The term debt pushdown refers to any type of structuring where a portion of the acquisition debt is pushed down into the acquired company (the target company). These structures, which require a sequence of successive transactions, are fairly complex yet popular because they offer the advantage of facilitating acquisition financing. It is in the common interest of the lender, the buyer, and the seller to find a win-win solution and close the financing as quickly as possible (1).

  1. Why Use Debt Pushdown? Since the acquisition entity (holding company) generally has limited substance, banks prefer having the target company as their debtor, given its proven track record, potential collateral, and better credit rating. It is therefore quite attractive for the holding company to leverage its new subsidiary's assets to finance the acquisition.

  2. Which Structure to Choose Traditionally, the structure involves providing funds through two loans. A bridge loan is granted to the holding company to cover the purchase price. After the acquisition, the bank provides a second loan directly to the target company, allowing the bank to take security. With the available funds, the target company distributes a dividend (or reduces its capital) so that the holding company can repay the bridge loan The end result is that long-term financing sits with the target company, which will then repay the bank.

  3. Alternative Structures. Among the many variations of this structure, another common approach relies on deferred payment. The holding company purchases the target company’s shares in exchange for a deferred payment commitment (seller note or vendor loan). Following the acquisition, the bank grants a loan to the target company, backed by security over its assets. The target then distributes the proceeds through a special dividend to the holding company, which can then settle the vendor loan. This setup is particularly suitable when there is a strong level of trust between the parties (such as family business transfers).

  4. Sufficient Equity. Whatever structure is chosen, the target company must have sufficient equity. Indeed, to repay the bridge loan or the vendor loan, the target company will need to make a dividend distribution, which is only permitted to the extent of available reserves (including retained earnings). Alternatively, if the share capital is substantial, a capital reduction can also be considered.

  5. Subject to Financial Assistance Rules or Not? Does a debt pushdown fall under financial assistance rules? This question is often raised. As a reminder, when a target company assists its parent company in acquiring its own shares, financial assistance requires a specific procedure subject to strict formal requirements to protect the interests of creditors and minority shareholders. Today, it is widely accepted that a debt pushdown does not necessarily trigger financial assistance rules, with the causal link serving as a key differentiating criterion (2).

  6. Case-by-Case Analysis.Therefore, proposed structures must be analyzed on a case-by-case basis. Transaction documentation is critical: if the link between the bridge loan and the long-term loan is established from the outset, proving a causal link will be hard to deny. If, however, the two transactions are not linked in their intent, financial assistance formalities do not appear necessary.

These legal provisions must be interpreted strictly, meaning the benefit of the doubt goes to the taxpayer/litigant. Nevertheless, it is recommended to approach this type of structuring with caution and seek advice from specialists.

Article originally published in La Libre Économique by Tanguy della Faille, Partner at Fondaris, on 09/09/2021. Published/updated version on the Fondaris website with the author’s permission.