With the lifting of all COVID-19 border measures, Singapore exited the acute phase of the pandemic in early 2023. Together with the reopening of the broader Association of Southeast Asian Nations (ASEAN) region and China’s easing of its zero-COVID policy, there is renewed optimism for greater economic activity and a fast recovery for the ASEAN and Asia-Pacific regions, which is expected to boost Singapore’s outlook. Given its geography, the city-state is traditionally considered a natural platform and financing hub for acquisition financing transactions in ASEAN.
The major lenders in the Singapore market for financing transactions fall into three broad categories, as follows:
Amid the global energy transition trend, two leading Singapore offshore and marine engineering conglomerates, Sembcorp Marine and Keppel Offshore & Marine, completed their merger in 2023 to form one of the world’s largest offshore energy players. The combined entity is expected to benefit from greater synergies from its broader global footprint and operational scale, and have the capability to compete more effectively in the renewable and clean energy space.
Weakened stock prices brought on by inflation fears and geopolitical tensions in Europe have also given rise to opportunities for privatisations and delistings across various sectors and industries (such as healthcare, hospitality, 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 buyouts. Sponsors of these transactions include founder shareholders, local and foreign corporate purchasers, private equity and other investment funds and sovereign wealth funds.
Proposed Amendments to the Companies Act 1967
Proposed amendments to the Companies Act 1967 (CA) could however have a dampening effect on Singapore privatisation transactions. The Singapore Ministry of Finance (MOF) and the Accounting and Corporate Regulatory Authority of Singapore (ACRA) issued their responses in early 2023 to key feedback received on proposed amendments to the Act. Under Section 215 of the CA, a person (the “transferee”) has the right to acquire the shares of any dissenting shareholder on a compulsory basis if a scheme or contract involving the transfer of all the shares of a company (the “transferor company”) has been approved by at least 90% of the shareholders (the “90% threshold”). Section 215(9) of the CA provides that shares held or acquired by (i) a nominee on behalf of the transferee, or (ii) a related corporation of the transferee or a nominee of that related corporation, will be treated as held or acquired by the transferee, so these shares are excluded from the computation of the 90% threshold for compulsory acquisition. The Companies Act Working Group, a committee comprising industry stakeholders set up by ACRA, had proposed that shares held or acquired by the following persons should also be excluded from the computation of the 90% threshold for compulsory acquisition under Section 215:
MOF and ACRA have accepted the proposal with modifications and, following the public’s feedback, will modify the threshold to establish control of a body corporate to 50%, instead of the 30% threshold that was originally proposed. This will be in line with similar concepts in the CA and the Singapore Code on Take-Overs and Mergers (the “Takeover Code”).
During the height of the pandemic, the recognition (and allocation) of transaction and business risks associated with COVID-19 featured noticeably in a number of acquisition financing transactions – and, indeed, in Singapore financing transactions generally. Understandably, borrowers and sponsors were keen to carve out and/or qualify the effects of the pandemic from their obligations in finance documents. Top-tier sponsors/borrowers have had some success in negotiating such concessions, which have taken various forms, ranging from additional grace periods in respect of obligations to submit deliverables (eg, audited financial statements, the production of which was 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.
As most (if not all) of the COVID-19 movement restrictions and other orders precipitating business and operations disruptions have since been stood down, these concessions are gradually being withdrawn by lenders as the Singapore economy exits the pandemic.
Common law choice of law rules apply in Singapore. If the parties to a contract have expressly selected a law to govern said 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 that 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 – the facility agreement, the intercreditor agreement and the security documents – does not follow any strict form, and no formalities such as notarisation or registration are required in order for these documents to be effective (apart from the registration of any security, as discussed in 5.1 Types of Security Commonly Used). There are also no minimum content requirements under Singapore law for loan contracts.
