When considering the structuring of an acquisition, one of the principal decisions to be made is how to most efficiently finance the purchase. The buyer needs to strike a balance - the financing should be cost-efficient as it affects the cost of the acquisition generally (in a bid scenario, cost-efficient financing may give the buyer a competitive advantage in the purchase price negotiations), while at the same time, it should also be non-restrictive to allow the buyer the necessary freedom to manage and expand the acquired business after closing. Although the financing is obtained by the buyer, the seller is also interested in ensuring that the buyer has locked in the financing to be able to pay the purchase price at closing.
In this chapter, we will discuss some of the most common considerations for acquisition financing in Latin America, as well as related trends, practices and challenges, focusing primarily on the six largest economies in Latin America - Argentina, Brazil, Chile, Colombia, Mexico and Peru - from a New York perspective. The first section provides a market overview of acquisition finance in Latin America for 2020 and the first half of 2021, and some of the current trends. The second section examines matters to be considered when structuring an acquisition financing. Sections three and four outline certain noteworthy provisions typically included in the loan and acquisition documentation. The final section highlights certain Latin America-specific considerations in debt financing transactions.
Market overview of acquisition finance in Latin America
More than half of the largest M&A transactions (in terms of deal value) in Latin America are typically financed in whole or in part by debt. That was not the case for the first half of 2020, which, based on our review of the biggest M&A transactions in the market, saw a significant decline in the value of leveraged and non-leveraged loan issuances in the region,2 most likely due to the volatility and augmented caution from investors and lenders as a result of the covid-19 pandemic.3 However, that decline was reversed in the second half of 2020 and the first half of 2021 as investors and lenders adjusted to the pandemic. Based on our review of the largest M&A transactions in the market, approximately 60 per cent of those transactions were financed in whole or in part by debt, which is closely in line with the pre-pandemic trend.4
Unlike acquisition financing in the US and European markets, which are commonly limited in recourse to the shares of the target and its assets, in Latin America, the financing sources typically have full recourse to the buyer. Often that recourse extends to the balance sheet of the ultimate sponsor, coupled with a parent guarantee. Although some financings in Latin America have been done on a limited recourse basis, they are not as common.
Latin America has also witnessed cutting-edge developments in bank acquisition financing. The green loan provided to Agrosuper, the Chilean food conglomerate, to acquire Empresas AquaChile, a local fish farming company, is a good example. The acquisition qualified for the green loan benefits as it reduced the use of antibiotics in salmon.5 Generally, there has been an increase in Latin America sovereign issuance of green, social and sustainable bonds, which reached US$6.8 billion in 2020 (including Chile's US$7.4 billion in issuance to date, Mexico's first sustainable bond ?750 million (linked to the UN's Sustainable Development Goals) and Ecuador's first sovereign social bond US$400 million (with proceeds used to finance affordable urban housing))6. We expect that buyers of assets that can qualify for the green, social and sustainability loan benefits will take advantage of the availability and competitive pricing of these green financings and we would accordingly anticipate an increase in acquisition financings with this feature.
Another debt financing structure worth noting is reflected in the financing put in place for the acquisition by Trident Energy and Karoon Energy of certain upstream assets from Petrobras,7 which took the form of a reserve-based lending. This structure will certainly be considered for future transactions in the most active markets for oil and gas M&A in the region.
President Biden's 'Root Causes Strategy' Initiative, a US$4 billion investment plan to decrease violence, corruption and poverty in certain countries in Central America in an effort to address the root causes of migration into the United States, may also spur M&A activity and related financing in the region. Although the initiative and overall implementation strategy are still being developed, the initiative is expected to reincentivise the relocation of supply chains to Central America. It aims to mobilise private investment in the region to promote economic stability and job creation, which will boost M&A activity in certain sectors. Among other things, the initiative contemplates working with multilateral development banks, such as the World Bank and the Inter-American Development Bank, to develop infrastructure and promote foreign investment by engaging with the private sector in a cost-effective and competitive manner. Historically, investments made by multilateral development banks and agencies increase the private sector's confidence in these markets and subsequently private sector investments. Though we expect this initiative will have the intended impact on private investments in Central America, given its nascent stage, that impact will not be immediate.
