Since the granting of upstream security can potentially raise the issues under the Ruritanian capital maintenance rule, several approaches can be taken to deal with this issue:
Debt push down and downstream guarantee
There are several arrangements to achieve this financing structure:
· Debt upstream
Following the acquisition is completed, IPCo will obtain a loan in similar amount to the acquisition debt from the same Lender. This loan proceeds are then up-streamed as an inter-company loan to BidCo for paying off the acquisition debt. In this instance, IPCo can provide security over its IP as collateral of its latter debenture.
· Post-acquisition merger
A post-acquisition merger entails merging Target Group with BidCo following the completion of the acquisition. This approach makes it possible to push down debt obligation to the lower level and to service it out of its cashflow.
· Refinance IPCo’s existing debt
If IPCo has existing indebtedness at the time of acquisition, the Lender can provide some portion of its term debt to IPCo for repaying the existing lender prior to the proposed acquisition. Under this circumstance, the upstream security/guarantee prohibition become irrelevant since IPCo has also become a primary debtor to the Lender.
In consequence of the above structures, the Lender would become a direct/primary creditor to IPCo and would have stronger claim. As a direct borrower to Lender, IPCo can provide security over its assets (including IP) and use its cash-flow as source of repayment for the debt. Coupled with that, to enhance Lender’s position, the Lender could also obtain guarantee from Target and BidCo (except in the case of merger) over IPCo’s debt.
BidCo’s share pledge over Target
Since the service of acquisition debt will depend on the strength of the Target Group’s projected future cash-flow, share pledge over BidCo’s shares in Target could be provided to the Lender as collateral to ensure it will get maximum flexibility over the business in terms of enforcement. In case of default, the Lender is entitled to sell BidCo’s shares in Target to other buyers without disturbing the Target Group’s business, thereby preserving the Target Group’s value as a going concern.
Target Group which is a cash-generative operating company may lend money up to BidCo as and when required to supply for BidCo’s debt service requirements to Lender. Please note, however, this arrangement may amount to financial assistance and it may be necessary to demonstrate real corporate benefit for the Target Group (which will not receive any repayment until after all institutional debt is repaid) as well as the Target Group need to accede to the inter-creditor agreement to subordinate its claim against BidCo to the claims of the Lender.