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Commitment Letters: Trends in Selected Provisions
Practical Law Article 8-586-4668 (Approx. 11 pages)
Commitment Letters: Trends in Selected Provisions
by Practical Law Finance
| Published on 24 Nov 2014 • USA (National/Federal) |
This Article highlights trends in commitment letter provisions addressing documentation principles, expense reimbursement, carve-outs from indemnities and bifurcation of governing law provisions for acquisition finance commitment letters. Analysis is based on publicly filed commitment letters that were signed during 2014 (through mid-October).
A commitment letter is a letter from a lender, or a group of lenders, to a borrower in which the lenders commit to lending money to the borrower and specify the most significant terms applicable to the loan. After the commitment letter is signed, the parties negotiate the full package of loan documents, the terms of which should be consistent with the agreed terms specified in the commitment letter (and the term sheet that is typically attached to it).
The terms contained in commitment letters continue to evolve as the market responds to the competing demands of borrowers seeking to maximize their operational flexibility and lenders wanting to protect their interests while offering loans on competitive terms.
Many provisions that are discussed in commitment letter negotiations concern the economic and other business terms of the loan (usually contained in the term sheet). However, certain terms are typically included in the body of the commitment letter and address:
- The form of documentation to be used to document the loan.
- Responsibility for the lenders' transaction expenses.
- Lender indemnities.
These matters often fall to the borrower's and lenders' attorneys to resolve according to what is customary for a deal of the size and type as the one being negotiated.
Practical Law Finance has analyzed commitment letters that were signed during 2014 (through mid-October) to determine what's market for the following commitment letter provisions:
- Documentation principles.
- Expense reimbursement.
- Carve-outs from indemnities.
- Bifurcation of governing law provisions.
Our analysis is based on 42 commitment letters that were publicly filed during 2014, categorized according to deal size as follows:
- Over $5 billion: seven deals.
- Between $1 billion and $5 billion: 14 deals.
- Between $500 million and $1 billion: seven deals.
- Between $100 million and $500 million: 12 deals.
- Under $100 million: Two deals.
Documentation Principles
Loan documentation should be drafted to accommodate the particular operational and strategic requirements of the borrower and its subsidiaries that the lenders are prepared to accommodate. Commitment letters, however, sometimes provide that the loan documentation will be drafted so that its terms are consistent with those in similar deals or an earlier loan that the borrower obtained.
We have categorized the commitment letters we reviewed according to whether the loan documentation should reflect terms:
- Contained in the commitment letter and term sheet only.
- Contained in an existing credit agreement (typically the borrower's existing credit agreement).
- That are usual and customary for similar financings.
- Contained in the borrower's existing credit agreement and terms that are usual and customary for similar financings.
- Contained in a precedent agreement specified by the borrower's sponsor (if any).
- According to a different standard not specified above.
Deal Size | Limited to Term Sheet | Based on Existing Credit Agreement | Usual and Customary for Similar Financings | Based on Existing Credit Agreement and Usual and Customary for Similar Financings | Sponsor Precedent | Other |
Over $5 billion | 1 (14%) | 5 (72%) | 1 (14%) | |||
$1 billion - $5 billion | 1 (7%) | 3 (21%) | 6 (43%) | 2 (14%) | 1 (7%; sponsor deal) | 1 (7%) |
$500 million - $1 billion | 2 (29%) | 4 (57%) | 1 (14%) | |||
$100 million - $500 million | 2 (17%) | 2 (17%; including one sponsor deal) | 1 (8%) | 3 (25%) | 1 (8%; sponsor deal) | 3 (25%; including one sponsor deal) |
Under $100 million | 1 (50%) | 1 (50%) |
- For deals over $5 billion:
- one deal (14%) in which the loan documentation was limited to the terms contained in the term sheet;
- five deals (72%) in which the loan documentation was based on an existing credit agreement; and
- one deal (14%) in which the loan documentation was based both on an existing credit agreement and on terms usual and customary for similar financings (see the Tyson Foods, Inc. commitment letter).
- For the five deals in which the loan documentation was based on an existing credit agreement:
- four deals (80%) in which the loan documentation was based on the borrower's existing credit agreement; and
- one acquisition financing deal (20%) in which the loan documentation was based on the target's existing credit agreement (see theHillshire Brands Company commitment letter).
- For deals between $1 billion and $5 billion:
- one deal (7%) in which the loan documentation was limited to the terms contained in the term sheet;
- three deals (21%) in which the loan documentation was based on an existing credit agreement;
- two deals (14%) in which the loan documentation was based both on an existing credit agreement and on terms usual and customary for similar financings;
- one deal (7%) in which the loan documentation was based on a specified sponsor precedent (see What's Market, xpedx Holding Company Commitment Letter Summary); and
- one deal (7%) in which the loan documentation was limited to the terms contained in the term sheet for revolving and term loan facilities and was based on terms usual and customary for similar financings for a bridge facility (see What's Market, Zebra Technologies Corporation Commitment Letter Summary).