Raising capital in the IPO market is another trend that continues to gain interest in Brazil.8 While the use of proceeds is generally labelled as general corporate purposes, market participants indicate that more often than not companies are raising funds to effect acquisitions. Brazil has enacted new legislation to regulate its natural gas market, which has increased competitiveness by breaking the natural gas monopoly of state-owned Petrobras and generating investment opportunities in the sector. The privatisations of state-owned companies and spin-off of Petrobras entities are expected to continue in 2021 and 2022, but it remains to be seen whether and to what extent the Brazilian 2022 presidential election will impact these opportunities.9
Structuring a debt financing for an acquisition
There are three primary factors that affect the structure of debt financing: (1) whether the acquiror is a strategic or financial buyer, (2) whether the M&A transaction is an exclusive direct negotiation or a competitive bid and (3) the financing sources available for the buyer and the target assets or business.
Strategic versus financial buyer
Strategic buyers are looking to expand their ongoing business and, accordingly, will be seeking the least costly financing that will not restrict their ability to operate and expand their business. Accordingly, strategic buyers are more willing to provide lenders recourse to their balance sheet to obtain more favourable financing terms. Thus, debt financing provided to strategic buyers is typically structured as unsecured short-term or bridge loans with full recourse to such buyers' balance sheet. This arrangement is usually followed (under normal conditions, long in advance of the maturity date of such loans) by a capital markets transaction (or permanent term loan) to repay the loans and raise additional capital for the target's operations, also referred to as a 'bridge to bond'.
When the buyer is a private equity fund or other financial sponsor, such buyer is interested in adding value by repackaging the acquired business and exiting in a relatively short time frame (see Chapter 3 of this guide, 'Private Equity Funds and Institutional Investors in M&A'). The acquisition debt will typically be structured as a loan provided to a special purpose entity created solely for the purpose of acquiring the target, and such loan will be secured by all the assets of the borrower (e.g., the shares of the target in a stock purchase), when permitted. To avoid structural subordination issues caused by the fact that the target's lenders will structurally be senior to the buyer's lenders with respect to the target's assets, either a merger between buyer and target will follow or the acquisition financing will refinance any existing debt of the target. This financing arrangement for a financial buyer may also be structured as a bridge to bond.
Private sale versus competitive bid
In an auction process, the sellers invite several bidders to compete to acquire the target. One of the key elements that a seller will consider when analysing bids is whether the buyer will finance the acquisition with debt and, if so, what is the risk that such financing will not be available at the time of the closing of the acquisition. To address this risk, the auction draft acquisition agreement and the definitive agreement will typically not include a 'financing out' provision, which would otherwise allow a buyer to walk away from the deal if it is unable to obtain financing. Another way sellers mitigate the risk is scrutinising the conditions to the disbursement of the loans and favouring bids with limited conditions. As a result, commitment papers negotiated between buyers and their debt providers in a bidding process will often include 'SunGard' provisions (examined in more detail below), which limit the conditions to be satisfied for funding the debt.
In a private sale, where the M&A deal terms are bilaterally negotiated between buyer and seller, the buyer will be in a better position to negotiate more favourable provisions with respect to the availability of financing in the acquisition agreement and, thus, debt financing in those cases may often resemble financing provided in a non-acquisition context.
In an environment of historically low debt rates, buyers around the world have sought to finance their acquisitions, in whole or in part, with debt. Prior to the covid-19 pandemic, acquisitions in Latin America have been no exception and buyers have flocked to the bank debt market. The most common financing structure in Latin America is the bridge to permanent financing, be it a bond or term loan.
