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Expansion of the “Limited Condition Acquisition” Calculation Flexibility

Recent high yield bond (“HYB”) and leveraged loan deals have included calculation flexibility typically allowed to determine availability under baskets and ratios in connection with “Limited Condition Acquisitions” to be used for transactions that do not qualify as an acquisition that is “not conditioned upon the availability of…thirdparty financing” (“LCA Acquisition”).

“Limited Condition Acquisition” provisions (“LCA Provisions”) were originally introduced so that a buyer in an acquisition could bolster its position by stating its offer to buy is not conditional on obtaining third party debt. As a departure from the market standard, the buyer’s financing documents allowed it to elect (“LCA Election”) to test availability under debt incurrence baskets (including ratio tests) and/or conditions such as “no default / event of default” at the time of
signing the acquisition documents rather than at its completion. This meant that if, for example, an event of default is continuing, or EBITDA deteriorated between signing and completion so that a leverage ratio test would be satisfied at signing but not at completion, the acquisition could still complete via-a-vis its financing documents.

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