That being said, financiers and major acquisition sponsors in Singapore often take guidance from the forms of facilities agreements published by the Loan Market Association and the Asia Pacific Loan Market Association. 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 if there is a foreign security provider or foreign guarantor to the financing transaction, or if security is being taken in a foreign jurisdiction.
Legal opinions (ie, opinions given to financiers by their legal counsel) are typically required as conditions precedent to acquisition financing. 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. Legal opinion gives assurance to 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. If the target is not listed, it is also common to include the appropriate due diligence reports relating to the target and its subsidiaries (eg, 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 the primary means of financing the acquisition in question in most cases involving external debt.
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, such mezzanine debt is generally expected to 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 in 3.1 Senior Loans, 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 cases 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 a subsequent “take out” financing, taking the form of senior loans or bonds (in the case of a bridge-to-bond financing).
In certain circumstances, tapping the bond/debt capital markets has been the preferred long-term financing strategy for certain issuers undertaking major acquisitions (eg, pursuant to their existing medium-term note 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 after the acquisition, these stakeholders are usually “rolled up” so that they become direct/indirect shareholders of the Bidco in lieu of receiving cash consideration for the sale of their shares in the target. Such “rolled-up” interests may take the form of shares or shareholder loans (including loan notes), or a combination of these.
Where the target group operates and owns an asset portfolio of an appropriate class (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 be subject to a loan-to-value (LTV) security covenant or other equivalent collateral headroom coverage test, in addition to cashflow-based financial covenants. 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 so that, in the event of an LTV breach, the borrower and/or 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 of these options.
Range of Agreements
Intercreditor arrangements may range from “vanilla” security sharing agreements (ie, a conventional security sharing arrangement with a basic recovery waterfall, with the lenders ranking pari passu among themselves) at one end of the spectrum, to highly structured intercreditor agreements with arrangements dealing with creditors’ voting, enforcement moratoriums, call options and other bespoke provisions at the other. 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 debt providers, the subordination of mezzanine debt to senior debt can also be achieved through structural subordination. This 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 the shareholders of the Bidco is 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 that 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 (senior creditors) are typically entitled to share in the security package and are therefore parties to the intercreditor agreement. In terms of priority, the hedging debt would usually rank pari passu with the senior debt.
Leveraged Financing Transactions
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 to the revenues of the target group, and/or to 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 that members of the target group make up a certain minimum percentage of the EBITDA, revenues and/or consolidated gross assets of the target group.
A wide range of security may be granted in acquisition financings, most commonly taking the form of mortgages, fixed and floating charges, and assignments. Section 131 (1) of the CA requires certain categories of security created by a Singapore company (or a foreign company registered under Division 2 of Part XI of the CA) to be registered with the Accounting and Corporate Regulatory Authority of Singapore within 30 days of their creation (or within 37 days if the instrument in question is executed out of Singapore). If this section is not complied with, the charge will be void against any liquidator or creditor of the company. The registration of security interests is usually 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:
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. However, it is 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 giving the chargee 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 that are listed on the Singapore Exchange Securities Trading Limited (SGX-ST). How security is taken over scripless shares depends on where those shares are held. If 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 that must 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 is 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 is 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 that is subject to security.
Security Over Intellectual Property Rights
Security over intellectual property rights is 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 1993 (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.
If 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 assignment, the mortgage document is executed in escrow so 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, except in the following two notable exceptions:
The processes (including filings and other procedures) to register and/or perfect security interests depend on the type of collateral, among other things, and are described in greater detail in 5.1 Types of Security Commonly Used and in 8.1 Stamp Taxes. If 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 in 5.5 Financial Assistance and 5.6 Other Restrictions.
The CA 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 in the holding company or 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. However, various “whitewash” procedures are available under the CA which, if undertaken and complied with, will permit the Singapore company in question to give the security or guarantee that would otherwise constitute prohibited financial assistance.