Unlike the US market where buyers will often finance an acquisition in the capital markets (and thus bridge facility commitment papers are only entered into as a back-up), bridge loans in Latin America are usually funded. The preference to fund bridge loans instead of directly financing an acquisition through the bond market is due, among other things, to the limited access to capital markets for some buyers and smaller and less liquid markets generally in the region, which may constrain a buyer's ability to timely complete a bond offering. Additionally, stricter confidentiality obligations and unavailability of certain information delay the buyer's efforts to satisfy disclosure obligations and its ability to immediately go to the bond market prior to the closing of the acquisition. Finally, funding the acquisition through bridge financing also enhances the certainty of funds on the date of closing the acquisition, ensuring that buyers will have the funds to pay the purchase price. Furthermore, commercial bank debt provides flexibility when there are tight time constraints and sometimes unexpected developments. Buyers also prefer the agility of a bridge loan where they can decide after the acquisition, when the negotiating leverage has shifted, whether to take out the bridge loan with a term loan or bond.
Another form of acquisition financing vehicle that has recently resurged in the market, particularly in the United States, are SPACs - special purpose acquisition companies. A SPAC is a company sponsored by an investor and management team with experience and reputation for identifying, acquiring and operating businesses that raises capital through an IPO to pool funds for the purpose of effecting acquisitions of targets yet to be identified in a set period of time. SPACs are now ubiquitous in the US market, raising over US$12 billion during the first half of 2020.10 Similar structures, although few, have been used in Latin America as evidenced by the successful US$650 million IPO by Vista Oil & Gas, SAB de CV (Vista) in 2017 in Mexico.11
Based on conversations with leading fund managers in Latin America, the view is that more activity in SPAC transactions is foreseen due to investors' appetites for IPOs and the availability of assets in post-covid recovery. Despite this enthusiasm for the future of SPACs in the region, consummating a SPAC transaction in Latin America is not without challenges, particularly as countries in the region do not currently regulate this type of structure. SPACs more typically appeal to foreign investors and are denominated in US dollars, and accordingly, will likely only be available for industries in which revenue is generated in US dollars; otherwise, they would be vulnerable to currency risks. Additionally, any debt raised by these types of entities would be of a non-recourse nature, which is not as readily available for Latin American borrowers.
Acquisition finance documentation
Like any debt financing arrangement, acquisition finance transactions involve two principal phases. First, the mandate or commitment stage, where buyers and debt providers negotiate the fundamental commercial and legal elements of the facility to be provided, which usually culminates in the signing of mandate or commitment letters documenting the agreed terms. Second, the negotiation of the definitive documentation and closing of the transaction. In acquisition finance, the more important of these phases may indeed be the former, particularly in a competitive bid acquisition where the commitment letters will often be submitted with the bid. These commitment papers generally have the following characteristics: (1) certainty of commitment, (2) market standard 'SunGard' provisions for certainty of funds and (3) market 'flex' provisions.
Level of commitment
As mentioned above, 'financing out' provisions are becoming less common in acquisition agreements and, accordingly, buyers are mitigating that risk by requesting a firm commitment or full underwriting by the bank engaged to arrange the credit facility. Banks will typically accept this risk if they are comfortable that they will not have to hold the loan for an extended period and will be able to successfully syndicate or sell down their commitments. To support a bank's ability to sell down, commitment papers typically include syndication provisions pursuant to which the prospective buyer agrees to assist, and to cause the seller or target to assist, the arrangers to syndicate their loans.12 Note that the buyer will always require the arrangers to provide the financing regardless of whether the syndication is successful. Typically, these syndication provisions apply until the earlier of a sunset date or the date the arrangers achieve their desired hold.
To mitigate the risk of financing not being available at closing to pay the purchase price, sellers and buyers may require that the commitment papers include limited conditionality to funding, commonly known as, the 'SunGard provisions'.14 Essentially, there would be no daylight between the conditions for closing in the acquisition agreement and those for funding under the financing documentation - if the conditions in the M&A documentation are satisfied and the buyer is required to close, the conditions of the financing would also be satisfied and the lenders would be required to fund. SunGard provisions are only used in limited transactions in Latin America, even though there is a trend towards limited conditionality in commitment papers (particularly for buyers acquiring assets in the US or Europe and obtaining financing from commercial banks that are familiar with these provisions).
