Ever look at massive M&A deals and wonder, “where is all this money coming from?” They might well involve leveraged finance. We asked the Paul Hastings team for an insight into this important area of law…
What is leveraged finance?
Katie Forer, associate: I usually start by describing leveraged finance as “the debt part of M&A.” To those interested in the practice of corporate law, “M&A,” or mergers and acquisitions, is one of the most likely entry points. Any law student taking a corporations class has a taste of what is involved in the law of buying and selling companies, the decisions a board might make if it’s interested in acquiring another business or if it’s comparing offers to sell the business to the right buyers at the right price.
What I didn’t learn in law school but learned quickly after I started at my firm (by necessity, as this often happens, to properly complete one of my first assignments) was how those deals I was so interested in were financed. A “leveraged buyout” is a transaction in which the buyer, typically a private equity fund, buys a company with a combination of equity and debt – the same way a future homeowner may one day buy a home with her hard-earned down payment and a mortgage from a bank – because the buyer believes that under its ownership the company will grow and its returns will outpace the cost of the debt.
Shekhar Kumar, partner: Leveraged finance primarily deals with loans made to private equity sponsors and corporate borrowers in connection with leveraged buyouts or acquisitions. The concept of “leverage” in these transactions refers to a company accessing the debt markets in connection with an acquisition in order to leverage – or get more out of – the equity it is contributing toward an acquisition.
What kind of work is involved day to day?
SK: Much of the practice involves working with either the lending team or the borrower (depending on which side you are representing) to negotiate and draft the documentation that will govern the loan being made to the borrower.
Typically, leveraged finance lawyers will spend much of their time negotiating a commitment letter and a fee letter at the early stages of the M&A negotiations. These letters set forth the framework for the definitive documentation, including, among other things, the amount of debt that will be provided, the conditions on which it will be provided, the flexibility and prohibitions that will be associated with the documentation governing such debt and the cost of such debt.
Bianca Lee, associate: Associates typically draft commitment papers and credit documentation, as well as coordinate diligence and execution of documents.
KF: At a firm like Paul Hastings, we pull in experts from our diverse practice groups to advise on any given aspect of a deal that deserves special subject matter attention – for example, an environmental law partner to review a consultant’s report or someone from our real estate team to review a company’s leases – which allows us to use the full scope of the firm’s capabilities to advise our clients.
“One of my favorite parts of the practice is I feel like there is always more to learn.”
What makes it distinctive from other areas of finance in terms of legal practice?
KF: Part of what makes leveraged finance so interesting is the market for these loans after they are wrapped up and funded to the borrower. In addition to understanding our clients’ and borrowers’ needs in the negotiation and drafting process, we also have to keep in mind which provisions will make the loans more or less appealing to potential buyers. The syndicated finance market is constantly changing, and knowing what’s happening across the spectrum of deals our clients are doing, and deals other firms and their clients are doing, is one of the most important aspects of our job.
BL: The loans underwritten by our clients, which are institutional banks, are typically syndicated instead of held by our clients. As a result, we have to deal with lender comments from a wide variety of prospective lenders when drafting the credit agreement. In addition, because our clients are not holding on to the debt themselves, they have to focus on the attractiveness of certain terms to secondary investors in addition to reviewing them from an internal credit perspective.
What are the highs and lows of the practice?
SK: The highs and lows of a typical leveraged finance practice generally both center on the unpredictability and pace of a leveraged financing. Given that leveraged finance transactions are often an ancillary part of a broader M&A transaction, the demands upon the finance teams – on both the business and legal sides – are often driven by the broader M&A transaction and can rise relatively unexpectedly. I often end my day having spent the majority of my time focusing on transactions I was not expecting to address when the day started.
KF: One of my favorite parts of the practice is that I feel like there is always more to learn, and that constant learning keeps it interesting for me. We also get to do a lot of cross-border work with countries all over the world, which is both challenging and an incredible opportunity to expand our collective legal expertise. That said, if I could change one thing about my practice, I’d probably lasso Houston, London and Sydney to pull them into my time zone.
What is a partner's typical role in matters?
SK: Partners in a leveraged finance practice are intimately involved in the analysis, negotiation and drafting of the relevant documentation in each stage of a leveraged financing transaction. Much of a partner’s role is centered on negotiating the substantive terms of the documentation and acting as a liaison between their client and the opposing side’s client in an attempt to come to an agreement on more heavily negotiated or contested terms, and once such an agreement is reached, ensuring that the relevant documentation properly reflects the terms of the agreement.
Aside from their review of the actual documentation, clients will typically look to the partner on a matter for guidance on market terms and problem solving for potential issues. Given the complex nature of many leveraged finance transactions, as well as the underlying M&A transactions, clients often look to the partner – or other senior lawyers on a transaction – to draw upon past experiences and issues and extrapolate from them in order to come up with solutions to a new issue facing the client.
“It’s an environment that is particularly conducive to thinking on your feet.”
