Singapore, with its political stability and reputation as an investors’ safe haven, continues to shine as a key global financial centre. Its whole-of-government approach to managing and containing the spread of COVID-19 and the Singapore government’s continuing advocacy for international co-operation and a rules-based multilateral world order in the face of the pandemic has also earned it global praise and further enhanced Singapore’s status as an efficient, consistent, trusted and principled state with a strong rule of law. Given its geography, Singapore is also traditionally considered a natural platform and financing hub for acquisition financing transactions in the ASEAN region.
The major lenders in the Singapore market for financing transactions fall into three broad categories:
Real estate investment trusts (REITs) consolidation is the predominant theme in the Singapore M&A scene over the past 24 months. To achieve greater trading liquidity, higher market capitalisation and better economies of scale, many REITs – which are a prominent feature in Singapore listings – have merged. One notable transaction is the combination of CapitaLand Mall Trust and CapitaLand Commercial Trust by way of a trust scheme of arrangement to create CapitaLand Integrated Commercial Trust, forming one of the largest REITs in the Asia Pacific region.
Weakened stock prices brought on by the pandemic have also given rise to opportunities for privatisations and delistings across various sectors and industries (such as F&B, manufacturing, real estate and construction). On the financing front, banks and other lenders continue to demonstrate their willingness to support and fund these mergers, privatisations and buy-outs. Sponsors of these transactions include founder shareholders, local and foreign corporate purchasers, private equity and other investment funds and sovereign wealth funds.
The recognition (and allocation) of transaction and business risks associated with COVID-19 featured noticeably in a number of acquisition financing transactions – and, indeed, Singapore financing transactions generally.
Understandably, borrowers and sponsors are keen to carve out and/or qualify the effects of the pandemic from their obligations in the finance documents. In fact, the top-tier sponsors/borrowers have had some success in negotiating for such concessions. Such concessions can take various forms: from additional grace periods in respect of obligations to submit deliverables (eg, audited financial statements the production of which has been delayed by lockdowns) to specific qualifications and exclusions of COVID-19-precipitated disruptions and other negative consequences from the material adverse effect definition and various business and/or operations centric representations, undertakings and events of default.
In terms of transaction timelines, COVID-19 movement restrictions have resulted in changes in the manner in which M&A transactions are undertaken, particularly those with cross-border elements. Due diligence is performed remotely and some delay has been caused as access to on-site due diligence is restricted. Shutdowns in various jurisdictions have also caused delays in processing of approvals by government agencies. Inevitably, these disruptions on the M&A front have had a knock-on effect on the financing work stream.
Common law choice of law rules apply in Singapore. If the parties to a contract have expressly selected a law to govern that contract, that choice will be regarded as a valid selection and recognised by the Singapore courts as long as it has been made in good faith.
In the context of a financing transaction, the foregoing applies to the primary financing documents such as the facility agreement, the intercreditor agreement and other documents which do not give rise to a proprietary or other security interest. In the case of security documents, for reasons of lex situs and ease of enforcement, it is appropriate for the governing law of the relevant security document to be the same as the law of the place where the secured assets are located.
The primary documentation for an acquisition financing transaction – being the facility agreement, the intercreditor agreement and the security documents – do not follow any strict form, and there are no formalities such as notarisation or registration required in order for these documents to be effective (apart from the registration of any security as discussed below). There are also no minimum content requirements under Singapore law for loan contracts.
The above being said, financiers and major acquisition sponsors in Singapore often take guidance from the forms of facilities agreements published by the Loan Market Association (LMA) and the Asia Pacific Loan Market Association (APLMA). These are referred to frequently during negotiations by both sides of the table and also as a starting point.
Documentation is typically prepared in English, and translated into a foreign language where necessary to comply with local law requirements. This can be relevant in the case where there is a foreign security provider or foreign guarantor to the financing transaction or where security is being taken in a foreign jurisdiction.
Legal opinions are typically required as conditions precedent to the financing. These are opinions given by the financiers’ legal counsel to the financiers. Standard opinions given include those relating to the validity and enforceability of the loan documentation executed or to be executed, or those relating to the capacity of the borrower or other obligors to enter into the transaction. The legal opinion gives assurance to the financiers of the validity, legal effect and enforceability of the transaction.
