 175bp to 250bp.

In the latest reported reverse staple – that of UK debt collection business 1st Credit – Citigroup, as arranger for vendor Bridgepoint, has received agreement from Barclays and European American Bank to continue their two-year facility despite the planned change of control. The details of the fee and improved terms involved have not been revealed, but the reverse staple is expected to make 1st Credit more attractive to its suitors who can take on the business without the need to immediately refinance. The only potential risk is that buyers view the reverse stapled terms as restricting their options to arrange financing, but in the current market the benefit of guaranteed financing must outweigh that risk.

Despite the improved terms which accompany reverse staples, by and large investors are not impressed, and there are market rumours that lenders are beginning to organise co-ordinated resistance to anticipated reverse staple deals. Nonetheless, faced with the market's lack of appetite for mega-debt deals, arranging a waiver and bringing (or dragging) along existing investors must be an attractive option. It won't always be an easy sell for arrangers, but we are likely to see more reverse staples in the next few months.

Michael Nicklin is a partner and Emma Malkin a professional support lawyer at international law firm Weil Gotshal.