Structuring Challenges In Leveraged Buyouts In Israel

Co-authored by Joshua G. Kiernan, Jayanthi Sadanandan and Scott Colwell, Latham & Watkins.

How foreign private equity sponsors and their lenders are finding solutions to local law structuring issues.

Leveraged finance acquisitions have existed in the Israeli market for many years. However, for a variety of reasons, the financings of these transactions have faced structuring challenges mainly in relation to the credit support granted by the target group. Many transactions, in particular with corporate sponsors, were secured on the target's shares with recourse to the sponsor, and required a relatively large portion of equity — the result of local Israeli banks traditionally supporting levels of leverage lower than those foreign banks have typically supported. With an increasing amount of acquisitions in Israel by foreign private equity sponsors, structures are being challenged in an effort to maximize leverage (with limited recourse to the sponsor, as is the trend in Europe and the US), and consequently, to maximize the value of the security package, to get US and European lenders across the line.

This Client Alert provides an overview of the main local law structuring issues foreign private equity sponsors and their lenders usually face in the context of a leveraged buyout (LBO) of an Israeli target group, as well as recent trends in overcoming these issues.

Financial assistance

A major challenge for structuring LBOs in Israel is the restriction on the ability of an Israeli company to provide financial assistance: under Israeli corporate law, a company's grant of financial assistance for the purchase of the company's own shares is a distribution, which must meet the requirements for making a distribution under the Israeli Companies Law. These requirements are twofold: first, the company must have sufficient distributable profits (the "profits test"); and secondly, the company must be able to meet its debts as they fall due. In most cases, on closing of the acquisition, the target will not have significant distributable profits. In addition, Israeli law has no "whitewash" procedure to permit financial assistance. Therefore, absent sufficient distributable profits, an Israeli target company cannot provide an upstream or cross-stream guarantee, nor can it grant security in support of the purchaser's acquisition debt obligations. Consequently, maximizing the value of the security package is a major structuring challenge in Israeli LBOs.

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