Alternative
Financing
Covenants

SUMMARY

An alternative financing covenant is a pre-closing covenant setting out a buyer’s obligations to procure replacement debt financing if the original financing contemplated by a debt commitment letter fails.

NEGOTIATIONS

Similar to negotiations around HOHW provisions, a seller will prefer a buyer to take any and all actions necessary to obtain replacement financing, whereas a buyer will likely successfully achieve a covenant requiring the buyer to obtain alternative debt financing on terms no less favorable than those in the original DCL.

ILLUSTRATIVE EXAMPLE

A buyer’s original debt financing fails. The only replacement debt financing available is on terms significantly more burdensome and costly than the original debt financing. Procuring this replacement financing would significantly undermine the buyer’s investment thesis for the transaction.

If the alternative financing covenant required the buyer to obtain replacement financing on any terms, the buyer will be forced to close the deal with the more costly debt financing. If the buyer refuses, a seller could sue for specific performance to force the closing.

If the alternative financing covenant requires the buyer to obtain replacement debt on terms no less favorable than those in the DCL, then the buyer will not be required to obtain the costly financing and close the deal.

In the latter case, the financing failure would still exist. Accordingly, the seller could terminate the transaction agreement and, if available, collect a reverse termination fee.