The SunGard provisions typically limit the conditions precedent to funding to the following:
Representations and warranties
Only the most fundamental representations and warranties (commonly referred to as 'specified representations') made under the financing documents need to be true and correct as a condition to funding. The specified representations are typically limited to those with respect to corporate existence, authority, enforceability of debt documents, margin regulations, no conflict, use of proceeds, US Investment Company Act status, solvency, compliance with anti-money laundering and anticorruption laws and creation and perfection of closing date security interests in any collateral.
Limiting the number of representations that are conditions precedent does not mean that the other representations under the financing documents are not made at closing. Rather, if any other representation is not accurate on the closing or funding date, while debt providers will still be required to fund, an event of default would be deemed to have occurred on such date (often referred to as a 'day two default'), giving the debt providers the right to exercise remedies immediately, but only after funding.
One common feature of acquisition financing commitment papers is a condition precedent for the closing and funding that the representations made by the seller under the acquisition agreement be true and correct. This condition is also included in commitment papers subject to SunGard provisions, albeit modified so that only the representations made by the seller under the acquisition agreement that are material to the interests of the debt providers and that give the buyer the right to terminate the acquisition agreement or to walk away from the transaction need to be accurate, subject to negotiated qualifications in the purchase agreement. How the inaccuracy of the other seller representations under the acquisition agreement is treated under the financing documentation varies depending on, among others things, how the relevant acquisition agreement is structured, and can range from treating the misrepresentation as an event of default (i.e., a 'day two default') to, if such misrepresentation affects the price of the asset and results in a purchase price adjustment, being addressed in the financing documentation by the provisions dealing with purchase price reductions.
The condition commonly regarding satisfactory completion of due diligence or the 'diligence out' is not normally included in commitment papers that include SunGard provisions, and debt providers are required to conduct and finalise their due diligence prior to the execution of the commitment letter. We note, however, that it is common for the 'due diligence' condition to be bracketed in the draft commitment papers with a footnote that it is the intention of the parties to remove prior to execution of the commitment papers.
The material adverse change (MAC) definition under SunGard provisions will be a mirror of the MAC definition in the acquisition agreement, and the related provisions are triggered solely by any MAC affecting the target. Consequently, one critical aspect of the lenders' due diligence of the acquisition will be a focus on reviewing, commenting on and getting comfortable with the MAC definition included in the acquisition agreement.
Market material adverse change provisions, that is, a material adverse change in the loan, capital or syndication markets generally, or both, which are often common in commitment papers depending on the Latin American country, are typically negotiated out of commitment papers for acquisition financings. Instead, flex rights (see below) are intended to mitigate the effects of market disruptions for syndication purposes.
In secured financings, one of the conditions to funding is generally that the security interests in all the collateral be fully perfected. However, to avoid delays in funding acquisition loans owing to the time-consuming process of perfecting certain types of collateral, the SunGard version of this condition only requires perfection with respect to security interests that may be perfected on the date of closing (e.g., security interest that may be perfected by means of filing a Uniform Commercial Code financing statement or delivery of certificated securities representing equity interests in the borrower).
Interestingly, the issue of not having a perfected security interest at the time of funding is one with which local banks and most international debt providers that are active in Latin America will be familiar, and is by no means exclusive to acquisition finance in the region. In most secured lending transactions, funding occurs before security interests over all the collateral are fully perfected. Thus, reflecting SunGard provisions in this respect usually follows what is common practice in the particular jurisdiction (e.g., that the condition to funding is the execution of the security documents and that certain perfection steps, such as filing with the relevant public registries, have been taken, and including a covenant to complete the registration within an agreed time period).
