An equity-investor loan is intra-group funding provided by the equity sponsor/investors to the parent company of the acquiring company evidenced by loan notes and downstreamed to the acquiring company (“Company”).  It is used at completion for payment of the target purchase price and for refinancing any debt to be made at that time and other permanent intra-group funding arrangements.  This intra-group loan is structurally subordinated to the senior, mezzanine debt and any second-lien debt.  It is contractually subordinated pursuant to the intercreditor agreement or otherwise on terms approved by the majority lenders.  It has a bullet repayment and no margin ratchet.

A structural intra-group loan is a subordinated loan made by the parent (acquirer) to the company (acquire) or by any other member of the group – parent-to-sub, sub-to-parent or sub-to-sub loans – as part of the distribution of the proceeds at deal completion.  It is used to pay the purchase price for the acquisition and for the refinancing of any debt to be made at acquisition and other permanent intra-group funding arrangements.  They are generally payable on a pay-if-you-can basis and subordinated under the intercreditor agreement.

“The impact of structural subordination is weakened if, for example, the parent company higher in the structure on-loans the proceeds of the structurally subordinated debt to the subsidiary which issues the senior debt.

A vendor note is issued by the parent to the seller of the target (vendor) equaling the portion of the purchase price that is owed to the vendor and deferred to be paid out at a later date.  Granting a vendor note is frequently a prerequisite for the completion of acquisition transactions.  Vendor loans have similar terms to equity investor loans and are generally the most deeply subordinated debt in the acquisition financing structure, often paid on an earn-out basis.

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