Transactions Blog

Introduction

29.983.000.000 EUR (5,2% of GDP), that is the number on which the Dutch government’s deficit landed in 2010.[1] In order to seal this gap, the Dutch government recently announced a plan containing a variety of structural measures to save up to € 18 billion between 2012 and 2015.[2]

Specific for the M&A field, one topic catches the attention: the restriction on the deductibility of interest on acquisition debt in a fiscal unity as from 1 January 2012.

What does it mean?

Under the current legislation, it is common practice that following an acquisition the leveraged acquiring company (holding) enters into a fiscal unity with the former Target, mostly an operational entity. The fiscal unity provides that income and cost from both companies can be offset against each other. Doing so, the tax base of this Dutch operational Target erodes due to a ‘debt push down’.

The new law wants to discourage such constructions. It imposes that the interest cost relating to the acquisition debt can only be offset against the taxable income of the acquiring (holding) company to the extent it does not exceed the taxable profit of this acquiring (holding) company. It will no longer be possible to offset the interest expenses of the acquisition debt against taxable profits of the acquired company. Hence, due to this exception on the Dutch fiscal unity a ‘debt push down’ will no longer be realised.

 The amount that is not deductible is the lower of (i) the excess interest expense minus 1m EUR or (ii) the result of the formula: total acquisition interest expenses * (excess debt / total acquisition debt). The amount that could not been offset in a given year can be carried forward.

Exceptions

The interest cost of the acquisition debt remains deductible when the debt/equity ratio of the fiscal unity does not exceeds 2:1 or, as mentioned above, when the interest cost of the acquisition debt is less than 1million EUR.

Conclusion

In order to safeguard the tax deductibility of interest on acquisition debt, proper debt structuring is (and remains) key.

P.S. Other measures

It should be pointed out that the Dutch Budget 2012 also includes proposals in respect of (i) the Dutch tax exemption on non-Dutch permanent establishments, (ii) substantial interest rules (ii) and dividend withholding tax relating to Dutch Cooperatives.

Further information can be found on: http://www.pwc.nl/nl/prinsjesdag/index.jhtml

Simon Boadle, Head of Debt Advisory, said “Though 2010 was not without significant hurdles including the euro-zone debt crisis, the debt markets found a path through to post a strong year with a robust pipeline entering Q1 2011.”

The high yield market continued to lead the way with record issuance driven by investor demand for yield and borrowers need to refinance debt. The leveraged loan market witnessed a strong recovery; however, the bulk of loan issuance has been used to refinance existing debt rather than to support M&A activity.

Refinancing was a principal driver of activity in the corporate loan market. Leveraged and corporate loan market participants are hopeful of increased M&A activity in 2011 as cash rich corporate borrowers and private equity houses take advantage of more buoyant debt markets and the improved global macro environment.

The sheer volume of borrowers needing to refinance in the coming years suggests that companies should begin to plan their refinancing strategy now. The more highly leveraged companies need to consider how they can reduce their debt to levels capable of being refinanced in the current market.

For more info, check the latest Debt Market Update Q1 2011

Despite previous uncertainty in the debt markets, Central Banks continue to be proactive to limit the chances of a double dip recession. The UK corporate loan market was lifted by the return of large cap M&A, with banks providing strong support for BHP Billiton’s bid for Potash Corp through a US$45 billion loan facility. Strong, positive momentum in the leveraged market during September bodes well for the remainder of the year.

Competition from the bond market is pushing up total debt multiples, in some cases to over 5x, whereas in the mid market total leverage is typically up to 4.25x. The corporate bond markets rebounded after the short lull in Q2 and our view is that the bond markets will continue to increase their overall share of financing activity.

In contrast to these buoyant levels and the recovery in leveraged finance, other credit markets are more subdued. This issue has a special focus on Project and Infrastructure Finance where despite a long-term need for infrastructure projects, demand for new finance has been dampened in the short-term.

Simon Boadle, Head of Debt Advisory, said “Despite specific issues in certain sectors, sentiment in the credit markets has generally improved and the short term outlook for the availability of debt finance is positive.”

For more details, check out the latest Debt Markets update from our UK colleagues -  Debt Markets Update Autumn 2010

UK corporate lending was therefore relatively quiet in Q2 with borrowers and lenders alike waiting for the outcome of the UK’s general election and emergency budget. There has been a steady flow of new Leveraged Buyout (LBO) deals over the last six months, but we should not forget activity levels are the lowest since the late 1990’s.