With the enactment and coming into force of Section 76 (9BA) of the CA, many of the older whitewash procedures – which require, among other things, the terms of the whitewash resolution to be published in a daily newspaper or (as the case may be) for all the directors to make a solvency statement – have all but fallen into disuse. Under Section 76 (9BA) of the CA, a company is permitted to provide financial assistance as long as:
The company does not need to wait a specified time after 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 of 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 that 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 when 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 (eg, through inter-company loans) or where it receives indirect benefits such as reduced cost of funding, or the 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 the acceleration of the secured debt, at which point the chargee can 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 that can be guaranteed by a Singapore company, save for any restriction 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.
Transactions That Can Be Set Aside
Transacting with borrowers who are insolvent at the time of the transaction or who become insolvent as a result of the transaction carries claw-back risks, which can void the transaction. In particular, the following transactions can be set aside by a liquidator in a liquidation:
The current timeframes under which transactions can be set aside are as follows:
In addition, extortionate credit transactions (ie, transactions whose terms require grossly exorbitant payments to be made in respect of the provision of the credit, or that are harsh and unconscionable or substantially unfair) can also be set aside if they are entered into three years before the commencement date.
A floating charge created within one year before the commencement date will be invalid except to the aggregate amount of the value of certain consideration (and interest thereon), unless it is proved that the borrower was solvent immediately after the creation of the floating charge.
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 regardless of whether or not the borrower was solvent immediately after the creation of the floating charge.
Restructuring of the Debtor
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 intends 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. Furthermore, 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 because the borrower is insolvent (commonly known as ipso facto clauses). The limitation of the enforceability of such ipso facto clauses serves to narrow the ability of a creditor to immediately call on and enforce the debt owed to it upon the occurrence of an insolvency event of default. However, the creditor will still be able to accelerate and/or enforce such debt 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 of SGD500 is payable in respect of security documents that create security over real property, stock or shares. Stamp duty of SGD10 is also payable where there is a declaration of trust (including turnover trusts), which may, in the context of 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 government 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 1947 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. Such legislation includes the Banking Act 1970, the Finance Companies Act 1967, the Insurance Act 1966, the Newspaper and Printing Presses Act 1974 and the Telecommunications Act 1999.
Securities Industry Council and the Takeover Code
The acquisition of companies, registered business trusts and REITs listed on the SGX-ST is 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. It 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 private reprimands, public censure and/or 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, so its provisions must be taken into account in the appropriate context – such as the obligation to make timely disclosures to shareholders regarding information to do with a takeover offer.
Failure to comply with the Listing Manual can lead to disciplinary action being taken by the SGX-ST, which may include reprimands, composition offers, trading suspensions and delistings.
The concept of certain funds is a central feature of takeover financing. In 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. If debt financing is used to fund the offer, the financial adviser will generally give this confirmation only once they are satisfied that the offeror’s financing is on a “certain funds” basis. Under a financing extended on a “certain funds” basis, a funding stop can only be precipitated by a small handful of default events that are of a critical nature or that 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.
If the Takeover Code does not apply, there is no regulatory requirement for the financing to 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.
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While market sentiments in the South-East Asia region in early 2022 were optimistic on the back of strong momentum carried over from a resurgent 2021, this would eventually give way to a more muted year overall. This was owing to numerous geopolitical and macroeconomic factors, such as the conflict in Ukraine, rampant global inflation and rising interest rates. In the Singapore context, total M&A deal volume and value decreased by 36% and 72%, respectively, from USD64.6 billion across 214 deals in 2021 to USD18 billion across 138 deals in 2022.
However, even with these geopolitical and macroeconomic factors dampening M&A activity generally across the South-East Asia region, Singapore remained the top regional dealmaker in 2022. Significant acquisitions in Singapore were observed in the industrial, real estate, high technology and financial sectors.
On the acquisition financing front, there was a 3.01% year-on-year decrease in the total value of acquisition financings in Singapore. However, there were still a number of significant acquisition financing transactions undertaken in Singapore in 2022, such as the financing for the SGD666.1 million acquisition of South Korean waste management company Eco Management Korea Holdings by a consortium led by Keppel Infrastructure REIT.
