The firm advises borrowers, shareholders and lenders on the financing of acquisitions (in French) and of growth transactions: senior bank debt, private debt, unitranche and mezzanine (in French), plain or convertible bond issues (in French), vendor loans, and structured financing backed by assets.
Three questions govern any financing, and they arise in this order: who is lending and in what capacity, what secures repayment, and what happens on the day the borrower departs from its plan. Documentation is judged on the third, the one nobody rereads at the moment of signing.
The choice of instrument (loan, bonds, quasi-equity), of the level of debt, of the split between holding company and target and of the repayment schedule is settled upstream, with the accountant and the financial adviser. The firm secures the legal translation of those choices and their consistency with the sale and purchase agreement and the shareholders' agreement.
One rule governs the structuring of leveraged buy-outs: a company may not advance funds, grant loans or provide security with a view to the subscription or the purchase of its own shares by a third party (article L. 225-216 of the French Commercial Code), subject to the exceptions that provision makes for the ordinary transactions of credit institutions and finance companies, and for transactions carried out with a view to the acquisition of shares by employees. The target therefore does not finance its own acquisition, and security is taken over the shares held by the holding company, not over the assets of the target.
Facility agreement, bond issue agreement, terms and conditions of the bonds, subordination agreement, bank letters of intent: the firm drafts or negotiates the documentation as a whole, on the borrower side or on the lender side.
Particular attention goes to financial covenants, events of default, prepayment clauses and information undertakings, which are the most frequent points of friction over the life of a financing.
A bond issue is further subject to its own conditions of validity. On pain of nullity of the contracts entered into or of the bonds issued, an issue by a joint-stock company that has not drawn up two sets of annual accounts duly approved by the shareholders must be preceded by a verification of the assets and liabilities by one or more auditors, whose report is submitted to the body deciding on the issue. The provision reserves in particular issues that carry the guarantee of companies which have themselves drawn up two sets of duly approved annual accounts. An issue is also prohibited to companies whose share capital is not fully paid up, subject to the exceptions provided for the benefit of employees (article L. 228-39 of the French Commercial Code).
On the interest charge, one rule is regularly overlooked in intra-group financing and in shareholder current account advances: interest that has fallen due, owed for at least a full year, itself bears interest only where the contract has so provided or where a court decision so states (article 1343-2 of the French Civil Code).
Pledge of shares and of accounts, cession Dailly (assignment of receivables by way of security), first demand guarantee, personal guarantee given by the director, fiducie-sûreté (security trust): the firm creates the security, checks that it is enforceable against third parties and arranges its release on repayment. It advises directors on the true extent of their personal commitments.
Suretyship is the contract by which a surety undertakes to the creditor to pay the debt of the debtor should the debtor default (article 2288 of the French Civil Code). The definition is short, and that is what makes it formidable: the director who signs commits their personal assets for a debt that is not their own, most often without the extent and the duration of that commitment having been discussed.
Between signing and drawdown, the lender requires a list of conditions precedent: corporate authorisations, security created, insurance policies assigned, no-default certificates, equity paid in, the acquisition documents signed, the absence of any material adverse event. The firm negotiates that list from the contract stage, removes the conditions outside the borrower's control and settles the exact form of each supporting document.
At closing, it keeps the documentary timetable, coordinates the deliverables with the bank and the advisers, draws up the conditions precedent satisfaction letter and the funds flow statement, arranges for the funds to pass through escrow, and converts the conditions that cannot be met in time into post-closing undertakings with a deadline.
A condition precedent that does not depend on the borrower is a condition the borrower will not meet. The consent of a third party, the production of a document held by the seller, the release of security by an outgoing lender: each of these lines is negotiated into a post-closing undertaking with a deadline, or into a best endeavours obligation, before the timetable turns it into a blockage.
Waivers, covenant renegotiations, refinancings, prepayments: debt documentation lives with the company. The firm assists with these adjustments and, should the situation deteriorate, connects them with its restructuring practice.
A waiver is not a formality. It is a one-off release granted by the lender, often paid for, sometimes coupled with a tightening of the ratios for the following periods. It is asked for before the breach, on the basis of a forecast, and not after the publication of the accounts that record it.
