South Africa: Mandate Letters - Practical Application

Last Updated: 8 June 2008
Article by Marke Kyle and Nick Grootes

The European type mandate letters in leveraged acquisition finance transactions are becoming more common-place in the South African market. This is a positive development in our market. In a complicated or sizeable acquisition finance transaction there are many issues that may arise between the arrangers and underwriters of the debt on the one hand and the borrower on the other hand that should ideally be clarified prior to commencement of the drafting and negotiation of the formal legal agreements. Certain of the provisions of the mandate letter will also survive the execution of the formal legal agreements and will remain highly relevant especially where there is a syndication of the facilities. In this article we consider some of the important features of a typical mandate letter in the context of a leveraged acquisition finance transaction and some of the reasons why the mandate letter is an important document.

From an arranger or underwriter perspective, the primary role of a mandate letter is to give them the exclusive right to arrange and/or underwrite the facilities on the terms set out in the agreed form term sheet (which should be attached to or referred to in the mandate letter) subject to various conditions, including the execution of all legal documentation. Below is a brief summary of the most common clauses one can expect to find in a mandate letter where the lead arranger or underwriter is providing an underwriting commitment to the borrower:

  1. Introduction

    The introduction sets out the facilities and currencies in which they will be available, the purpose of the facilities with reference to the underlying transaction and the identity of the borrower and guarantors.

  2. Underwriting Conditions

    Underwriting conditions will vary from one transaction to another, but generally include:

    1. execution of facility agreements and other finance documents and satisfaction of all conditions precedent to funding set out in those documents;

    2. the transaction being recommended to the target's shareholders by the target's board;

    3. the finalisation of satisfactory due diligences of the target; and

    4. other conditions such as there being no material adverse effect (mae) continuing (the mae may relate to a variety of factors ranging from the financial condition of the borrower, the circumstances prevailing in debt and capital markets to general economic conditions), no legal proceedings and finalisation of the structure of the acquisition and capital and tax structure.

  3. Underwriting Amounts (if more than one underwriter)

    The underwriting amounts set out each underwriter's underwriting commitment on a per facility basis.

  4. Syndication

    Syndication sets out how the syndication process will be managed in a manner that allows underwriters to sell down their commitments to the desired levels within a reasonable period whilst also being sensitive to the specific needs of the borrower and drawing on the benefit of any existing lending relationships the borrower may have with other potential lenders. Often however the more detailed syndication strategy will only be detailed later in a separate syndication strategy paper.

  5. Information Memorandum

    The Information Memorandum relates to syndication and sets out the obligation of the borrower to compile an information memorandum with the assistance of the mandated lead arranger, containing relevant information about the borrower, the target group and the use of the facilities.

  6. Clear Market

    The borrower undertakes in the clear market clause that there will not be any other financing in the domestic or international bank or capital markets or the guarantee of any such financing by the borrower or any member of the target group, except with the prior consent of the mandated lead arranger, prior to completion of syndication.

  7. Market Flex

    The document sets out the circumstances in which a lender will be entitled to change the pricing or structure of the facilities (referred to as market flex) in order to enhance the prospects of a successful syndication. Successful syndication is generally defined as the reduction of each underwriter's participation in the facilities to its minimum hold position, generally being a certain percentage of one or more of the facilities.

  8. Indemnity

    An indemnity is provided by the borrower in favour of the arrangers against any liabilities incurred by the arrangers as a result of the use of the facilities, any underwriting document or syndication of the facilities in each case except to the extent arising primarily from gross negligence or wilful misconduct of the indemnified party.

  9. Fees

    Fees can either be set out in the mandate letter or a separate fee letter and generally include arrangement and agency fees in respect of the facilities and a security agency fee (or security administration fee if a security spv is used and an independent trust company is appointed to administer the spv).

  10. Expenses

    The borrower must agree to pay all costs and expenses, including legal fees and due diligence costs, reasonably incurred in connection with the preparation, review and negotiation of the underwriting documents and the finance documents, as well as the syndication process.