- For the three deals in which the loan documentation was based on an existing credit agreement:
- two deals (67%) in which the loan documentation was based on the borrower's existing credit agreement; and
- one deal (33%) in which the loan documentation was based on a bank facility to be agreed but, if requested by the borrower, would be based on the borrower's existing credit agreement (see the AmSurg Corp. commitment letter).
- For deals between $500 million and $1 billion:
- two deals (29%) in which the loan documentation was limited to the terms contained in the term sheet;
- four deals (57%) in which the loan documentation was based on an existing credit agreement; and
- one deal (14%) in which the loan documentation was based both on an existing credit agreement and on terms usual and customary for similar financings (see the CBS Outdoors Americas Inc. commitment letter).
- For the four deals in which the loan documentation was based on an existing credit agreement:
- three deals (75%) in which the loan documentation was based on the borrower's existing credit agreement; and
- one deal (25%) in which the loan documentation was based on an indenture governing certain of the borrower's notes (see What's Market, AK Steel Corporation Commitment Letter Summary).
- For deals between $100 million and $500 million:
- two deals (17%) in which the loan documentation was limited to the terms contained in the term sheet;
- two deals (17%) in which the loan documentation was based on an existing credit agreement;
- one deal (8%) in which the loan documentation was based on terms usual and customary for similar financings;
- three deals (25%) in which the loan documentation was based both on an existing credit agreement and on terms usual and customary for similar financings;
- one deal (8%) in which the loan documentation was based on a specified sponsor precedent (see the MRVK Merger Co. commitment letter);
- one deal (8%) in which the loan documentation was to be negotiated in good faith (see What's Market, Aceto Corporation Commitment Letter Summary);
- one deal (8%) in which the loan documentation was to be mutually agreed (see What's Market, Horizon Pharma, Inc. Commitment Letter Summary); and
- one deal (8%) in which the loan documentation was based both on a sponsor precedent and on terms usual and customary for similar financings (see the Flamingo Merger Sub Corp. commitment letter).
- For deals under $100 million:
- one deal (50%) in which the loan documentation was limited to the terms contained in the term sheet; and
- one deal (50%) in which the loan documentation was based on terms usual and customary for similar financings.
Expense Reimbursement
Traditionally, borrowers were required to reimburse their arrangers for their expenses in negotiating and documenting the deal, regardless of whether the deal closed. However, more recently, some large cap borrowers have negotiated a more limited obligation to reimburse the arranger for its expenses only if the deal closes (known as a contingent expense reimbursement). Middle market borrowers are more likely to have an obligation to reimburse their arrangers regardless of whether the transaction closes. However, contingent reimbursement obligations have begun to appear in middle market deals, particularly if the borrower is owned or controlled by a private equity sponsor.
Deal Size | Expense Reimbursement Unconditional | Contingent Expense Reimbursement | No Expense Reimbursement |
Over $5 billion | 5 (71%)) | 2 (29%) | |
$1 billion - $5 billion | 11 (79%) | 3 (21%) | |
$500 million - $1 billion | 6 (86%) | 1 (14%) | |
$100 million - $500 million | 8 (67%) | 4 (33%) | |
Under $100 million | 1 (50%) | 1 (50%) |
- For deals over $5 billion:
- five deals (71%) in which the borrower was required to reimburse expenses regardless of whether the transaction closed; and
- two deals (29%) in which the borrower was required to reimburse expenses only if the transaction closed.
- For the one sponsor deal, the borrower was required to reimburse expenses only if the transaction closed (see What's Market, xpedx Holding Company Commitment Letter Summary).
- For deals between $500 million and $1 billion:
- six deals (86%) in which the borrower was required to reimburse expenses regardless of whether the transaction closed; and
- one deal (14%) in which the borrower was required to reimburse expenses only if the transaction closed.
- For deals between $100 million and $500 million:
- eight deals (67%) in which the borrower was required to reimburse expenses regardless of whether the transaction closed; and
- four deals (33%) in which the borrower was required to reimburse expenses only if the transaction closed.
- For the three sponsor deals:
- one deal (33%) in which the borrower was required to reimburse expenses regardless of whether the transaction closed (see the MRVK Merger Co. commitment letter); and
- two deals (67%) in which the borrower was required to reimburse expenses only if the transaction closed (see the Flamingo Merger Sub Corp. and Omnitracs, LLC commitment letters).
- For deals under $100 million:
- one deal in which the borrower was required to reimburse expenses regardless of whether the transaction closed; and
- one deal in which there were no expense reimbursement provisions (see What's Market, ViSalus, Inc. Commitment Letter Summary).
Indemnification Carve-outs
Commitment letter indemnification provisions require the borrower to indemnify the administrative agent, the arrangers, the lenders and their related parties (the indemnified parties) for costs and liabilities they incur as a result of entering into the loan transaction. There are certain circumstances, however, when the borrower's indemnification obligation is limited by carve-outs which specify when the borrower is not obligated to indemnify an indemnified party because of:
- The gross negligence, willful misconduct or breach of contract in bad faith by the indemnified party (misconduct carve-outs).
