Staple Financing

It is a package in which the pre-arranged financing package is made available to prospective bidders for an acquisition

Author: Kevin Henderson
Kevin Henderson
Kevin Henderson
Private Equity | Corporate Finance

Kevin is currently the Head of Execution and a Vice President at Ion Pacific, a merchant bank and asset manager based Hong Kong that invests in the technology sector globally. Prior to joining Ion Pacific, Kevin was a Vice President at Accordion Partners, a consulting firm that works with management teams at portfolio companies of leading private equity firms.

Previously, he was an Associate in the Power, Energy, and Infrastructure Investment Banking group at Lazard in New York where he completed numerous M&A transactions and advised corporate clients on a range of financial and strategic issues. Kevin began his career in corporate finance roles at Enbridge Inc. in Canada. During his time at Enbridge Kevin worked across the finance function gaining experience in treasury, corporate planning, and investor relations.

Kevin holds an MBA from Harvard Business School, a Bachelor of Commerce Degree from Queen's University and is a CFA Charterholder.

Reviewed By: Rohan Arora
Rohan Arora
Rohan Arora
Investment Banking | Private Equity

Mr. Arora is an experienced private equity investment professional, with experience working across multiple markets. Rohan has a focus in particular on consumer and business services transactions and operational growth. Rohan has also worked at Evercore, where he also spent time in private equity advisory.

Rohan holds a BA (Hons., Scholar) in Economics and Management from Oxford University.

Last Updated:September 3, 2023

What Is Staple Financing?

A staple financing package is a pre-arranged package made available to prospective bidders for an acquisition. 

The investment bank advising the selling company arranges staple financing, which includes all details of the lending package, including the principal, fees, and loan covenants. 

The term comes from the fact that the financing information is stapled to the back of the acquisition term sheet. A staple financing package is one that a seller arranges for potential buyers as part of an auction process. 

This financing is advantageous in the acquisition of one company by another. Because financing is already in place with this transaction, the seller often receives more timely bids. 

Buyers benefit from seeing the terms of the pre-arranged lending deal and no longer need to scramble for last-minute financing to complete a purchase.

This financing method allows the bank to earn fees from both sides of the merger by providing advice and underwriting services to the seller and financing packages to the buyer. 

Because this financing speeds up the bidding process, it has become popular in the merger and acquisition field. However, some have expressed concerns about the ethics of an investment bank serving interests on both sides of a transaction.

Key Takeaways

  • Staple financing streamlines the bidding process by offering pre-arranged funding to potential bidders.
  • Sellers benefit from staple financing with quicker bids and increased competition, potentially leading to higher sale prices.
  • Buyers benefit from staple financing by having access to pre-arranged lending terms. This eliminates the need to search for financing independently and allows them to focus on bidding competitively.
  • Staple financing can raise ethical concerns because the investment bank involved serves both the seller and the buyer. 
  • Staple financing is used to accelerate the sales process, maximize the sale price, signal the seller's price expectations, and guarantee financing for buyers who may struggle to secure funding on their own.

Uses of staple financing

This is frequently used to increase the sale price. However, by making the stapled debt package available to all potential purchasers, a potential bidder gains access to debt that it would not have been able to raise on its own. 

From the seller's perspective, the more fully-funded potential bidders there are, the more competition there is, and thus, the higher the potential sale price.

It is also used to facilitate a quick sale. When potential buyers are presented with a well-negotiated term sheet, the banking process is streamlined, especially when they would otherwise have had to start from scratch with a syndicate of several banks.

The following are some examples of staple financing applications:

1. Accelerate the sales process

Some potential buyers involved in an M&A transaction may not have liquid capital ready to complete the transaction within the specified time frame. This means they will have to spend more time looking for financing from various financial institutions to close the deal. 

However, when the seller and its advisors make financing available to bidders, the process can be accelerated, leading to a successful transaction.

    2. Maximize your sales price.

    All potential buyers who have expressed an interest in completing the transaction are given staple financing. It ensures that they will receive some form of funding even if the amount they can raise on their own falls below the threshold. 

    Because financing is available to all potential buyers, the overall competition increases, forcing buyers to raise their offering price to emerge as the overall auction winner. 

    Even if the seller raises the asking price, bidders will compete to outbid one another because the seller guarantees financing to supplement the buyer's available financial resources.

    3. Mechanism of price signaling

    Shrewd buyers use staple financing to gauge the seller's price expectations. It is possible to achieve this by reverse-engineering the financing package to obtain the debt-to-EBITDA ratio

    When the bidder is aware of the price range that the seller anticipates, they can submit a bid with a high likelihood of being accepted by the seller. Knowing the price also promotes transaction transparency by providing all buyers with balanced information.

    4. Firms are guaranteed financing

    Staple financing guarantees financing to businesses with difficulty obtaining funding from lenders. 

    It reduces the possibility that some purchasers with a high chance of winning the bid will drop out of the auction process due to a lack of sufficient capital to complete the transaction.

    Many purchasers may be unable to complete the transaction if the seller and its advisors do not provide financing. The seller may be forced to accept a lower purchase price due to a lack of competition.

    Conflicts of interest in staple financing

    Although staple financing is a useful tool in a buyer-seller relationship, certain risks call its legitimacy into question. One of these dangers is the investment bank's potential conflicts of interest. 

    During an auction, the investment bank's advisory department assists the seller in obtaining the best offer possible from the list of interested purchasers.

    On the other hand, the bank's lending department organizes financing packages for potential buyers who want to close the deal.

    The bank is at a crossroads because it collects two fees as both an advisor and a lender. One price is earned for advising the seller, while the other is earned by providing financing to the potential buyer.