Given the limited conditionality nature of commitment papers, particularly the absence of a market MAC, commitments for acquisition financing may be challenging to sell down in the primary or secondary market. In addition to the syndication cooperation covenants of buyers, debt providers try to protect against adverse market conditions by including 'market flex' provisions in their commitment papers. These provisions allow debt providers (that determine that their syndication efforts based on the proposed financing terms have been or will be unsuccessful) to adjust those terms, usually by increasing the pricing and modifying other terms within parameters agreed with the buyer to make the financing more attractive to the market. Parameters of common flex provisions include: when the flex can be exercised (i.e., usually by pre-determining what would qualify as 'successful syndication' defined by a minimum hold for each bank), the time period within which the flex can be exercised, whether the flex can be exercised with or without consulting the borrower and whether provisions other than pricing can be flexed.
Protections for debt providers in acquisition documentation
One of the important items of due diligence performed by debt providers and their advisers in connection with an acquisition financing is the review of the acquisition agreement. Aside from more obvious reasons like understanding the terms of the acquisition, learning more about, and analysing, the target and its assets through the representations and warranties, there are two additional reasons for debt providers to review the acquisition documents: (1) ensuring the target's cooperation with the financing and (2) limiting the debt provider's exposure to claims under the acquisition agreement.
Cooperation with financing
As discussed earlier, buyers are usually required to assist and to cause the seller and target, both of which have more familiarity with the target and its assets, to assist the debt providers with their diligence and syndication efforts. This obligation is commonly documented in the acquisition agreement through the inclusion of a financing cooperation covenant, pursuant to which sellers or targets agree to use some level of effort to cooperate with the buyer's financing efforts at the request and expense of the buyer to, among other things, assist in the preparation of marketing materials or information memoranda, make senior management available for meetings with the debt providers and their advisers, arrange for payoff letters, and provide information to allow the debt providers to complete their know-your-customer, anti-money laundering and other internal processes.
If an acquisition transaction is not consummated, there is a risk that disputes between buyers and sellers may arise and that the sellers may seek to include the debt providers in these disputes for failure to provide the financing. Further, some acquisition agreements include payment of certain break-up or termination fees by the breaching party (which may be interpreted to include the acquisition financing debt providers).15 To protect against these risks, debt providers typically insist on including 'no recourse' and 'limitation on liability' language in the acquisition agreement, commonly referred to as the Xerox provisions.16
No recourse against financing sources
Debt providers usually require that acquisition agreements include a broad disclaimer and waiver from the parties to such agreement providing that neither the seller nor the buyer has recourse in contract, tort, equity or otherwise against the debt providers and cannot pursue litigation against the debt providers directly, including as a result of the debt provider's failure to provide the committed debt financing. This provision does not limit the buyer's rights under the commitment papers and, thus, the buyer may claim damages or seek specific performance from the debt providers if the debt provider failed to fund (particularly if the seller has been successful in including in the acquisition agreement a covenant requiring the buyer to pursue litigation in those circumstances).
Limitation on liability
Acquisition agreements may limit the seller's remedies against the buyer or its affiliates if the buyer fails to consummate the acquisition to the payment of a reverse break-up fee, effectively capping the buyer's liability. In such cases, debt providers will typically require this limitation of liability and any other limitations on the buyer's liability to include the debt providers. This, however, does not override the general no recourse to debt provider' provision mentioned above, but rather works to provide an additional layer of protection for debt providers.
Most acquisition agreements include a 'no third-party beneficiary' clause, pursuant to which the parties agree that the agreement is intended solely for their benefit and that of their respective successors and that no other person may enforce the provisions of the agreement. Therefore, for debt providers as third parties to be able to attain the full benefit of the Xerox provisions and enforce their rights under the acquisition agreement, debt providers are expressly included as third-party beneficiaries of the Xerox provisions included in acquisition agreements.