- A material breach by an indemnified party of its obligations under the commitment letter.
- Disputes between or among the lenders agents if the borrower is not involved in such dispute.
41 of the 42 commitment letters in our sampling included misconduct carve-outs (one deal under $100 million had no indemnification carve-outs (see What's Market, Rand Worldwide, Inc. Commitment Letter Summary)). While a majority of these 41 commitment letters also included carve-outs for material breaches and disputes among indemnified parties, some of them included one of these carve-outs but not the other.
Deal Size | Misconduct Carve-outs Only | Misconduct Carve-outs, plus Material Breach | Misconduct Carve-outs, plus Disputes among Indemnified Parties | Misconduct Carve-outs, plus Material Breach, plus Disputes among Indemnified Parties |
Over $5 billion | 1 (14%) | 1 (14%) | 5 (71%) | |
$1 billion - $5 billion | 1 (7%) | 3 (21%) | 10 (72%) | |
$500 million - $1 billion | 1 (14%) | 1 (14%) | 1 (14%) | 4 (57%) |
$100 million - $500 million | 1 (8%) | 4 (33%) | 7 (58%) | |
Under $100 million | 1 (100%) |
- For deals over $5 billion:
- one deal (14%) in which there was an additional indemnification carve-out for material breach;
- one deal (14%) there was an additional indemnification carve-out for disputes among indemnified parties; and
- five deals (71%) in which there were additional indemnification carve-outs for material breach and for disputes among indemnified parties.
- For deals between $1 billion and $5 billion:
- one deal (7%) in which there were no additional indemnification carve-outs (see What's Market, The Laclede Group, Inc. Commitment Letter Summary);
- three deals (21%) in which there was an additional indemnification carve-out for disputes among indemnified parties; and
- ten deals (72%) in which there were additional indemnification carve-outs for material breach and for disputes among indemnified parties.
- For deals between $500 million and $1 billion:
- one deal (14%) in which there were no additional indemnification carve-outs (see What's Market, Koppers Inc. Commitment Letter Summary);
- one deal (14%) in which there was an additional indemnification carve-out for material breach;
- one deal (14%) in which there was an additional indemnification carve-out for disputes among indemnified parties; and
- four deals (57%) in which there were additional indemnification carve-outs for material breach and for disputes among indemnified parties.
- For deals between $100 million and $500 million:
- one deal (8%) in which there were no additional indemnification carve-outs (see What's Market, Consolidated Communications, Inc. Commitment Letter Summary);
- four deals (33%) in which there was an additional indemnification carve-out for material breach; and
- seven deals (58%) in which there were additional indemnification carve-outs for material breach and for disputes among indemnified parties.
- In the one deal under $100 million that had indemnification carve-outs, there was an additional indemnification carve-out for material breach (see What's Market, ViSalus, Inc. Commitment Letter Summary).
Bifurcated Governing Law Provisions
Some large cap acquisition financing commitment letters, and more recently some middle market acquisition financing deals as well, now provide for bifurcated governing law provisions. In these instances, the commitment letter-specific provisions are governed by the laws of one jurisdiction (typically New York; 38 of the 39 acquisition financing commitment letters in our sampling were governed by New York law) while provisions that relate directly to the acquisition agreement are governed by the laws of the state governing the acquisition agreement (often Delaware).
Deal Size | Bifurcated Governing Law Provisions | Non-Bifurcated Governing Law Provisions |
Over $5 billion | 1 (14%) | |
$1 billion - $5 billion | 1 (7%) | |
$500 million - $1 billion | 1 (14%) | 1 (14%) |
$100 million - $500 million | 1 (8%) | 4 (33%) |
Under $100 million | 1 (100%) |
- For acquisition financing deals over $5 billion, all seven deals (100%) had bifurcated governing law provisions in the commitment letter.
- For acquisition financing deals between $1 billion and $5 billion:
- nine deals (64%) in which the commitment letter had bifurcated governing law provisions; and
- five deals (36%) in which the commitment letter was governed by the laws of one jurisdiction.
- For the one sponsor deal, the commitment letter had bifurcated governing law provisions.
- For acquisition financing deals between $500 million and $1 billion
- two deals (33%) in which the commitment letter had bifurcated governing law provisions; and
- four deals (67%) in which the commitment letter was governed by the laws of one jurisdiction.
- For acquisition financing deals between $100 million and $500 million:
- seven deals (58%) in which the commitment letter had bifurcated governing law provisions; and
- five deals (42%) in which the commitment letter was governed by the laws of one jurisdiction.
- For the three sponsor deals:
- two deals (67%) in which the commitment letter had bifurcated governing law provisions; and
- one deal (33%) in which the commitment letter was governed by the laws of one jurisdiction.