The lifecycle of a merger: A funding lawyer’s perspective

The eggs have hatched – Due diligence stage

So, a proposed merger is live within your board’s future planning. Any registered provider (RP) considering a merger will almost certainly need funder consents, and want to consolidate and synergise its funding portfolio post-merger. Finance due diligence requires a detailed review of each entity’s funding documents with these twin goals in mind, with a particular focus both on any existing restrictions, and the future plans of the merged entity – incomplete due diligence means one could easily threaten the other, and potentially the very point of the merger as identified at the outset. It is therefore key to dedicate considerable time and resources to this stage of the merger cycle. Some key due diligence themes include:

• Structure: the analysis should assist in confirming the best structure for the merged entity and the legal process to get there. There are a few different options to consider before committing to the next stage of the lifecycle: a full scale amalgamation, a transfer of engagements, or the acquisition of one entity by the other as a subsidiary (possibly with either an amalgamation of transfer of engagements to follow).
• Funder consents: the scale and nature of funder consents will be a key factor in dictating the merger option selected (particularly, following a careful analysis of any listed bonds, minimising the need for bondholder consents). Decisions will also be needed regarding what debt to refinance and what amendments should be sought, with a view to achieving covenant consistency throughout the merged entity as far as possible. It is essential to engage with funders at an early stage to ensure that consents to both the merger and any amendments will be forthcoming and build such consents (including any credit approvals processes) into the timescales.
• Financials: due diligence must also focus on the financials, likely with input from financial advisors. For example, any adjustments to gearing covenants for the new merged entity in view of the additional debt it will be taking on, and whether any interest cover and asset cover covenants will need adjustment post-merger. What borrowing and cross-default limits will apply to the merged entity? Will these need to be increased post-merger? Look ahead to any intra-group financial arrangements that will apply to the merged entity: will these be permitted by the financial support restrictions? Many funding documents restrict not only loans but also the giving of credit, donations, investments, guarantees, and intra-group support. Carve-outs to such restrictions will need careful consideration to ensure homogeny in the merged entity and, in the worst case, that existing arrangements avoid defaulting newly-acquired covenants on day one of the merger. Transparency and forward-looking will be key.
• Security: due diligence on existing security arrangements and restrictions are also vital. For example, funder consent may be needed to transfer or otherwise dispose of all or a “substantial part” or identified percentage of the RP’s properties or assets; such restrictions must be addressed in the funder consents before a transfer of engagements can proceed.
• Pensions: whilst specialist advice will be part of all early stage merger discussions, remember to also review pension covenants in existing funding documents. For example, there may be defined benefit pension schemes within the newly-merged group, with new covenants biting which may not have pre-merger.  Seek amendments as needed to reflect the post-merger entity and avoid a day one default.

Caterpillar to chrysalis – Consents

Once the route to merger has been selected and the necessary consents and amendments identified, the next stage of the lifecycle will often be at least a two-stage process. Firstly, funder consents must be negotiated and in hand prior to any merger coming into effect; and secondly, only at the point the merger is ‘live’ can certain amendments then be effective, as they will be predicated on the successful completion of the merger.

Once each RP has established if any funders will be prepaid (and prepayment timings factored in), amendments can be negotiated. Drawing up heads of terms may assist, particularly if seeking consistent terms across all funding documents post-merger. Any regulatory timings for registration of the new entity/transfer must also be noted, particularly if there is an external timings driver (for example a pensions-related deadline).

The butterfly emerges

With the necessary consents and amendments in hand, the merger goes live. Tempting as it is to bask in the sun, this is of course where the real work begins, that of successfully merging two entities – most of which is beyond the scope of this article. From a funding lawyers’ perspective, do remember that on completion the entity may be subject to new obligations. Keep note of any changes and, if the merged entity has any publicly listed bonds, communicate merger completion by way of RNS and updating the investor relations page.

A version of this article appeared in Social Housing Magazine.