Amendment and waiver of certain provisions
Finally, as the amendment provision of acquisition agreements typically only requires the consent of the parties to such agreement to modify any provision thereunder, debt providers will require that acquisition agreements that include Xerox provisions also include a prohibition on modifying any such provisions (and, sometimes, other key provisions of the acquisition agreement) without such debt provider's consent.17
Specific considerations in Latin America
For any acquisition finance transaction in Latin America, the parties will need to assess specific local law considerations for structuring, including the types of collateral available and related creation and perfection requirements, any limitations on financial assistance, withholding and stamp tax applicability, tax efficiency and foreign exchange controls. Those considerations will be informed by the underlying acquisition (whether assets or stock), the organisational structure of the target, the security package offered to the debt providers and the recourse or non-recourse nature of the acquisition financing.18
The general considerations with respect to security interests in Latin America centre around incurrence of additional costs and the time required for registration and perfection that can often not be achieved at funding. As discussed earlier, funding will typically need to occur before security interests in all the collateral are fully perfected, particularly where certain additional steps need to be taken. Accordingly, certain perfection actions will be required to be satisfied at funding, while others will be deferred as needed, thus reducing the execution risk associated with delays in registration of a security interest.
Perfection in most Latin American countries requires specific formalities prescribed by applicable law, including that the security interest be documented in a notarised public deed and registered before one or more public registries. These formalities result in additional costs (including stamp taxes) and may cause delays in the perfection of the debt providers' security interest as the registration process is, with some exceptions, lengthy (in some instances taking more than a month).
Another key aspect for debt providers to consider when taking collateral in Latin America is whether private enforcement is available. In many countries in Latin America, including Argentina, a pledge does not grant the secured creditor the right to privately enforce its rights and foreclose on the collateral, but rather requires enforcement through a court proceeding, resulting in time and cost concerns for borrowers and debt providers upon enforcement. For this reason, some Latin American jurisdictions, such as Argentina, Brazil, Colombia, Mexico and Peru, allow lenders to take a security interest in the form of a security trust. Under this arrangement, the collateral is conveyed to a trustee that, upon default, will enforce the secured creditor's rights as instructed by such secured party, which may include conducting a private sale of the assets subject to the trust.
Yet another consideration for borrowers and debt providers are regulations limiting a buyer's right to pledge the shares of the target or the ability of the target to provide a guaranty or pledge its assets to secure the obligations of the buyer to the debt providers (commonly known as financial assistance regulations). Although financial assistance regulations are rare in Latin America, there are exceptions, most notably Argentina and Peru.19 However, most jurisdictions will require compliance with certain corporate governance regulations. Thus, buyers and debt providers should consult local counsel in the applicable jurisdiction to ensure compliance with these regulations and to understand the potential implications of any non-compliance on the validity of any security in the acquired shares or corporate guarantee.
Finally, some countries in Latin America, such as Colombia and Mexico, have limitations on granting upstream guarantees. If upstream guarantees are being provided by certain types of legal entities, the corporate purpose of the guarantor should expressly include its capacity to provide upstream guarantees.
Withholding and stamp taxes
Taxes play an important role when structuring a financing transaction. An acquisition financing involves tax considerations that are typical for any financing, including the applicability of withholding tax, value added tax (VAT) and stamp taxes.
Withholding tax rates in respect of the payment of interest (and, in some jurisdictions, fees) in Latin America vary by jurisdiction, and can be as high as 35 per cent. However, most jurisdictions have a preferential tax rate that will apply to certain foreign debt providers (e.g., financial institutions) from certain jurisdictions (e.g., non-tax havens and jurisdictions with which the country has a tax treaty to avoid double taxation) in connection with certain types of transactions and upon certain requirements being met. The applicability of withholding tax and the availability of the mitigants described above may limit the pool of potential debt providers and viable structures in certain jurisdictions.
Finally, in a few jurisdictions, including Argentina, local stamp taxes might be applicable to the execution of any instrument with economic value. This may include the loan agreement, the promissory notes and the security documents.
Foreign exchange controls
Foreign exchange controls can be challenging when structuring an acquisition financing in Latin America. Although Argentina, Brazil, Chile and Colombia have foreign exchange-related regulations, currently only Argentina imposes foreign exchange controls and these controls continue to consistently become tighter with new regulations issued by the Argentine government.20 Mexico and Peru do not have any such regulations. However, as most of the countries in the region have imposed foreign exchange controls at some point, debt providers should make this part of their customary diligence when providing financing in the region.
