What is a best-efforts arrangement?

In a best-efforts deal, the arranging bank agrees to use its “best efforts” or “commercially reasonable efforts” to market and place financing with lenders and other investors.  Generally, the arranger has no obligation to provide any of the financing itself unless and until the facility is successfully syndicated.

Lenders will consider provisions in the acquisition agreement regarding the buyer’s obligations to obtain financing.  Typically, buyers agree to use “reasonable best efforts” or “commercially reasonable efforts” to obtain the financing in the commitment letter.

– Mellor, 2019

Best-effort arrangements are traditionally used for risky borrowers, complex transactions and syndications in bad markets.  With the arranger providing no guarantee for the full amount of required financing, the borrower assumes the risk that it will not be raised.

The arranger commits to underwrite significantly less than the full amount of the required financing, but only if the rest can be placed with participant lenders.  Best-effort syndication closing generally coincides with the signing of the facility agreement.

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A best-efforts arrangement is multilateral financing that is arranged and distributed to more than one lender without underwriting.  Like firm-commitment underwriting, it also requires the involvement of participant lenders.

Best-efforts arrangements involve only retail syndication, no wholesale sub-underwriting phase.  They are marketed to and distributed by lead arrangers to participant lenders in general syndication without underwriters or underwriting.

No loan transfer to lenders is final until the syndication of the required financing amount is successful.  If not fully syndicated, either the terms of the financing will be renegotiated or the syndication does not close.  Higher fees or a larger margin may have to be paid to encourage sufficient lender participation in the transaction.

The borrower pays an arrangement fee to the lead arranger for its services and a closing fee to the participant lenders for their commitments.  The arrangement fee in a best-efforts deal is considerably lower than in firm-commitment underwriting because the arranger bears no syndication risk.