Finland: American Lawyer Media: Focus Europe Nordic Report

Buyout Market In Finland

There has been a good deal of leverage buyouts (LBOs), i.e. acquisitions financed with heavy reliance on debt, in Finland during the past couple of years. The emphasis has been on acquisitions of mature companies with the ability to provide stable cash flows. Recently, acquisitions have been made, for example, within the chemicals and materials industry, the industrial products and services industry, as well as in medical-related industries.

Finnish buyout transactions have in many cases followed a fairly simple formula. An acquisition vehicle is set up. It then enters into the necessary financing agreements with external financiers, private equity investors and management, dealing either as individuals or through a management investor company.

Although there are no particular obstacles preventing the use of an acquisition vehicle based abroad, a number of factors have contributed to the appeal of establishing a Finnish limited company as an acquisition vehicle. Establishing a Finnish limited company is a fairly straightforward process, and the minimum share capital requirement of EUR 8,000 is unlikely to deter the parties involved. The fact that Finnish law does not contain any express thin capitalization rules makes a flexible structure and the use of debt financing possible.

Finnish tax rules have also been amended to favour the use of Finnish limited companies as acquisition vehicles. The capital gains that a company receives on selling shares accounted as fixed assets became exempt from income tax, provided that the shares have been owned for more than ten years and the ownership of the seller in the target company exceeds 10%. This exemption does not apply to partnerships or companies engaged in venture capital business. Despite these limitations, the new regulations may be useful in regard to target companies of venture capital funds. They may also open up new possibilities in tax planning, for example through spinning off certain parts of the business from target companies before the actual exit.

Furthermore, Finnish tax rules allow group contributions to be paid between Finnish group companies, under certain conditions. The Marks & Spencer case, once resolved, will affect the Finnish group contribution regime as it will also affect other similar regimes in Europe. At this point, no information has been disclosed as to what new rules may come to replace the current group contribution rules.

The Finnish government submitted its proposal for a new Companies Act on 2 September 2005 to the Parliament. The intention of the proposal is to introduce a clearer and more comprehensive Companies Act, replacing the current Act in its entirety.

In general, the reform aims to provide more flexibility and to reduce the amount of interpretation required to give effect to the applicable provisions. On the other hand, the new Act would put a lot more weight on general principles of corporate law, such as the equality of shareholders.

Among the proposed changes to the subject matter of the Act, there are some that may be of particular interest to venture capital investors. First of all, the new Act would completely abandon the concept of the nominal value of a share, allow conversion of shares to another class of shares in any ratio (not just 1:1) and allow shares to be issued without charge in certain circumstances.

These changes would facilitate the structuring of investor protection mechanisms such as anti-dilution clauses. The new Companies Act would also provide the means to create different kinds of securities more flexibly. The obligation of compulsory liquidation of companies would be removed.

After the enactment of the new Act, limited companies could issue shares and acquire their own shares in a more flexible manner. They could, inter alia, issue shares to the company itself, which could at a later date use such shares as consideration in corporate acquisitions. Furthermore, the new Act would take a clearer stand on financial assistance, making it less problematic to merge a new company with a target company after a buyout transaction.

Stiff Competition Among Lenders

Some of the Finnish commercial banks, which have not previously been particularly active in the leveraged finance business, have become more interested in the market, perhaps due to the increased possibility of earning higher margins than in the highly competitive conventional debt markets. Also, the fact that credit losses of Finnish banks have been at a low level during recent years may have increased the appetite for higher risks inherent in LBO financing.

Commercial banks face stiff competition nowadays, which drives the banks to lend at low margins. Due to the relatively cheap debt, equity investors are tempted to use even higher leverage in LBO transactions. However, over-leveraging may turn out to be risky as breaching the covenants is likely to lead to stricter terms and higher margins and may even require the investors to put in more equity.

Refinancing and Other Partial Exits

One of the recent dominant trends on the Finnish LBO market has been to refinance previous LBO deals. In some cases, refinancing has even been possible fairly soon after the original transaction, where the target company has performed better than expected. However, in most cases the financing agreements contain restrictions on obtaining early refinancing from sources outside the original lender group. By restructuring the financing, target companies have obtained a more attractive financing package, with a higher amount of debt that allows the target company to repatriate funds to its shareholders.

In Finland, capital in LBO transactions typically consists of senior debt, mezzanine loans with or without warrants, capital loans as well as common and/or preferred shares. The terms of such instruments vary from deal to deal and the rights and obligations of lenders with regard to one another are arranged by tailor-made inter-creditor agreements.

There are three major local banks active on the Finnish LBO market. In addition, several foreign banks have a local presence in Finland. Some of these banks operate as merchant banks providing all forms of financing for LBO transactions.

Today, approximately 65% to 80% of the financing in private equity backed buyouts generally comes in the form of debt financing. The amount of senior debt has typically ranged from EUR 50 million to EUR 200 million in deals syndicated in Finland. The typical participation of a local bank in such a syndicate amounts to EUR 10-50 million. However, some local banks have shown a willingness to take even larger amounts of debt on their own account.

In Finland, at least so far, the bonds issued in capital markets have rarely been used in relation to LBO deals. Perhaps this is due to relatively small size of the deals, more time consuming process of establishing such financing and, in general, more stringent requirements for amendments and waivers.

Although on today’s financial market there may be good possibilities to increase leverage in LBO deals, it is worthwhile keeping in mind that over-leveraging may also turn out to be risky, especially if interest rates rise. Deals become more complicated and financial instruments also evolve. From the lenders’ perspective, covenants are of primary importance since possibilities to receive security are limited.

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.