Over the past year and in recent months Argentine foreign exchange control regulations have continued to be tight.21 The government has indicated that these regulations are inevitable and will remain in force as they seek to stabilise the economy and control the country's volatile parallel foreign exchange markets.22 Some of these regulations directly affect foreign indebtedness. Notably, a set of regulations introduced in September 2020 limited a debtor's ability to repay its dollar-denominated debt in US dollars by restricting the debtor's ability to access the Argentine foreign exchange market to an amount not greater than 40 per cent of the current scheduled principal amount; the remaining 60 per cent to be either refinanced by extending the average life of the debt by at least two years or by converting the debt into pesos through the foreign exchange market. Debt providers must consider these restrictions and any potential additional controls when structuring acquisition financing in Argentina.23
The activity in the acquisition finance market is beginning to recover as buyers are learning to better navigate the effects and impact of covid-19 pandemic. We continue to foresee opportunities in Latin America, including in some of the smaller jurisdictions where M&A activity is increasing. We would expect financings for acquisitions to generally continue to be structured as syndicated or club commercial bank loans, rather than stand-alone capital markets transactions. However, depending on a buyer's access to the local or international capital markets, as well as investors' appetite for debt denominated in local currency, and maturities available in a specific market, we could envision an increase in 12- to 18-month bridge loans that will be refinanced in the local, or if of significant size, the international capital markets.
While financing in Latin America seems to be adjusting to accommodate the requirements of a more challenging acquisition market, accounting for country-specific considerations, it will be interesting to see how these transactions evolve and whether alternative financing structures, like SPACs and green, social and sustainability financings, become more commonly used.
1. Denise Grant is a partner, Augusto Ruiloba is a counsel and Rita Ghanem is a senior associate at Shearman & Sterling LLP. The authors would like to thank Sebastian de la Puente for his invaluable contributions to the preparation of this chapter. The authors also would like to thank the representatives of the leading companies and financial institutions in Argentina, Brazil, Chile, Colombia, Mexico, Peru and New York who were interviewed for this chapter and who so generously gave of their time. A special thanks also goes to the law firms that shared their insights with us - Barros & Errázuriz, Demarest Advogados, Errecondo, Gonzalez & Funes Abogados, Philippi Prietocarrizosa Ferrero DU & Uría, Pinheiro Neto Advogados, Ritch, Mueller Heather y Nicolau and Rodrigo, Elías & Medrano Abogados.
2. This M&A and acquisition financing market analysis is based on independent research that the authors of this chapter undertook based on deals in the market that are publicly announced or included on various databases including S&P Capital IQ and Refinitiv Loan Connector.
3. See Chapter 1 of this guide for further analysis of the impact of the covid-19 pandemic on M&A transactions in Latin America.
4. See footnote 2.
5. See La Tercera, 'Agrosuper suscribe crédito verde por US$100 millones para financiar compra de AquaChile', (29 October 2018) found at https://www.latercera.com/pulso/noticia/agrosuper-suscribe-credito-verde-us100-millones-financiar-compra-aquachile/380587/ (last visited 27 September 2020).
6. See LatAm Sovereign Green, Social, and Sustainable Issuance Is Growing: March 2021 found at https://www.fitchratings.com/research/sovereigns/latam-sovereign-green-social-sustainable-issuance-is-growing-march-2021-17-03-2021 (last visited 4 September 2021).
7. See Latin Finance, 'Brazil ushers reserve-based lending' (16 August 2019) found at https://www.latinfinance.com/daily-briefs/2019/8/16/brazil-ushers-in-reserve-based-lending (last visited 27 September 2020).
8. See Chapter 8 of this guide, 'Public M&As, Hostile Takeovers and Shareholder Activism'.
9. See Chapter 6 of this guide, 'Privatisations and M&A Transactions with Government Entities'.
10. See https://inspirgroup.com/en/spacs-an-attractive-alternative-to-an-ipo-for-target-companies/ (last visited 27 September 2020). The same article mentions that there are around 71 SPACs on the market currently that are seeking targets, five of which are seeking acquisitions in Latin America.
