Who are the obligors in acquisition finance?

The syndication process is initiated by a sponsor.  The sponsor is the “Investors” that contribute “equity” in the form of equity capital (common or preferred) and/or shareholder loans to the “Parent”.  A sponsor is commonly a private equity fund that engages in leveraged acquisition on behalf of a group of investors and the ultimate owners of the company group.  They are usually not party to the finance documents, to avoid assuming any obligations under the finance documents.

For the purposes of intercreditor agreements, the “Investors” are the immediate providers of the loan note equity investment in the parent and holder of the loan notes.  Frequently they must be party to the intercreditor agreement in order to subordinate any shareholder debt or the proceeds of claims made by the investors, but not if they immediately provide the loan note equity investment in the parent and hold the loan notes.

In LMA-style acquisition finance documentation, the “Company” is the wholly owned subsidiary (SPV) of the parent company that is newly formed (“NewCo”) for the purpose of acquiring the target company and to which the senior loans are made available to acquire the shares in the target group.  The “Group” is the company group that encompasses the “Parent”, the Company, the “Target” and its respective subsidiaries (“Target Group”).  With the positioning of the Company as senior borrower within the Group, structural seniority for senior and mezzanine lenders against the subordinated classes of debt is preserved.

The Company will usually need to be an original borrower to fund the acquisition while all target group subsidiaries will usually need to accede as additional borrowers to refinance existing debt of the Group and to possibly fund the acquisition costs.  Because target group subsidiaries cannot accede to a facility agreement as borrower until transaction completion, they cannot be original borrowers.