Where documentation is governed by foreign law or an obligor is a foreign entity, an equivalent legal opinion from foreign counsel on similar matters relating to the relevant foreign jurisdiction is usually also required. In the case where the target is not listed, it is also common to include the appropriate due diligence reports relating to the target and its subsidiaries (such as legal, tax or other accounting due diligence) as conditions precedent to the financing.
Due in large part to the liquidity and depth of the Singapore loans market, senior loans continue to be the mainstay of acquisition financing, and are, in the majority of cases where external debt is involved, the primary means of financing the acquisition in question.
Senior loans are typically taken out by the purchasing vehicle (the “Bidco”). Where conditions permit (such as, whether there are any local law financial assistance or other analogous prohibitions and, in the case of a public takeover, whether a privatisation is contemplated), debt "push-down" requirements and features are often incorporated.
Where mezzanine debt is used in conjunction with senior loans in an acquisition financing, it is generally expected that such mezzanine debt be taken out by an intermediate holding company (the “Holdco”) at a level above the Bidco. Where the mezzanine debt is required to be incurred at the Bidco level, a contractual subordination arrangement will need to be put in place to ensure that the senior loans rank ahead of such mezzanine debt in terms of priority.
As observed above, due to the depth of the Singapore loans market, the external debt funding component of an acquisition is, more often than not, wholly satisfied by senior debt. The use of mezzanine debt in conjunction with senior debt continues to be the exception rather than the rule.
Bridging loans are a common feature in the Singapore acquisition financing landscape, and are especially useful in the case where confidentiality and speed of execution are of the essence. Bridging loans generally have tenors between three to 12 months, and may incorporate tenor extension features together with margin step-ups at various tenor milestones to properly reflect and account for the bridge lenders’ associated refinancing risks.
Bridging loans (if drawn) are typically refinanced by its subsequent "take out" financing, taking the form of senior loans or (in the case of a bridge-to-bond financing) bonds.
In certain circumstances, tapping the bond/debt capital markets have been observed to be the preferred long-term financing strategy for certain issuers undertaking major acquisitions (for instance, pursuant to their existing MTN programmes). Where bonds are so used, they are issued to "take out" the original bridging loan pursuant to the so-called bridge-to-bond model.
Where existing management or other stakeholders who held equity in the target are expected to remain post-acquisition, these stakeholders are usually "rolled up" such that they become direct/indirect shareholders of the Bidco in lieu of them receiving cash consideration for the sale of their shares in the target. Such "rolled up" interests may take the form of shares, shareholder loans (including loan notes) or a combination thereof.
In cases where the target group operates and owns an asset portfolio of an appropriate class (eg, real estate, vessels, etc), the financing for the group’s acquisition can take on a more asset-based lending complexion where, subject to the financial assistance prohibitions and other relevant restrictions being overcome (see 5.4 Restrictions on Upstream Security), the asset portfolio – which would have been provided as collateral for the financing – will, in addition to cashflow-based financial covenants, also be subject to a loan-to-value (LTV) security covenant or other equivalent collateral headroom coverage test. This would be in addition to the usual financial covenants imposed on a leveraged finance transaction. It is not uncommon for LTV covenants to come with the borrower’s and/or the sponsor’s right of cure such that in the event of an LTV breach, the borrower and/or the sponsor may, within the agreed grace period, rectify the LTV by prepaying the relevant loans or provide additional security acceptable to the lenders or a combination thereof.
Intercreditor arrangements may comprise "vanilla" security sharing agreements (ie, a conventional security sharing arrangement with a basic recovery waterfall and with the lenders ranking pari passu among themselves) at the one end of the spectrum to highly structured intercreditor agreements with arrangements dealing with creditors’ voting, enforcement moratoriums, call options and other bespoke provisions. Intercreditor arrangements typically include sharing arrangements similar to those in typical syndicated loan transactions. Any debt recovery proceeds received by a creditor in excess of the amount it is entitled to receive under the agreed terms of the intercreditor agreement can be clawed back and redistributed to the other creditors in accordance with those terms.