Noteworthy trends and developments in the acquisition financing space include the increase in “amendment and extension” arrangements (in lieu of refinancings or fresh financings), and concerns relating to covenant-light financings, but perhaps the most significant trend was the move towards green and sustainability-linked loans. In this regard, 2022 saw the completion of the largest syndicated real estate green financing in Asia as at the end of 2022 – a SGD3 billion green financing granted to a consortium led by Perennial Holdings to finance the redevelopment of 8 Shenton Way, which is slated to be the tallest building in Singapore. These and other trends and developments are explored below in more detail.
Enterprise Financing Scheme, M&A Loans – Extension and Enhancement
While there is a tendency to focus on high-value M&A deals, there has been a noteworthy development in the small and medium enterprise (SME) M&A sector. This relates to the Enterprise Financing Scheme (EFS), which was rolled out at the end of 2019 by Enterprise Singapore as a streamlined umbrella initiative under which nascent SMEs could make simplified applications to certain participating financial institutions for various types of loans. There are a number of loan schemes under the EFS, one of which is the EFS – Mergers & Acquisitions loan scheme (the “EFS M&A Scheme”), which allows eligible local SMEs to access funding support for intended M&A transactions of an international nature with a view to growing and expanding their businesses.
It was announced in the Budget 2022 that the EFS M&A Scheme would be extended for a further four-year period, from 1 April 2022 up to 31 March 2026, and also that it would be enhanced. The enhancements to the EFS M&A Scheme include, significantly, the granting of loans for domestic M&A activities, which is over and above the support given to borrowers in relation to international M&A activities, which was initially provided when the EFS M&A Scheme was first introduced. The loans (whether used for domestic or international M&A activities) are subject to a maximum quantum of SGD50 million per borrower or borrower group.
It is noteworthy that most of the loan schemes under the EFS that constituted immediate support measures for SMEs in the midst of the pandemic have been or are projected to soon be discontinued as the economy recovers from the worst effects of the pandemic. For example, the EFS – Trade Loan and the EFS – Project Loan Schemes have both been discontinued. However, the EFS M&A Scheme’s four-year extension suggests an intention on the part of the government to promote growth and expansion through M&A activity beyond just the short term. This supports the continued horizontal and vertical scaling and expansion of local SMEs, including the venturing by such SMEs into complementary businesses and emerging sectors both within and outside the Singapore market (eg, in emerging markets), allowing them to tap into new client bases to optimise their operations and to consolidate and take advantage of resources such as new intellectual property and talent. There is value in this approach as regards incentivising the expansion of SMEs as, according to the Singapore Department of Statistics, SMEs accounted for 44% of the value added to Singapore’s nominal GDP and constituted 99% of all enterprises in Singapore in 2021.
Under the EFS M&A Scheme, participating lenders also stand to benefit as they are partially shielded from the risk of borrowers’ defaults. Generally speaking, Enterprise Singapore’s risk share is 50%. However, in the case of young enterprises (ie, firms formed within the past five years with at least one employee, and with more than 50% of such firms’ equity owned by individuals) and enterprises operating in a challenged market (ie, in countries with Standard & Poor (S&P) ratings of BB+ and below, and non-rated countries) Enterprise Singapore’s risk share is 70%. In a default situation, a participating lender must first seek recourse through its usual commercial recovery procedures, including realising any security, before it may apply to Enterprise Singapore to claim against the proportionate 50% (or, as the case may be, 70%) of the outstanding amount. Repayment of the loan principal is, nonetheless, fully the borrower’s responsibility, and the maximum repayment period is five years from initial drawdown.
It will be interesting to chart the effect that such enhanced financing support under the EFS M&A Scheme will have on the SME M&A sphere in the coming years.
