Debt Pushdown: Moving Acquisition Debt to the Target

A buyer typically forms a new company to make the purchase, and the acquisition loan is made to it because, until completion, it is the only company the buyer controls. The lender's first security is a pledge of the target's shares. That pledge gives it control of the target if the loan fails, but not a claim on the target's assets. If the target fails too, its suppliers, landlords and employees are paid from its assets first, and the acquisition lender receives only what the shareholder would have received. That ranking is structural subordination.

The lender therefore lends on the condition that the debt moves down within a set period after completion. The buyer may want the same thing for tax reasons, so that interest is deductible against the profits that pay it. In each of the three markets, group tax rules may already allow that without a pushdown; where they do, the move is mainly the lender's.

The first route leaves the loan with the buyer and has the target stand behind it: an upstream guarantee and security over the target's assets. The second moves the debt itself: the target borrows from the lender and lends or pays the money up to the buyer, which repays the acquisition loan. The third, available in New Zealand, joins the two companies. A short-form amalgamation of a holding company with its wholly owned subsidiary produces one company that owns the business and owes the loan.

Each route needs approval at the target. A guarantee or security for the debt that bought the target's shares, or a loan from the target to its buyer, is financial assistance. New Zealand permits it through procedures that rest on board resolutions and the solvency test; Australia permits it where it does not materially prejudice the company, its shareholders or its ability to pay creditors, or where shareholders approve it, which acquisition lenders commonly require; the UK restricts it only where a public company is involved. A payment up to the buyer that is a distribution must meet the distribution rules of its market. And in every route the target's directors must be able to show corporate benefit and weigh whether the company can carry the debt: solvency is a statutory test in the New Zealand procedures and, in every market, a question a liquidator may ask later. In New Zealand's amalgamation, the directors certify that the amalgamated company will satisfy the solvency test, and secured creditors must be told in advance. Australia and the UK have no general out-of-court merger procedure of that kind for private companies (court-approved schemes aside), so a pushdown there runs through guarantees, security and intra-group lending.

A buyer, constructed for this page like every figure in it, pays US$60m for a New Zealand group of hearing-aid clinics through a new acquisition company, funded by US$24m of equity and a US$36m loan. The clinics earn EBITDA of US$8.0m and owe US$10m to their own trade and other creditors. The facility agreement gives the buyer 90 days to complete an amalgamation. The figures are the example's.

The pushdown does not reduce the leverage by a cent; it moves the lender from behind the clinics' creditors to ahead of their unsecured claims. It needs the amalgamated company to grant, or confirm, security over its assets: a pledge of the target's shares falls away when those shares are cancelled. That move is why the clinics' directors carry the weight. Before signing the solvency certificate, they read the amalgamated company's position with the debt inside it: whether the clinics' assets are worth more than the US$46m of combined liabilities, and a cash flow that must meet interest and scheduled repayments on US$36m as well as the clinics' own bills. If either limb is thin, the remedy is a smaller pushed-down amount or a different repayment profile, not a certificate signed on hope. The secured recovery leaves out claims, such as some employee entitlements, that can rank ahead of part of the lender's security.

DEFINED IN ONE PARAGRAPH → · FINANCIAL ASSISTANCE → · THE SHARE PLEDGE →

An upstream guarantee is one instrument; a pushdown is the aim it can serve. A guarantee gives the lender a claim on the target while the debt stays at the buyer, and its value depends on the target's directors having been entitled to give it. Moving the debt, by borrowing at the target or by amalgamation, makes the target the borrower, so the loan is tested against its own accounts and its own covenants rather than through a guarantee.

It also differs from a dividend paid to service the acquisition debt. Upstream dividends leave the debt where it was and depend each year on the target's board resolving to pay them. A lender relying on them is still structurally subordinated, however reliable the dividends have been.

The pushdown is commonly a condition subsequent: the loan is drawn first and the steps follow, which is why the lender's file records what happens if they do not. A facility agreement commonly makes failure to complete them by a date an event of default, and the credit paper says whether the lender would lend on the share pledge alone if that date passed. It runs beside the clean-up period, a separate grace window in which problems found at the target do not yet count as defaults; the file keeps the two dates apart.

The second place it decides a file is the target's other creditors. A target with a bank facility of its own, or minority shareholders, may need their consent before it can guarantee, borrow or amalgamate. A lender that discovers that after completion has bought a share pledge and a negotiation.

CORPORATE BENEFIT → · GUARANTOR COVERAGE TEST →