In addition to the use of an intercreditor agreement to achieve the relative ranking and priorities between the debt providers, the subordination of mezzanine debt to senior debt can also be achieved through structural subordination. Structural subordination occurs where the mezzanine creditors lend to the Holdco, which sits above the Bidco in terms of the chain of ownership, while the senior creditors lend to the Bidco directly. The funds received by the Holdco under the mezzanine debt are used to fund the Holdco’s subscription of shares in the Bidco. On the winding-up of the Bidco, the mezzanine creditors are "structurally subordinated" and only have recourse to what the Holdco can recover as a shareholder of the Bidco. The senior creditors will retain their priority and rank ahead of the mezzanine creditors in this manner as the former would have recourse to the Bidco’s assets as its creditors.
In terms of permitted payments, there are typically no prohibitions on any scheduled, mandatory and voluntary payments or interest servicing of the senior debt. In contrast, subject to any express carve-outs as agreed between the parties, no payment of principal on any mezzanine and high-yield debt is usually allowed until the senior debt is repaid in full. However, interest on mezzanine and high-yield debt (subject to pre-agreed rates and/or caps) may usually be paid and/or capitalised.
For completeness, debt provided by shareholders of the Bidco are typically subordinated by way of an express subordination agreement. The subordination agreement would contain customary provisions such as those prohibiting the repayment of such debt (including by exercising any set-off), and those requiring the shareholder to turn over to the common security trustee any recoveries received by it in respect of such debt, up to the aggregate of all amounts which may be or become payable as senior debt. In a number of deals, the Bidco is entitled to repay shareholders debt if the target group meets certain financial targets but this is negotiated on a case-by-case basis.
Where the acquisition financing in question involves a combination of bank loans and bonds, the intercreditor agreement will incorporate the appropriate ranking and priorities between these two classes of debt.
Where interest in respect of the senior debt is hedged, hedge counterparties that are senior creditors are typically entitled to share in the security package and therefore are parties to the intercreditor agreement. In terms of priority, the hedging debt would usually rank pari passu with the senior debt.
Outside of investment grade acquisition financing or other acquisition financing transactions with substantive recourse against the sponsor, recourse under leveraged financing transactions is generally limited to the Bidco and the target group. The target may seek to limit its subsidiaries providing security and guarantees to those with a certain minimum level of contributions to the earnings before interest, tax, depreciation and amortisation (EBITDA) and/or revenues of the target group, and/or those holding a certain minimum percentage of the consolidated gross assets of the target group. Such “material subsidiary” tests are often accompanied by an overarching guarantor coverage requirement which requires members of the target group to make up a certain minimum percentage of the EBITDA, revenues and/or the consolidated gross assets of the target group.
A wide range of security may be granted in acquisition financings. Mortgages, fixed and floating charges and assignments are the most common forms that these security interests take. Section 131 (1) of the Companies Act requires certain categories of security created by a Singapore company (or a foreign company registered under Division 2 of Part XI of the Companies Act) to be registered with the Accounting and Corporate Regulatory Authority of Singapore within 30 days (or if the instrument in question is executed out of Singapore, within 37 days) of its creation. If this section is not complied with, the charge will be void against any liquidator or creditor of the company. Registration of security interests is usually attended to and handled by the lenders’ counsel.
Security over the target group's assets is typically granted in accordance with certain agreed security principles between the borrower and the financiers. These principles essentially seek to balance the interests between the parties by implementing a cost-benefit analysis in relation to the creation of the security; considerations in determining whether a particular security should be given include (i) whether the giving of such security would result in a breach of corporate benefit, financial assistance laws or other similar laws or regulations, and (ii) whether the giving of such security would result in costs that are disproportionate to the benefit obtained by the debt providers.
Security over Shares
The manner in which security is taken over shares depends on whether the shares are in scrip form or scripless.
In the case of scrip shares, security can be taken by way of a legal mortgage or an equitable charge. In a legal mortgage, the shares are registered in the name of the mortgagee (ie, the mortgagee will become the holder on record of those shares), subject to the mortgagor’s equity of redemption. It is, however, more customary for security over shares to be created by way of an equitable charge. In the case of an equitable charge, physical certificates representing the shares so charged are delivered to the chargee together with undated blank transfer forms executed by the chargor. The security document creating the equitable charge will contain express provisions conferring the chargee with the right to complete the transfer forms and to effect a transfer (typically to a receiver in preparation of a subsequent mortgagee sale) upon the security becoming enforceable.
