Cross-Border: They Do Deals Differently in Europe. . .
A Winston & Strawn memo reviews 9 ways in which European transactions differ from what buyers are accustomed to in U.S. deals. This excerpt addresses the European approach to funding arrangements:
Like in the U.S, the typical leveraged buyout will involve both acquisition funding and working capital financing. Term funding may be provided in the form of a bond or a loan. There are different regulatory and tax consequences depending on the jurisdiction of the borrower. So, the private equity sponsor should be careful to ensure that the proposed lender or arranger confirms that they can actually comply with the structuring requirements for the transaction before agreeing to terms.
Since there are more deal variables to be worked out on a typical European term loan and documentation is less standardised than U.S. documentation, term sheets for term debt in Europe are considerably more detailed than those in the U.S. U.S. sponsors should be wary of agreeing short form term sheets with U.S. lenders without obtaining advice, since this typically exposes them to worse terms than are generally obtained in the European market and the possibility that the lender has not worked out whether it can meet all of the relevant withholding tax and regulatory requirements.
Increasingly, the working capital financing is provided by a different funding source than the term debt. Non-bank lenders typically won’t be able to provide banks accounts, let alone the efficient overdrafts, cheque facilities, letters of credit or credit cards that a business needs. Also, the business may need intra-day payment lines, currency exchange facilities or interest or currency hedging. Typically, a local bank, perhaps one with a track record with the business, is needed to provide these services.
Other topics addressed in the memo include, among other things, transaction structuring, employee issues, the role and expectations of advisors, accounting principles, and currency issues.
-John Jenkins, DealLawyers.com November 8, 2019
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