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PE Firms Make Bold Pre-Cap Proposals

December 07, 2012

By RICHARD E. FARLEY

Private equity firms are trying to chip away at another safeguard that investors in riskier credits have come to expect: the right to have their bonds and loans repurchased in the event of a merger or acquisition. These escape clauses, known as change-of-control provisions, compel the purchaser of a company to redeem its existing debt, typically at a premium to face value. They give bondholders and lenders an out in the event they are not comfortable with the new ownership.

According to Richard Farley, Leveraged Finance partner, two large, well-known private equity firms have tried to put language into the deal financing documents that would exempt any future sale of a company being taken private from the requirement triggering the change-of-control clause on the existing debt.

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