Scripless shares (ie, dematerialised shares) are typically shares of companies which are listed on the Singapore Exchange Securities Trading Limited (SGX-ST). How security is taken over scripless shares turns on where those shares are held. In the case where the shares are held directly with the Central Depository, security is created by way of a statutory assignment or a statutory charge via the prescribed forms under the Securities and Futures (Central Depository System) Regulations 2015. If the shares are held in a sub-account with a depository agent, security is created by way of a "common law" charge. Key creation and perfection steps required to be complied with include both the chargor and the chargee opening and maintaining their respective sub-accounts with the depository agent, and the delivery of the notice of charge to the depository agent.
Security over Inventory
Because the chargor is expected to have continued use of its inventory in the course of its business, security over inventory generally takes the form of a floating charge, crystallising upon the occurrence of an enforcement event or any other stipulated event as agreed between the parties.
Security over Bank Accounts
Security over bank accounts are typically expressed to be taken by way of a fixed charge (although the manner in which the accounts are operated by the chargor may well result in its recharacterisation as a floating charge). Depending on the purpose for which the accounts are set up, the withdrawal conditions applying to those accounts may differ. For instance, a greater latitude will be given for operating accounts while a higher degree of control will apply to special purpose accounts such as debt service reserve accounts, mandatory prepayment accounts and equity cure accounts. Notices are delivered to the account bank to perfect the charge.
Security over Receivables
Security over receivables or book debts are created by way of an assignment or charge. Notices are delivered to the contract debtors in order to perfect the security. Whether such notices are deliverable upon the creation of the security or only after the occurrence of an enforcement event is often the subject of negotiations, with the parties taking into consideration administrative factors such as the number of contract debtors, the receivables quantum from the contract debtor in question, whether the composition of contract debtors is expected to vary over time, etc.
Upon the chargor’s collection and receipt of the receivables, such receivables are typically required to be promptly deposited into a bank account which is subject to security.
Security over Intellectual Property Rights
Security over intellectual property rights are created by way of an assignment or charge. If the intellectual property rights in question are registered, the assignment or charge should also fulfil registration requirements, and be duly recorded in the appropriate register at the Intellectual Property Office of Singapore.
Security over real property in Singapore may be created by way of a legal or equitable mortgage or charge. However, where title is registered under the Land Titles Act (as is typically the case), the legal mortgage must be in the form prescribed by statute. The prescribed form dictates only the format of the mortgage, and parties may include such covenants and provisions as they deem fit. The standard covenants and provisions of a particular bank would be set out in a Memorandum of Mortgage filed at the Land Registry with the Singapore Land Authority and are, for the purposes of a particular mortgage, incorporated into, and amended as necessary by, the mortgage security document by reference.
In the case where title has not been issued, an equitable mortgage is usually created over the sale/lease/building agreement by way of an assignment of that agreement. In addition to such an assignment, the mortgage document is executed in escrow such that the mortgagee is able to perfect the security by registering the mortgage once the separate title has been issued for the land. In such a case, it is customary for mortgagees to protect their interest in the land by lodging a caveat with the Singapore Land Authority.
Parties are generally free to agree on their own forms of security documents and are not circumscribed by the use of a fixed form save for the following two notable exceptions:
Processes (including filings and other procedures) to register and/or perfect security interests turn on, among other things, the type of collateral and are described in greater detail in 5.1 Types of Security Commonly Used and in 8.1 Stamp Taxes. Readers should note that in the case where the security provider is incorporated in a foreign jurisdiction, specific local law registration and/or other perfection requirements under that jurisdiction may also apply.
Restrictions on upstream security and procedures to overcome such restrictions are described in greater detail below in 5.5 Financial Assistance and 5.6 Other Restrictions.
The Companies Act prohibits a public company (or a company whose holding company or ultimate holding company is a public company) from providing financial assistance, whether directly or indirectly, to any person in the acquisition or proposed acquisition of shares in that company or the holding company or the ultimate holding company of that company. The legislation is broadly worded and does not make a distinction between financial assistance for the original acquisition financing and financial assistance for subsequent refinancings thereof. However, various “whitewash” procedures are available under the Companies Act which, if undertaken and complied with, will permit the Singapore company in question to give the security or guarantee which would otherwise constitute prohibited financial assistance.