On the debt restructuring front, payment defaults and new formal restructuring discussions are substantially lower than a year ago, covenant resets less so. This perhaps indicates we are through the worst of the restructuring cycle. However, whilst the maturity wall continues to be chipped away by new bond and leveraged loan issuance, we still expect that a significant pool of the more highly leveraged borrowers will require formal restructuring to address their gearing issues.

Simon Boadle, head of the Debt Advisory team comments, “Overall the debt markets look set for a quiet summer and only by the end of Q3 will a clearer – and hopefully more positive – longer-term picture begin to emerge.”

For further info consult the Debt Markets Update – Summer 2010 from our UK colleagues

The final quarter of 2009 saw encouraging signs of confidence returning across a broad spectrum of bank lending. The mild softening in pricing and the lengthening of tenors in the corporate market, a cluster of new leveraged buyouts at the end of 2009 and the re-entry of banks into the commercial property market (on a selective basis) all presage a more active banking market in 2010.

Corporate lending – There are signs of increasing confidence in the corporate lending market reflecting a slight softening of pricing, particularly on larger deals and the extension of tenors to four years in some instances. Lenders are also more willing to consider financing a new borrower where there has been a resilient track record through the recession and prospects are attractive. There are initial signs that banks are beginning to consider taking material underwriting positions; a key milestone in the return to a more normalised market.

Leveraged finance – 2009 was the quietest year for over a decade in the syndicated leveraged finance market. However, there was an uptick in activity in the fourth quarter and the pipeline for new deals is encouraging. Whilst the market is not about to accept a surge in highly leveraged, thinly priced deals, a gradual improvement in lending conditions is realistic.

Corporate Bonds - For larger borrowers, the bond market filled the vacuum left by the contracting bank sector in 2009 with UK issuance up 12% year on year. Investor appetite also helped put pressure on bank pricing for large corporate refinancings. More borrowers could consider tapping the capital markets to diversify their lending sources (as well as lock in longer term debt).

Property finance - The sector has been one of the worst hit by the credit crunch. Lenders have generally been supportive of overleveraged credits where the borrower continues to service its debts, but take more robust positions where there is a new money requirement, in some cases taking material equity positions. There are an increasing number of lenders offering debt for new deals, but the level of available leverage will leave a significant funding gap on those deals with upcoming bullet maturities, which suggests there will be a significant amount of restructuring activity in the next 2-3 years.

Restructurings - The second half of 2009 saw a reduction in the number of borrowers commencing formal restructurings. However, there will continue to be a steady stream of borrowers seeking a renegotiation of their debt facilities over the medium term. Quite apart from the anaemic macroeconomic backdrop, companies that were the subject of leveraged buyouts in 2005-2007 face tightening covenant levels over the next 18 months.

Identifying the most important value drivers and estimating values in distressed companies is key for a successful restructuring process, especially in the case of debt for equity swaps. That’s what Michael De Roover, Partner at PwC and Philippe Rasquin, Director at PwC talked about on the fourth session of our M&A Academy.

They shared with our audience their experience in valuing distressed companies and business restructuring, highlighting the key issues and discussing some of the key steps to consider when faced with a restructuring.

Download “Safeguarding value through business restructuring“.

More info about the M&A Academy season (programme, subscriptions, etc.).

On 24 September, we hosted the first session of our M&A Academy season, which mainly dealt with access to the current debt market and alternative financing methods. Josy Steenwinckel , Financial Services Leader at PwC Belgium, introduced the subject before handing over to our guest speaker, Freddy Van den Spiegel, Chief Economist at BNP Paribas Fortis, who presented his view of the current economic situation and the possible challenges for companies and the banking sector in the coming years.

Download “Access to the current debt market and alternative financing methods“.

More info about the new M&A Academy season (programme, subscriptions, etc.).

After one of the toughest periods for M&A in decades, some high profile announcements have got everyone talking. We are entering a test period for M&A, where more quality assets are coming to market than we have seen in 18 months. Successful completions will depend on vendor price expectations coming into line with acquirers’ views. If the majority of these deals close, it may well signal a more buoyant 2010.

Ongoing challenges in the debt markets will create an hourglass shaped M&A market where there are a number of mid-market transactions and mega deals beyond , but where there is a dearth of deals in the upper mid-market due to equity and debt constraints.

However, marketing businesses to corporate acquirers will require a different approach, and realising value will depend on getting this right.

Watch the webcast from PwC UK colleagues:

On 28 May, we hosted the last M&A Academy session of the season, which dealt with tax aspects of debt restructuring. Jan Muyldermans talked about what it is that is driving debt structuring transactions, the tax basics, the tax aspects of overall debt restructuring and the continuity law. Finally, he put all this into practice using a case study.

Download the “tax aspects of debt restructuring” presentation.

The new season of the M&A Academy will be launched soon.