12. These provisions include making the officers of the buyer or the target available for discussions with prospective debt providers, agreeing to prepare an information memorandum to be distributed to potential lenders or obtaining a credit rating. Further, commitment papers also include, either as a condition to funding or covenant (which is the preferred approach for acquisition finance transactions that include SunGard type provisions) a 'clear market' provision, pursuant to which the buyer or its parent agrees not to syndicate, offer or issue debt during the syndication period. Finally, the assignment provisions of the credit agreement may also reflect the need for syndication by allowing the lenders to assign without the borrower's consent during the syndication period or until an agreed minimum hold is reached (other than to competitors of the borrower and others identified by the borrower, usually referred to as 'disqualified lenders').
13. SunGard is the standard used in the US and many large Latin American acquisition financings. The 'certain funds' standard, a variation on SunGard, is commonly used in Europe and has made its way to a few Latin American acquisition finance transactions. Under a 'certain funds' approach, the conditions to funding are generally more limited and typically relate to the bidder group only and not to the target and its subsidiaries. For further information, see https://www.shearman.com/-/media/Files/NewsInsights/Publications/2017/02/Recent-Trends-In-Limited-FN020317.pdf.
14. The SunGard provisions are named after the 2005 acquisition of SunGard Data Systems by a consortium of private equity firms, the first public transaction to contain the same.
15. While it is out of the scope of this chapter, most New York law governed acquisition agreements in which the buyer is obtaining financing to consummate the transaction include representations and warranties of the buyer regarding the financing commitment and include covenants from the buyer regarding such financing. Acquisition agreements often include a reverse break-up fee, which obliges buyers that fail to consummate the deal because they were unable to obtain financing or for other reasons to pay a pre-determined fee to the seller.
16. The Xerox provisions are based on the merger agreement for Xerox's US$6.4 billion acquisition of Affiliated Computer Services, one of the early deals to contain these provisions.
17. International debt providers will typically require that the acquisition agreement provides that any disputes involving the debt providers would be governed by New York law and heard by New York courts, which is typically the preferred jurisdiction and governing law for international debt providers in the Latin America market. Relatedly, the acquisition agreement would typically include the waiver of rights to trial by jury in respect of such disputes that is also common in international New York governed financings. This provision could be separate and in addition to the general dispute resolution clause of the acquisition agreement which may be governed by the laws of another state or country or subject to a forum other than New York courts.
18. Owing to the extensive nature of the subject, we will not be addressing the insolvency regimes of any Latin American jurisdiction. However, debt providers should closely analyse how local insolvency and bankruptcy regulations may affect their interests. For example, Colombian law deems ineffective any contractual provision that may frustrate a reorganisation process, including the acceleration of debt, if directed towards undermining the debtor's reorganisation; while in Chile, once a debtor is subject to a bankruptcy proceeding, default interest may no longer be charged on defaulted amounts.
19. In Argentina, for example, there is a restriction on the target company's ability to provide a guarantee or provide financial assistance for the acquisition of its own shares. Peruvian law limits the ability of buyers to pledge the shares of the target and the ability of the targets to provide collateral to secure debt incurred to finance the acquisition.
20. See https://www.batimes.com.ar/news/economy/strict-foreign-exchange-controls-to-stay-in-place-says-kulfas.phtml (last visited 27 September 2020).
21. The Argentine Central Bank, the Argentine Securities Commission and the Argentine Federal Taxing Authority issued a group of resolutions tightening foreign exchange restrictions in Argentina, specifically: Communications 'A' 7104, 'A' 7105 and 'A' 7106 of the Central Bank, General Resolution No. 856/2020 of the CNV and General Resolution No. 4815/2020 of the AFIP.
22. See https://www.batimes.com.ar/news/economy/strict-foreign-exchange-controls-to-stay-in-place-says-kulfas.phtml (last visited 13 October 2021).
23. See footnote 22.
Originally published by Latin Lawyer.
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