With the enactment and coming into force of Section 76 (9BA) of the Companies Act, many of the older whitewash procedures – which require, among other things, publishing terms of the whitewash resolution in a daily newspaper or (as the case may be) all directors making a solvency statement – have all but fallen into disuse. Under Section 76 (9BA) of the Companies Act, a company is permitted to provide financial assistance as long as:
As there is no time period which the company must wait out upon passing such a resolution before it can give the financial assistance, the procedure in Section 76 (9BA) allows members of the target group that are Singapore companies to give the guarantees and security very shortly after (or even contemporaneously with) the completion of the acquisition.
Guarantees and security may be given by a company in respect of the borrowing of other members of its corporate group. However, as guarantor or security provider, the company must be cognisant and pay due attention to the issues of corporate benefit. The directors of the company are under a duty to ensure that the company enters into agreements which are commercially beneficial to the company.
In the case of a downstream guarantee, the existence of corporate benefit can usually be easily established. On the other hand, where the guarantees are cross-stream or upstream (as is the case where members of the target group are required to guarantee the purchaser’s liabilities), justifying the existence of corporate benefit to the guarantor guaranteeing the debts of its holding company or sister companies may pose some difficulty. In such a scenario, the established market practice in Singapore is to obtain the approval of the shareholders of the company seeking to give the guarantee. Alternatively, the guarantee can be justified where the guarantor is itself receiving the proceeds of the loan (through inter-company loans, for example) or where it receives indirect benefits such as reduced cost of funding or stronger or maintained financial capability of the parent.
Security is generally expressed to become immediately enforceable upon the occurrence of an event of default or upon the acceleration of the secured debt. Upon the occurrence of such an event, the chargee can then exercise the powers granted to it pursuant to relevant security documents and enforce the security over the charged assets. Such powers would usually include:
When exercising its power of sale, the chargee has a duty to act in good faith and to take reasonable steps to obtain the true market value or the proper price or the best price reasonably obtainable at the time. This need not necessarily mean that the sale must be by public auction.
As a matter of prudence, the chargee should generally seek advice from appropriate financial advisers as to whether a private sale or a public auction will yield the best price. The touchstone and central tenet in such an exercise is "reasonableness" (as further expounded by case law). Before proceeding with the sale, the chargee should also consider getting a valuation, advertising the sale in the relevant market, and making reasonable efforts to explore the range of possible buyers in the relevant market.
Outside of investment grade acquisition financing or other acquisition financing transactions with substantive recourse against the sponsor, the guarantors will generally be limited to the Bidco and members of the target group. Where the financing is with recourse against the sponsor, the sponsor itself may stand as guarantor.
Apart from the restrictions and issues already discussed in 5.4 Restrictions on Upstream Security to 5.6 Other Restrictions, there are no general limitations relating to the amount of debt which can be guaranteed by a Singapore company, save for any restriction as contained in its constitution. Guarantees may also extend to present and future obligations. As a matter of Singapore law, a guarantee by a Singapore company does not, in itself, attract any registration requirements with any Singapore authorities.
There is no express requirement for guarantee fees under Singapore law.
There is no express doctrine of equitable subordination under Singapore law.
Transacting with borrowers who are insolvent at the time of the transaction or who become insolvent as a result of the transaction carry claw-back risks which can void the transaction. In particular, the following transactions can be set aside by a liquidator in a liquidation:
Presently, the timeframes under which transactions can be set aside are as follows.
In addition, extortionate credit transactions (ie, transactions which terms require grossly exorbitant payments to be made in respect of the provision of the credit, or which are harsh and unconscionable or substantially unfair) can also be set aside if entered into three years before the commencement date.
A floating charge created within one year before the commencement date will, unless it is proved that the borrower was solvent immediately after the creation of the floating charge, be invalid except to the aggregate amount of the value of certain consideration (and interest thereon).
Where the floating charge is made in favour of a person connected with the borrower, the timeframe would be two years before the commencement date irrespective of whether the borrower was solvent immediately after the creation of the floating charge.
The risks of claw-back referred to above apply equally to cases where, instead of winding up, a judicial manager is appointed to restructure the borrower as a going concern or to achieve a more advantageous realisation of assets for creditors.