    The conflict arising from such an arrangement is that the bank may recommend a buyer who will use the financing agreement to the seller, even if the bid is lower than others. The bank's motivation, in this case, is to collect fees from the buyer.

    Examples of recent deals offering staple financing

    In an M&A transaction, stapled finance is a loan promise arranged by a seller. The winner of the bidding war has the choice (but not the responsibility) to accept this loan pledge. 

    We demonstrated that stapled finance enhances bidding competitiveness by subsidizing weak bidders who raise their bids and, as a result, the price that strong bidders (who are more likely to win) must pay. 

    The lender does not anticipate making a profit and must be rewarded for making the loan. Therefore, the seller's gain is reduced but not eliminated. Unfortunately, this also means that stapled finance loans will perform worse than other buyout loans.

    Here are a few examples of transactions that have been completed using staple financing:

    1. Michael Foods Inc.

    Michael Foods, a producer and distributor of refrigerated potatoes, specialty eggs, cheese, and other dairy products, was sold to GS Capital Partners in 2010 for $1.7 billion by Thomas H. Lee Partners.

    Michael Foods and Thomas H. Lee's sole financial advisor was Bank of America (BofA) Merrill Lynch. To facilitate the transaction, BofA affiliates provided debt financing.

    2. Hillman Group 

    In 2010, Oak Hill Capital Partners, a New York-based private equity firm, purchased Hillman Group, a company held by Code Hennessy & Simmons and others. The company was bought for $815 million in total. Barclays Capital advised Hillman Group, providing loan financing to Oak Hill Capital Partners to complete the transaction.

    Concerns for the Seller in Staple Financing 

    While the entire staple financing package must be believable from a commercial and legal standpoint, the seller will be concerned with issues that affect value and timeliness.

    The following are issues related to credibility, value, and timing:

    1. Quantum

    A higher loan quantum may increase the price a buyer is willing to pay, which affects value. On the other hand, if the amount of debt on offer is insufficient, it will damage credibility and timing.

    2. Pricing has to do with trustworthiness and value.

    Value-based pricing ensures that your consumers are satisfied with the amount they are paying, given the value they are receiving. 

    Pricing your goods in accordance with the value your clients see in them keeps you from undervaluing yourself and ensures that the customer experience you provide meets their expectations.

    3. Other key commercial issues.

    Other issues exist, such as margin ratchet operation, cash sweep, equity cure rights, concern credibility, value, and timing.

    4. Certainty of Funds

    In the event of a split exchange and completion, the seller's confidence in the financing is crucial. 

    A well-informed seller will expect its preferred bidder to have certainty of funds by the time the SPA is signed, with minimum "outs" for both the banks and the preferred bidder under the banking documents and the SPA.

    Any attempt by the banks to insert any event or circumstance (for example, target group insolvency) as a reason for the banks to refuse to fund, which the seller would not accept as a condition to completion under the SPA, should be vigorously resisted. 

    Any prudent buyer will demand symmetry between the terms of its financing and its duties under the contract.

    5. Condition precedent refers to the order in which events occur. 

    The shorter the time between the final bid being accepted and signing, the more precedent conditions can be pushed to become the following conditions.

    This is especially the case in a split exchange and completion scenario, where all commercial papers (CPs) must be satisfied or agreed upon to achieve funding certainty.

    6. Key legal points

    The definition of material adverse effects (MAE), what constitutes a "continuous" event of default, and the amount to which representations and guarantees, covenants, and events of default have been deleted or qualified, all affect credibility and timing. 

    While the seller will usually have no interest in the conditions of the facilities after they are completed, a well-informed buyer will anticipate a reasonable position to have been reached on these points if the documentation is portrayed as substantially negotiated.

    7. Management input has to do with credibility and timeliness. 

    At the earliest opportunity, management input on the documentation should be requested.

    The following are issues that the seller will be less concerned about:

    • Equity / Acquisition Structure: This will differ from one buyer to the next. Thus it should be left to the relevant buyer to negotiate with the banks.
    • "Permitted" Items: Management input (and the usual carve-outs) in relation to the representations and generally positive and negative undertakings found in the facilities agreement should be sought. 

    Different purchasers will have their plans for the business in the future and need to negotiate any bespoke permissions / carve-outs on their own.

    • Financial Covenants: Every effort should be made to agree on a range of covenants, a reasonable level of headroom, and (where possible) advanced covenant definitions.

    The financial covenant ratios (and, to some extent, the definitions) will ultimately be determined by the relevant purchaser's financial model.

    Transferability: transfer constraints will be a key concern for the banks. Different purchasers will have different transfer criteria (borrower approval necessary, white-lists or black-lists of approved or banned transferees, borrower consultation, etc.). Thus it is best left to the individual purchaser to argue for their desired formulation.

    Issues for purchasers in Staple Financing

    Buyers are not obligated to accept the attached staple financing and are free to get their bank financing.

    Indeed, where a group of banks provides financing, many buyers will regard the commercial terms as representing the "lowest common denominator" and prefer to shop around for a better deal.

    However, a buyer's ability to do so in recent years, particularly on larger deals where it may need to assemble a syndicate of six or seven banks by signing, is severely limited. 

    This is especially the case if the seller has prohibited vendor due diligence disclosure to financiers other than the staple banks. 

    Instead, a buyer may opt to augment the staple banks with one or more of its relationship banks, allowing it to afford to lose a bank — either because it withdraws at the last minute or because it is "bounced" for refusing to surrender important points. 

    If all banks can agree on final documentation, each bank may be able to engage on a reduced scale.

    Researched and authored by Ruxue Bai | LinkedIn

    Reviewed and edited by James Fazeli-Sinaki | LinkedIn

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