Green Loans and Sustainability-Linked Loans
A greater emphasis on sustainability has been seen in various sectors in Singapore, including finance. To address their concerns, governments and institutions have introduced regulations and guidelines to steer lenders towards loan instruments that align with sustainability objectives. Such loan instruments include the following.
These are loans where the proceeds are used for green purposes. In acquisition financing, green loans are specifically provided to acquire companies or assets that have a positive environmental impact (eg, acquiring renewable energy companies). While there are no official “green benchmarks” for the acquisition of companies in Singapore, there are awards that recognise the green achievements of companies, for example, the Singapore Environmental Achievement Awards, issued by the Singapore Environment Council in support of the Singapore Green Plan. By and large, the current market practice in Singapore is to refer to the Green Loan Principles (GLP), which are voluntary recommended guidelines developed by a working party (consisting of the Asia Pacific Loan Market Association, the Loan Market Association and the Loan Syndications and Trading Association), with refinements and adjustments as may be necessary to take into account the commercial and operational requirements of each bank when assuming the role of green loan co-ordinator.
Sustainability-linked loans (SLLs)
These are loans where the pricing is pegged to sustainability performance targets (SPTs), measured using key performance indicators, external ratings and/or equivalent metrics. Unlike green loans, the use of the proceeds is not a factor in categorising a loan as an SLL; instead, the emphasis is on improving the borrower’s sustainability profile against specifically identified SPTs. The Sustainability-Linked Loan Principles (SLLP), which are voluntary recommended guidelines developed by the same working party that developed the GLP, commonly serve as the reference point for SLLs in Singapore. Numerous major SLLs have been entered into across various sectors including the SGD860 million syndicated SLL granted to Singapore real estate investment trust (REIT) Lendlease Global Commercial REIT for the acquisition of Jem, an integrated office and retail development. In the energy sector, a five-year SGD1.2 billion SLL was granted to Sembcorp Financial Services Pte Ltd for the purpose of, among others, financing or refinancing 11 renewable energy and other sustainable projects.
In Singapore, there has been a notable rise in the granting of green loans and SLLs, with almost SGD40 billion of such loans made between 2018 and 2021. To bolster this trend, in 2021, the Monetary Authority of Singapore (MAS) introduced the Green and Sustainability-Linked Loan Grant Scheme (GSLS), which is valid until 31 December 2023, and which seeks to:
The GSLS incorporates the aforementioned GLP and SLLP as high-level frameworks to guide the origination of green loans and SLLs respectively, and market participants are encouraged to refer to them. In response, major financial institutions have rolled out their own green and sustainability-linked loan frameworks – for example, Oversea-Chinese Banking Corporation (OCBC) has been providing sustainability-linked loans to SMEs under the OCBC SME Sustainable Finance Framework since November 2020, with the total amount lent by OCBC to SMEs for sustainable projects estimated to exceed SGD3 billion as at the end of 2022.
Another major green financing initiative is the EFS-Green loan scheme (the “EFS-Green Scheme”) which, like the EFS M&A Scheme, also allows participating lenders to benefit from being partially shielded from the risk of borrowers’ defaults. Under the EFS-Green Scheme, Enterprise Singapore’s risk share for green loans to eligible enterprises in qualifying green sectors (eg, clean energy and decarbonisation, the circular economy and resource optimisation, green infrastructure, and clean transportation) is 70%. The first loan granted under the EFS-Green Scheme was a SGD6 million green trade loan issued by HSBC Singapore to Singapore-based energy storage solutions company Durapower Group. Many more such loans have been granted since then, with over 30 SMEs having taken up close to SGD120 million in such loans by February 2023. It is projected that 2023 will see continued growth in the green loans sector in conjunction with Enterprise Singapore’s efforts to raise awareness of such schemes and develop green loan frameworks that are better bespoke to the needs of each sector.
