M&A transactions rarely occur in a financial vacuum. Whether the target company is being acquired through an asset or equity purchase, its existing debt structure can introduce a host of legal and logistical challenges that must be carefully addressed. Overlooking these issues can lead to covenant violations, unanticipated costs, or even post-closing legal disputes.

One of the most immediate concerns is the risk of covenant breaches. Most commercial loan agreements contain a range of restrictive covenants that limit the borrower’s ability to sell assets, merge with another company, or incur new debt without the lender’s prior consent. An M&A transaction, especially one that involves a change of control or significant restructuring, can easily trigger these restrictions. Violating a covenant can result in an event of default, acceleration of the debt, or a requirement to repay the loan in full. As such, early review of credit agreements and open communication with lenders are essential.

Another common issue is prepayment penalties. If existing debt must be retired as part of the transaction, the borrower may be required to pay fees or premiums for early repayment. These penalties, often buried in the fine print of loan agreements or bond indentures, can materially impact the economics of a deal. Buyers and sellers must factor these costs into their financial modeling and, where appropriate, negotiate with lenders to reduce or waive them.

For companies with layered or syndicated financing, intercreditor consents add another level of complexity. Intercreditor agreements often give certain classes of creditors—typically senior lenders—rights to approve or block changes to the capital structure, asset sales, or collateral arrangements. Coordinating these consents across multiple stakeholders can be time-consuming and politically sensitive, particularly if some creditors view the transaction as unfavorable.

Finally, asset-based loans and secured financing arrangements often involve security interests in the target’s property, equipment, accounts receivable, or intellectual property. As part of the M&A process, these security interests must be released, a legal process that may involve obtaining lien releases, UCC-3 termination statements, or other documentation. Once the buyer acquires the assets or equity, it must re-perfect the security interests in its own name if post-closing financing is involved. This requires careful coordination with legal counsel, lenders, and filing offices to avoid gaps in collateral coverage.

In short, the intersection of M&A and existing debt obligations is a complex but critical area of legal diligence. A proactive approach—one that involves identifying all outstanding debt instruments, understanding their restrictions, engaging with lenders early, and planning for refinancing or consent logistics—can help avoid costly disruptions and ensure that financing doesn’t become a roadblock to a successful closing.

M&A Deals: Here’s What You Need to Know
How Commercial Contracts Can Make or Break Your M&A Deal
What Really Keeps M&A Deals on Track? A Closer Look at Governance and Fiduciary Duties
Consents and Approvals: The First Gate to Closing an M&A Transaction

For guidance, contact Vincent Costa at vcosta@cmmllp.com or 631-738-9100.