Certain funds and cash confirmation
The regulatory framework for P2P transactions in the UK means that an offer will have to be accompanied by a cash confirmation by the bidder’s financial adviser that sufficient resources are available to the bidder to satisfy the consideration for the offer in full. This will involve the financial adviser ensuring that any debt financing for the offer is made available on a “certain funds” basis. In other words, all conditions precedent which are not in the borrower’s control must be satisfied before announcement of the offer; the conditionality of the funding will be more limited than might be the case for a private company acquisition; and the financial adviser will need to carry out appropriate due diligence on the ability of the relevant lenders to meet in full their commitments to fund.
Where the lenders are private credit funds rather than banks, the financial adviser which is to give the cash confirmation statement is likely to need to undertake due diligence on each lender’s structure and sources of funding. This will be similar to the diligence conducted on any PE fund providing equity finance for the transaction.
Given the bespoke fund structures of many private credit funds, the due diligence needed to back the cash confirmation process can be complex. It will commonly involve legal opinions on the formation of the fund structure (often from lawyers in offshore jurisdictions) and confirmation of the availability of capital from fund investors. It is, therefore, important that the due diligence requirements of the financial adviser are explored early in the process to avoid any delays to the announcement of the offer.
This process can be particularly time-consuming if there are a significant number of lending entities/funds to cash confirm, so one solution may be to limit the number of entities taking on the certain funds commitment and, if required, to include a mechanic through which additional entities which are not subject to the cash confirmation can be brought in as lenders at closing (but without detracting from the legal commitment of the cash-confirmed entities to lend).
Transfers prior to closing
When funding private acquisitions it is common for private credit funds to have the ability to transfer their commitments to affiliates or to related funds prior to closing, even where “certain funds” provisions apply to the transaction. Given the UK’s cash confirmation requirements for P2Ps under The City Code on Takeovers and Mergers (the “Code”), this flexibility isn’t generally available on the financing of public bids (at least without prior consent from the financial adviser).
This can present challenges for those credit funds who undertake regular internal reallocations, particularly given the generally longer timetable between signing and closing which tends to arise on P2Ps as compared to private acquisitions.
The additional lender mechanic mentioned above can also provide some assistance with this because, as only a limited number of the funds are cash-confirmed, the financial adviser providing the cash confirmation should not be concerned about amendments to the funds which are not subject to the cash confirmation. So, provided there are no changes to those funds which have been cash-confirmed, those reallocations should not present a significant issue.
Timetable for funding
As private credit funds will need to call capital from investors in order to fund, this means that they are likely to need more time between the bidder’s service of a utilisation request and the funding date than a bank would need.
On a P2P transaction, the timetables for funding are prescribed by the code (which requires that the consideration must be sent to accepting shareholders within 14 days of the offer going unconditional), so there may be a conflict between the drawdown periods needed by the lenders and the timeframe prescribed by the Code for the payment of the consideration to shareholders.
It is worth considering this early in the transaction and discussing what is required and what is feasible for lenders and borrowers alike so that a solution can be reached which works for all parties.
A growing opportunity for private credit
Private credit is expanding its reach across all areas of the leveraged loans market and the financing of P2Ps is no exception. The resilience of private credit in the face of current market uncertainty may mean that credit funds will increasingly be presented with opportunities to finance P2Ps.
Whilst the source of the debt finance doesn’t necessarily affect the commercial terms of the P2P financing, it is important for lenders and borrowers alike to be guided through the specific considerations relevant to the deployment of private credit on these deals.
The Hogan Lovells team have acted on a number of recent private credit backed P2P financings. Please contact us if you have any queries.
Authored by Scott Gibson.