Further clauses may be added which deal with how payments arising from the mandate letter may be made between the parties, confidentiality, announcements regarding the underwriting documents or the identity of arrangers and underwriters, other roles that the arrangers or underwriters perform which may result in a conflicting interest with the borrower, a prohibition against front running by arrangers or underwriters (to ensure that no underwriter acts in a way to frustrate the primary syndication of the facilities), assignment, termination and survival.

The importance of a mandate letter should be self evident. We comment below on some of the reasons why arrangers and underwriters should insist on signing up to a mandate letter and agreed form term sheet with the borrower at the earliest possible stage of a proposed transaction and some of the pitfalls of failing to do so:

  • In a transaction where there are multiple underwriters and/or arrangers, issues can arise where different arrangers or underwriters may have an existing relationship with the borrower or where individual arrangers or underwriters may have agreed certain issues in side discussions with the borrower. This is often the case in larger transactions and while the existence of such relationships of itself is not a bad thing, and quite to the contrary may be beneficial, and while such discussions are not necessarily entered into with the intention of prejudicing the other parties to the transaction, or the transaction itself, these existing relationships and side discussions may, in the absence of a mandate letter, often lead to confusion about what has actually been agreed. Such discussions may even result in disputes on fundamental issues such as who has been appointed to perform what roles in the transaction, whether or not the arrangers and underwriters are entitled to a commitment fee or ticking fee and who is liable for certain fees, costs and expenses.

  • Recent experience has shown that arrangers and borrowers often intend entering into a mandate letter at the start of a transaction, but end up negotiating the mandate letter and term sheet concurrently with the legal documentation. This can be counter-productive and result in unnecessary costs being incurred given the purpose of the mandate letter and can leave an arranger or underwriter exposed to costs and liabilities in certain circumstances in the event the transaction collapses before the signature of legal documentation.

  • Arrangers and underwriters proceeding straight to legal documentation without a signed mandate letter do not have the security of tenure of appointment as arrangers and/or underwriters that they would if they had signed up to a mandate letter with the borrower. Without a signed mandate letter it is easier for a borrower to simply go with another bank should the negotiations not go according to its expectations.

  • The mandate letter contains several important provisions relating to syndication of the facilities. Without these provisions underwriters who are required by their investment committees to sell down their participation may not be in a position to do so without appropriate agreement on market flex provisions and the preparation of an information memorandum.

  • Arrangers or underwriters who have existing relationships with other corporates who are competitors of the relevant borrower may find themselves facing claims from the borrower regarding conflicts of interest unless this matter is appropriately regulated in the mandate letter.

  • If there are multiple arrangers and underwriters, the absence of appropriate front running language binding on them in a mandate letter may frustrate the process of primary syndication.

  • Prospective lenders who are active in European markets would expect to see a mandate letter.

  • Borrowers in leveraged acquisition finance transactions are often shelf companies with no assets other than the prospective assets to be acquired through the acquisition. In these circumstances the mandate letter can establish the relevant contractual nexus which may be required as between the arrangers and underwriters on the one hand and the sponsors and investors on the other hand to ensure that the arrangers and underwriters are not left with a claim against the proverbial "man of straw" and in certain cases may have recourse on a joint and several basis to investors and sponsors.

  • It has become more common-place to include deal protection mechanisms between an offeror and a target in public to private deals. One of these protection mechanisms is the payment of a break fee by the target should it wish to go with another offer. Similarly arrangers and underwriters may consider including this concept of a break fee should the financing not go ahead and their appointments terminated in certain circumstances. The mandate letter is an ideal place for this.

  • In the absence of appropriate indemnity language typically contained in a mandate letter, arrangers may be exposed to claims from potential syndicate participants where the information memorandum or parts of it are incorrect or materially misleading with no right of recourse against the borrower.

In conclusion the prevalence of mandate letters in the South African leveraged acquisition finance market is seen as a positive development which promotes certainty between arrangers, underwriters and borrowers and helps to develop good market practices during the earlier stages of deal negotiation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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