Wachtell Lipton: Innovation in Investment Grade Acquisition Financing
By Lawdragon News | August 20, 2025 | Press Releases, Wachtell Lipton News
For decades, the investment grade acquisition debt market has been the stodgy, well-heeled grandparent of the financing world—steady-handed, deep-pocketed, and set in its ways. Investment grade lenders have traditionally offered a single, unchanging product to companies seeking to finance major acquisitions: the 364-day bridge loan commitment. Recently, however, as leveraged finance has continued to showcase its dynamism in both the direct lending and the syndicated markets, change has also arrived in investment grade acquisition financing. Over the last several months, a number of borrowers and lenders have agreed to a new investment grade delayed draw term loan commitment structure that offers lower costs, greater flexibility, and more certainty to borrowers than the traditional bridge. In addition, investment grade lenders have shown more flexibility on the timeline to funding their commitments, responding to the accounting and financial reporting needs of acquirors and to the lengthy and often unpredictable timing of regulatory approvals for transactions in the U.S. and in what is often a myriad of other jurisdictions.
Delayed Draw Term Loan Commitment
The traditional investment grade bridge commitment is a high-premium, high-deductible insurance policy against the occurrence of the low-probability risk that financing markets shut down at the precise moment when an acquiror needs money to close an acquisition. A bridge commitment comes with a high fee burden and unattractive loan terms. As a result, borrowers never intend to draw these facilities but rather hope to replace them between signing and closing with longer-duration and cheaper debt. Enter the “delayed draw” term loan commitment—a multi-tranche, longer-dated, and dramatically cheaper commitment designed to be funded. The thrust is as follows: at the signing of an acquisition agreement, an acquiror obtains commitments for a term loan facility with a 364-day tranche and a medium-term tranche (often two to five years). The 364-day tranche functions like a traditional bridge commitment intended to be taken out with a bond issuance before closing, but is much cheaper to draw if it is funded. The medium-term tranche is a fully committed, favorably priced permanent part of the capital structure. Over the last several months, the market has explored a few flavors of this structure; but in all cases, these commitments have given borrowers more certainty by locking in a portion of the permanent capital structure at signing, with a significantly more attractive fee structure across the board.
New Flexibility for Closing Timing: Closing Alignment Provision and Applicable Margin Election
Closing Alignment Provision: Investment grade acquisition lenders are also beginning to show more flexibility for unconventional closing timelines. For accounting or financial reporting reasons, buyers may prefer to close acquisitions on the last day of a fiscal month or quarter rather than as soon as the conditions to closing are satisfied. Such an approach often requires complicated tradeoffs in the acquisition agreement as to when closing conditions are tested (whether at the time the closing conditions are first satisfied or at the actual, delayed closing date). Lenders have traditionally been reticent to follow the flag of the acquisition agreement, insisting instead that all conditions to closing of the financing be tested on the actual, delayed closing date and creating a practical impediment to executing on this structure. Today, lenders are showing more willingness to test closing conditions in the manner prescribed in the merger agreement in these circumstances, paving the way for buyers to close acquisitions on timelines that make sense for the business.
Applicable Margin Election: Closing timing is not only in the parties’ hands of course, and increasing regulatory scrutiny of acquisitions around the world has made the timing of closing of acquisitions less predictable. The buyer and seller ordinarily agree to an “outside date” in an acquisition agreement—if the conditions to closing the acquisition (including regulatory approval) have not been satisfied by such date, the agreement can be terminated by either party. Customarily, the financing commitment also terminates on or about that outside date. But if the buyer and seller wish to amend their acquisition agreement to extend the outside date to allow for additional time to close a transaction, there is a risk that the lenders will be unwilling to extend their commitments on the same terms (or at all). Recently, borrowers and lenders have adopted a new provision that gives the borrower the option to extend the outside date in a financing commitment beyond the original outside date, through what is known as the applicable margin election. Borrowers may elect to begin paying the interest rate spread (the “applicable margin”) starting at the original outside date, and until the commitments are drawn or terminated. The maturity of the loan is set based on the date the borrower begins paying the applicable margin (which date is also the original outside date) rather than the borrowing date (which date is the closing date of the acquisition), reducing the tenor of the facility by the amount of time reallocated to the pre-closing period. The result: new flexibility for acquirors that is responsive to current developments in the M&A world, at a fair cost to borrowers and without increasing the overall risk to the lenders.
Taken together these advances reflect a willingness by investment grade finance providers to create a better-tailored product for M&A participants. As always, thoughtful preparation and close partnership with innovative and experienced advisors will be critical for enterprising borrowers seeking to take advantage of these and other new opportunities in the acquisition financing markets.