In general, debt structures for the financing of major corporate transactions often involve strong financial or maintenance covenants that favour lenders, particularly in the case of financings granted by traditional financial institutions like banks. However, covenant-light loans significantly cut down on (and in some cases, remove) such covenants. This affords borrowers freedom from having to police and satisfy such tests, allowing borrowers to focus more on value creation. In particular, private equity-backed borrowers are, for certain financings, able to obtain more generous terms such as provision for unrestricted subsidiaries (ie, subsidiaries that are part of the borrower group, but to whom covenants do not apply) and substantial grower baskets (giving such borrowers more breathing room in the form of exceptions or carve-outs from restrictive covenants, such as covenants restricting further borrowing).
Covenant-light loans have seen a record-breaking increase in popularity in the US and Europe over the past few years, although this is showing signs of slowing in 2022 due to push-back from lenders and investors amid fears of a global recession and the effects of the conflict in Ukraine. According to S&P Global Market Intelligence, covenant-light loans formed 91% of institutional loans in the US and 96% of issuance in the European institutional loan market. By contrast, the reception for covenant-light loans in the Asia-Pacific region (including Singapore) has been far more measured, despite the rise in private equity-backed M&A deals. In particular, concerns over the inherent nature of covenant-light loans have made lenders and government authorities cautious of adopting the covenant-light approach in financings. Back in November 2011, the MAS raised concerns that the increase in the number of covenant-light loans could render banks and investors more susceptible to potential losses in the future. In this regard, lenders in the Asia-Pacific region may be more willing to accept a trade-off for strong covenants in exchange for weaker yields, and acquisition financing loan documentation in Singapore commonly includes maintenance covenants. As such, the observation is that covenant-light loans in the forms used in the US and Europe have not made their mark in Singapore in the same way.
However, certain types of more flexible loans with covenant-light features are seeing increased use in the Asia-Pacific region. These include the Term Loan B (TLB), also referred to as an “institutional term loan”, which is a term loan issued by institutional investors that is designed to maximise the investors’ long-term total returns and typically contains sponsor-friendly terms and excludes maintenance covenants and mandatory prepayment. Significant TLB transactions include the USD1.35 billion TLB granted by Commonwealth Bank of Australia to private equity firm KKR to finance its acquisition of a 55% stake in wealth management business Colonial First State Investment in 2021, and the TLB granted to US investment firm Carlyle in 2022 to partially fund its acquisition of China-based packaging company HCP Holdings. In Singapore, ride-hailing and food delivery giant Grab obtained a USD2 billion TLB financing in 2021. Therefore, while US/Europe-style covenant-light loans may not be common in the Asia-Pacific context, lenders here have been more tolerant towards TLB structures.
“Amendment and Extension” Exercises
With the prevailing high cost of funding, many borrowers are arranging for amendment and extension (A&E) exercises with their existing lenders in relation to their financing, instead of obtaining refinancing or fresh financing. In practice, A&Es involve the amendment and restatement of existing facility agreements and, apart from documenting extension to maturity dates, may also include the introduction of new commitments in addition to the amounts that are to be extended or rolled over. In some instances, certain terms of the financings in question may be renegotiated for re-alignment with each party’s commercial intention.
Although this appears to be a trend that has come and gone at various times in the past decades, most significantly during the credit crunch following the 2008 global financial crisis, A&Es tend to prove popular when:
For investors and lenders, in an environment where demand for new primary financing deals outstrips supply, a slight increase in margin while retaining such assets on their books is often preferable to not being able to secure financing.
In the first half of 2022, A&E deal volume in the US hit USD58.4 billion. Similarly, in the European Union, new loan issuance in the leveraged loan market plunged to one of the lowest levels in nearly a decade as funding costs skyrocketed. In Singapore too, more borrowers were observed shunning traditional refinancing in favour of A&E options in 2022.
