Documentary relaxation clauses
Produced in partnership with Neil Grant
Documentary relaxation clauses

The following Banking & Finance guidance note Produced in partnership with Neil Grant provides comprehensive and up to date legal information covering:

  • Documentary relaxation clauses
  • Background
  • Trigger conditions
  • Common documentary relaxations
  • Negotiation points
  • Temporary or permanent relaxations
  • Disapplying operational covenants
  • Conclusion

This Practice Note explains various aspects of a documentary ‘relaxation’ or ‘release’ clause, which is often included in leveraged buy-out (LBO) facility agreements. It also examines the most frequently encountered trigger conditions, common methods of relaxing requirements to provisions in the facility agreement and certain points to consider when negotiating this clause.

This Practice Note assumes a certain level of understanding of leveraged finance structures and documentation. For introductory information, see Practice Notes: Acquisition finance—introductory guide and Acquisition finance—facilities agreement. The Glossary of acquisition finance terms and jargon may also be helpful.

Background

Traditionally, leveraged buy-out (LBO) facility agreements have imposed tight restrictions on the group's activities and included stringent mandatory prepayment obligations due to the high leverage. Private equity sponsors often take the view that, while restrictions may be warranted while the balance sheet is highly leveraged, should the group substantially deleverage, tight controls are unnecessary. Deleveraging may occur either due to:

  1. a combination of earnings before interest, taxes, depreciation, and amortisation (EBITDA) growth and debt repayments, or

  2. an extraordinary event, such as a listing, which generates significant new equity proceeds to prepay a material portion of the debt

The essence of this clause is that if, during the life of the facility, a trigger condition is satisfied, the facility agreement will be automatically amended so as to be