What about associates?
BL: Associates typically keep the team organized for closing by coordinating closing documentation with opposing counsel.
KF: In addition to reviewing and drafting legal documents, associates are responsible for deal management and running process: preparing and maintaining the closing checklist, coordinating communication with local and regulatory counsel, wrangling third parties, and ensuring that client’s questions are directed to the correct specialists. In our group, the sooner you’re capable of taking on larger responsibilities and bigger pieces of the deal, the sooner you do. It’s an environment that is particularly conducive to thinking on your feet and honing your skills in real time, which is – critically – coupled with the support of senior associates and partners ready to jump in at a moment’s notice.
What qualities make for good leveraged finance lawyers?
KF: Good leveraged finance lawyers are inquisitive, responsive and flexible. Our practice is constantly changing and our clients expect us to keep a finger on the pulse of the market to advise them of these changes and make the necessary adaptations.
SK: To me, the three most important qualities for a good leveraged finance lawyer are (i) an attention to detail, (ii) the ability to use past deal history and transaction experiences to address new issues and (iii) the ability to work in a cooperative and constructive manner with all parties involved in a transaction.
Leveraged finance documents tend to be dense and relatively complex, so an attention to detail is critical in ensuring that a document works properly and accurately reflects the business deal discussed between the clients. While many “issues” leveraged finance lawyers address on a day-to-day basis are often items they have dealt with in prior transactions, it is typical for either an “old” issue to take on a slightly different fact pattern that can change how it needs to be addressed or for new issues to arise entirely.
What separates the Paul Hastings team from peers?
SK: The breadth of Paul Hastings’ finance team more generally and leveraged finance team more specifically makes it particularly well situated for the changing landscape of leveraged financing transactions referred to below. Our team has significant experience representing a wide variety of financial institutions in all types of leveraged financing – both in the syndicated space and in the buy-and-hold space – and across a wide variety of industries. Our extensive experience across different deal sizes, industries and client bases has provided our lawyers at all levels with significant exposure that they can draw upon to creatively address new issues that may arise in the course of a financing transaction.
KF: Most importantly, the leveraged finance group here is very close-knit: I know which podcasts my co-workers are consuming (“Where Shall We Begin” with Esther Perel), which foods they’re avoiding (peanuts but not peanut oil), and who will hoard the mic at our next karaoke night. Did I mention we have a weekly team lunch?
“The leveraged finance group here is very close-knit… I know who will hoard the mic at our next karaoke night.”
What trends have affected the practice recently?
SK: Documentation for leveraged finance transactions is constantly being updated to account for any regulatory changes as to the nature of the terms or requirements with respect to the financing sources providing such debt, and the onus is on the legal teams to keep abreast of these changes and ensure that any required changes are being made to the applicable documentation.
KF: We’ve been seeing a lot of cross-pollination between the European and US leveraged finance markets and have generally found that the parties in our deals are getting more and more sophisticated over time. Transaction terms that were historically reserved for top-tier private equity sponsors and large cap transactions have found their way down to deals in the middle market and beyond.
SK: One of the most interesting trends in the leveraged finance space to me is the expanding scope of financial institutions involved in leveraged finance transactions. While leveraged finance deals were often primarily “syndicated” transactions arranged by more traditional investment banks, we are seeing new types of investors get more directly involved in leveraged finance transactions at an earlier stage.
How do you see the practice evolving in the next few years?
KF: Incorporating “alternative” or “direct” lenders, as they are called, into our practice expands our skill sets and diversifies the types of deals we do and the terms our clients care most about.
SK: Many of these potential investors that are not traditional investment banks do not necessarily view a transaction with the same primary syndication or credit and risk criteria that an investment bank would be focused on, which can have an effect on the types of terms that end up being more negotiated and the eventual resolution that is reached with respect to those terms.
KF: That said, we will likely continue to focus on serving our bank clients as they navigate the changing landscape of the syndicated leveraged finance market and evolve their own businesses to accommodate the upward trends in private lending.
What advice would you give students interested in the area?
BL: Getting familiar with the market would be helpful in seeing the types of deals in the market. Law school does not really touch on all the different skills that are useful to a leveraged finance lawyer.
KF: Take whatever classes you want, make sure to study Secured Transactions for the bar exam, finesse your email communication skills, and then come ready to absorb everything you’ll possibly need to know for the job – on the job. Also, if your M&A professor skims over the debt part of the sources and uses table and just refers to the loans or bonds as “IOUs” come see me after class. You’ve got a lot to learn!
SK: Get as much exposure to the practice area as possible through internships or a summer associate position, but more importantly, try and speak to any associates or partners you have access to in the field to get a better sense of their day-to-day practice and challenges and what they find exciting about their practice.
My initial exposure to leveraged finance was through being put on a financing transaction when I was a very junior restructuring attorney, and while I was convinced coming out of law school that I wanted to be a litigator, my experience on that transaction fundamentally changed my view of where I saw my career heading.