There are several reasons why A&Es prove popular in times such as these. Firstly, borrowers negotiate directly with their existing lenders, thereby avoiding the uncertainties of the primary markets and achieving a bespoke transaction that works for the parties involved. For borrowers, a revision in the loan margin, along with an update of other terms to more accurately track prevailing market conditions, may involve less cost than entering into a brand-new transaction.
Secondly, for extending lenders, A&Es may involve attractive upfront or commitment fees. The extending lenders may also use this opportunity to tighten financial covenants against the borrower so as to better manage their lending risk.
The year 2022 also coincided with a global move towards the use of risk-free rates as the new benchmark interest rate for many loans, which saw many borrowers in Singapore amending their existing facilities to include new provisions relating to the Singapore Overnight Rate Average (SORA). The reason behind this sense of urgency is the scheduled discontinuation of the Singapore Dollar Swap Offer Rate (SOR) on 30 June 2023, after it was announced that the USD London Interbank Offered Rate (USD LIBOR), which the SOR references in its computation, would similarly be discontinued.
With the confluence of the above factors, it is no surprise that A&Es have once again dominated the Singapore loan market in 2022 and will likely continue to be a prevailing trend for some time to come.
Special Purpose Acquisition Companies
While bank loans remain a reliable and constant source of acquisition financing, there has been a surge of interest in alternative methods of financing M&A through investments in publicly-listed blank-cheque companies (special purpose acquisition companies, or SPACs). These would then pick a suitable target company to acquire and take public, and provide liquidity to such target from the capital raised from the initial public offering of the SPAC. Seen as a vehicle for a more efficient listing process of a potentially high-growth target company, SPACs caught a second wind in recent years with participation from big celebrity names like tennis star Serena Williams and Olympic gymnast Li Ning. While SPACs proved popular in the US market, with the New York Stock Exchange listing more than 60 SPACS between 2017 and 2020, the introduction of SPACs (and the putting in place of SPAC listing regimes) in Singapore only started in September 2021. As at the end of 2022, SPACs did not appear to have gained significant traction in Singapore.
This may be attributed to the strict listing regulations in Singapore. Wary of information asymmetries among investors, and low-quality assets being publicly available to investors via “back-door listings” that circumvent the high standards of the listing rules, regulators introduced a strict set of proposed rules for SPAC listings in Singapore in 2021. For example, the track record and reputation of a SPAC’s sponsor and its management team are among the significant factors considered in a thorough assessment by the Singapore Exchange (“SGX”) before the SPAC is deemed suitable for listing, curtailing the very efficiency of the process that made SPACs attractive in the first place. The minimum market capitalisation requirement for SPACs was initially SGD300 million, before it was revised down to SGD150 million following a public consultation. Furthermore, the United States Federal Reserve triggered a hike in global interest rates in March 2022 which tempered interest and further slowed the growth of SPACs in the region. As a result of the aforementioned circumstances, SPACs are viewed by many investors in Singapore as an unattractive investment option as compared to, for example, fixed deposits (in view of the prevailing high interest rates).
For a concept that was first introduced in 1993 in the US at a time when blank-cheque companies were not yet allowed, and that has since seen its popularity wax and wane over time, it will be interesting to note how the Singapore market will receive SPACs in the years to come.
The outlook for acquisition financing for the rest of the year will very much be shaped by the geopolitical and macroeconomic landscape. While early signs in the first quarter of 2023 may point towards a continued slowdown in M&A activity, the expectation is that South-East Asian economies (including Singapore) will be resilient in the face of strong global headwinds as they embrace economic reopening, even as inflation and geopolitical challenges remain key overhangs for the US and Europe.
One development that is almost certain to persist into 2023 and beyond is the increasing prevalence of green and sustainability-linked loans, as greater emphasis continues to be placed on the accountability of businesses and corporate actors for environmental, social and governance issues. Unlike other current trends and developments, it is likely that green and sustainability-linked loans will continue to thrive irrespective of uncertainty in the global economy and will be a crucial part of not just acquisition finance, but financing in general, for the foreseeable future.
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