Financial assistance, pledge of securities accounts, covenants, withdrawal of banking facilities.
02The French banking monopoly, intercreditor agreement, deferred access to share capital.
03Plain and convertible bonds, private placement, conversion ratio.
A covenant is a ratio the borrower undertakes to comply with throughout the life of the loan, for example a net debt to EBITDA leverage below a given multiple. A breach constitutes an event of default entitling the lender to demand early repayment, unless a waiver is negotiated. It is negotiated before signing, with realistic headroom.
Bank debt is lent by a credit institution, at a lower cost but with more rigid terms and capped amounts. Private debt is provided by dedicated funds: more expensive, but more flexible on repayment (bullet repayment at maturity), quicker to put in place and able to finance higher levels of leverage.
Banks ask for it almost systematically from SMEs. The firm negotiates the amount, the duration and the conditions for release of the guarantee, and checks that the protective formalities of the French Civil Code are complied with, a condition of validity of the commitment.
It is a borrowing carried out through the issue of debt securities subscribed by investors, open subject to conditions to SAS and SARL companies (the French joint-stock and limited liability forms). It allows funds to be raised without dilution of the share capital, using plain or convertible bonds, within a contractual framework that the firm drafts: the bond issue agreement, the terms and conditions, the security.
It is a condition the borrower must satisfy before the bank makes the funds available: corporate authorisations, security created, insurance, equity paid in, the acquisition documents signed. Until it is satisfied, the lender is not bound to disburse. The firm negotiates the list, removes from it the conditions outside the borrower's control and manages their satisfaction through to drawdown.
An acquisition holding company borrows, acquires the shares of the target, and repays the debt out of the dividends the target pushes up. The whole difficulty lies in the gap between two timetables, that of the debt instalments and that of the cash available at the target after tax.
The target cannot finance its own acquisition. Article L. 225-216 of the French Commercial Code prohibits a company from advancing funds, granting loans or providing security with a view to the subscription or the purchase of its own shares by a third party. The lender therefore takes its security over the shares held by the holding company and over the cash flows, not over the assets of the target. Badly placed security weakens the whole structure.
Nor is the interest charge fully deductible. Article 212 bis of the French General Tax Code caps the deduction of net financial expenses at the higher of two amounts: three million euros or thirty per cent of adjusted taxable profit. A business plan that overlooks this cap overstates repayment capacity.
The choice turns on three criteria: cost, the flexibility of the documentation and ranking should difficulty arise.
Senior debt is bank debt. It is the cheapest, but the most tightly framed: contractual amortisation, covenants tested at each accounting date, first-ranking security, prior consent for acquisitions and for distributions. Unitranche is provided by a debt fund as a single line, most often repayable at maturity: more expensive, but quicker to put in place, with fewer covenants and an ability to finance situations that the bank syndicate turns down. Mezzanine is subordinated to senior debt, repayable at maturity, and remunerated in part through access to the share capital. It is the most expensive, and the one that dilutes.
Where several layers coexist, the subordination agreement becomes the central document: it fixes the ranking, the payment blockage events in favour of the senior lender, the period during which the junior creditor may not take action, and the order in which the proceeds are applied on enforcement of the security. It is negotiated at the same time as the facility agreements, never afterwards.
Two conditions govern the validity of the issue, laid down by article L. 228-39 of the French Commercial Code. A joint-stock company whose share capital is not fully paid up may not issue bonds, subject to the exceptions provided for the benefit of employees. And a company that has not drawn up two sets of annual accounts duly approved by the shareholders must have the issue preceded by a verification of the assets and liabilities by one or more auditors, whose report is submitted to the body deciding on the issue, save where the issue carries the guarantee of companies that have drawn up two such sets of accounts.
The sanction is nullity of the contracts entered into or of the bonds issued: this is a point to deal with before any approach to investors. The firm then drafts the bond issue agreement and the terms and conditions, frames the representation of the body of bondholders, and handles the instruments giving access to the share capital, convertible bonds, bonds redeemable in shares and warrants, whose conversion mechanics are coordinated with the shareholders' agreement.
The points company directors put to us most often, treated in depth, with the sources.
