Key Matters To Look Out For In An IPO: Financing
Thinking of embarking on an initial public offering (IPO) journey? For the purposes of embarking on an initial public offering (IPO) exercise and in assessing the suitability of an applicant for listing, did you know that there are several consents or waivers that would be required from the financial institutions pursuant to the terms of the relevant financing documents? This alert summarises the key consents/waivers typically required to be sought from the financial institutions by an IPO applicant during the due diligence process.
n the course of business, many companies take up financing facilities with financial institutions in order to facilitate their business operations. For the purposes of embarking on an initial public offering (IPO) exercise and in assessing the suitability of an applicant for listing, do you know that there are several consents or waivers that would be required from the financial institutions pursuant to the terms of the relevant financing documents (e.g. letter of offers / facilities agreement etc.)?
This alert summarises the key consents/waivers typically required to be sought from the financial institutions by an IPO applicant during the due diligence process.
Change In Shareholdings
As part of the IPO process, the proposed listing group (Group) will typically undertake a restructuring exercise to incorporate a holding company to be the listed entity (ListCo) of the Group. This would result in a change in shareholding in the operating subsidiary(ies) of the Group, as they would then be wholly owned by the ListCo instead.
A negative covenant commonly sighted in financing documents is that the consent of the financial institution would be required prior to any changes in the shareholdings of the entity undertaking the facility.
“You shall not without first obtaining the prior written consent of the bank, allow any change in its existing shareholders or their respective shareholdings, failing, which the bank may declare the banking facilities to be cancelled and all indebtedness to be immediately due and payable.”
Release Of Personal Guarantees
It is also often a pre-requisite from the financial institutions that personal guarantees from the directors and/or shareholders of the companies are to be provided to guarantee the payment obligations of the company undertaking such facility.
For the purposes of the IPO, conditional consent from such financial institution will usually be requested to substitute the existing personal guarantees from the shareholders/directors with a corporate guarantee from the ListCo upon the successful listing of the ListCo. This is a matter of ensuring that there is no undue reliance on external financial strength in respect of the Group, which is a matter to consider in assessing the suitability of an applicant for listing.
Subordination Of Debt
Another common occurrence in businesses is that the directors/shareholders would provide personal loans or advances to their companies.
For similar reasons mentioned in paragraph 2 above in relation to the Group’s undue reliance on external financial strength, the loans are usually required to be fully settled during the IPO process and prior to the successful listing of the Group.
As such, it would be prudent to take note of the subordination of debt clause in the financing documents as it which would usually require the consent of the financial institutions for the company to settle the loans with the directors / shareholders prior to the settlement of the facilities provided by such financial institutions. Alternatively, a waiver of this subordination of debt clause can be sought from the financial institution.
“Where applicable, you hereby confirm that all the directors agree that any and all repayments of loans/advances/ facilities granted by the directors to you and any repayment of the said loans/advances/facilities due from you to the directors are hereby subordinated to the facility granted herein i.e. the settlement or the repayment of the facility granted herein shall rank in priority to the settlement or repayment of the loans/advances/facilities granted by the directors.”
Declaration Of Dividend
Additionally, there may be covenants in the financing documents which would require the consent of the financial institutions prior to the declaration of dividends by the company.
The restrictive covenants in respect of the declaration of dividends may vary and may be subject to a quantitative threshold, whereby consent would only be required if such threshold is exceeded. There may also be a catch-all clause requiring the consent of the financial institutions regardless of the amount of the dividend declared.
“You further undertake by its acceptance of the facility you will not without the Bank’s prior written consent declare or pay dividends to your shareholders if there monies under this facility due and payable.”
In summary, before embarking on any restructuring, declaration of dividend or particularly, an IPO process with requirements to discharge all personal guarantees by the directors/shareholders, it is prudent for a company to review all the terms in their financing documents to ensure that all requisite consents from the financial institution have been obtained. This is to prevent any breach of the company’s obligations under their financing facilities which may result in such facilities being terminated.
23 February 2023