Aside from claw-back risks, moratoriums prohibiting creditors from enforcing on a borrower’s security can be in force when an insolvent borrower is intending to propose a scheme of arrangement to its creditors to restructure itself (ie, debtor in possession restructuring) or when the insolvent borrower is in judicial management. Further, if the borrower commences scheme of arrangement or judicial management proceedings, a creditor cannot terminate or amend its contract with the borrower or claim for acceleration by reason only of its rights under contract to do so if such proceedings have been commenced or that the borrower is insolvent (commonly known as ipso facto clauses). The limitation of the enforceability of such ipso facto clauses means that the ability of a creditor to immediately call on and enforce upon the occurrence an insolvency event of default has been narrowed. However, the creditor will still be able to accelerate and/or enforce upon the occurrence of any other event of default under the loan agreement (ie, any event of default other than insolvency proceedings or insolvency).
Stamp duty of up to a maximum amount of SGD500 is payable in respect of security documents which create security over real property, stock or shares. Stamp duty of SGD10 is also payable where there is a declaration of trust (which may, in the context of the financing documents, be contained in subordination agreements, intercreditor agreements or other security trust agreements).
Payments of principal under financing documents may be made without withholding or deduction for or on account of any taxes, duties, assessments or governmental charges in Singapore. Interest payments connected to the loan made to any person not resident in Singapore within the meaning of the Income Tax Act will generally be subject to Singapore withholding tax. Relevant tax treaties may apply to reduce such withholding tax rate. If no exemptions apply, the applicable withholding tax rate is 15% of the gross amount of the income earned from any interest, commission, fee or other payment made in connection with the loan or indebtedness.
There are no thin-capitalisation rules under Singapore law.
While Singapore is generally considered to be an open economy with minimal investment restrictions, certain regulated industries with a national interest element (such as banking, insurance and media) may require regulatory approval for ownership beyond certain prescribed thresholds. Instances of such legislation include the Banking Act, the Finance Companies Act, the Insurance Act, the Newspaper and Printing Presses Act, and the Telecommunications Act.
Securities Industry Council and the Takeover Code
The acquisition of companies, registered business trusts and real estate investment trusts (REITs) listed on the SGX-ST are governed by the Takeover Code. For completeness, it should be noted that the Takeover Code can also apply to unlisted public companies or unlisted trusts if they have (i) more than 50 shareholders or more than 50 unit-holders and (ii) net tangible assets in excess of SGD5 million.
The Securities Industry Council (SIC) is the regulator with supervisory oversight in relation to matters pertaining to the Takeover Code. The SIC also has the authority to issue rulings on the interpretation of the general principles and rules under the Takeover Code.
While the Takeover Code does not have the force of law, any breach of its provisions can result in the imposition of sanctions by the SIC, which may include: (i) private reprimands, (ii) public censure and/or (iii) deprivation or suspension of the offender’s ability to participate in the Singapore securities market. The SIC may also issue rulings to require the acquirer to make compensatory payments to shareholders.
Where either the offeror or the target is a company listed on the SGX-ST, the SGX Listing Manual may also apply. The Listing Manual contains rules regulating the general affairs of listed companies. Therefore, its provisions must be taken into account in the appropriate context – such as, for example, the obligation to make timely disclosures to shareholders as regard to information pertaining to a takeover offer.
A failure to comply with the Listing Manual can lead to disciplinary action being taken by the SGX-ST, which may include (i) reprimands, (ii) composition offers, (iii) trading suspensions and (iv) delistings.
The concept of certain funds is a central feature of takeover financing. In the case of an offer where the Takeover Code applies, the offer documents must include an unconditional confirmation from an appropriate third party (typically the offeror’s financial adviser) that sufficient resources are available to the offeror to satisfy the full acceptance of the offer. In the case where debt financing is used to fund the offer, the financial adviser will generally give this confirmation only after having inspected (and becoming satisfied) that the offeror’s financing is on a “certain funds” basis. Under a financing extended on a “certain funds” basis, the events of default which can precipitate a funding stop will be confined to a small handful of events which are of a critical nature or which are within the offeror’s control. Similarly, the lenders’ right to accelerate the borrowings will be curtailed during this “certain funds” period to a similar extent.
In the case where the Takeover Code does not apply, there is no regulatory requirement that the financing be on a “certain funds” basis. However, it is not unusual for purchasers in such a context to negotiate for an equivalent standard of funding certainty with a view to enhancing their prospects of winning the bid.
All relevant considerations have already been addressed.