This article considers the issues that arise when an Iraqi business needs to refinance its debt while its ownership is changing. Refinancing and ownership changes often coincide. A buyer may want to replace the target’s existing facilities with its own financing. A seller may need to repay debt before it can transfer clean shares. A business may need new funding to bridge the period between signing and completion. Each scenario requires coordination between the existing lender, any new lender, the seller and the buyer.
The risks are significant. Existing facilities may be accelerated by the change of control. Security and guarantees given by the seller may need to be released and replaced. A new lender may be unwilling to lend until ownership is settled. If the steps are not coordinated, the business may face a funding gap or a default at a critical moment.
The Iraqi Civil Code No. 40 of 1951 governs loan agreements, guarantees, mortgages, pledges and their release. The Companies Law No. 21 of 1997, as amended, governs share transfers and corporate approvals. The Real Estate Registration Law No. 43 of 1971 governs registration and release of mortgages. The Banking Law No. 94 of 2004 and Central Bank of Iraq instructions govern bank lending. Where the business is regulated, sector rules may require approval of the ownership change. The Competition and Antitrust Law No. 14 of 2010 may also be relevant.
Reviewing existing facilities
The first step is to review the existing financing documents for provisions triggered by the ownership change:
- Change of control clauses. Many facilities allow the lender to accelerate or cancel if control changes.
- Restrictions on disposals and mergers. Facilities may restrict changes in the borrower’s structure.
- Guarantees and security from the seller. The seller or its affiliates may have guaranteed the debt or granted security.
- Prepayment terms. Notice periods, prepayment fees and break costs.
This review determines whether the existing lender’s consent is needed, whether the facility must be repaid and what it will cost.
Choosing a refinancing strategy
The parties may choose from several strategies:
- Consent and continuation. The existing lender consents to the ownership change, and the facility continues, possibly with new guarantees from the buyer.
- Repayment at completion. The facility is repaid at completion from the purchase price or new financing.
- New financing by the buyer. The buyer arranges new facilities to repay existing debt and fund the business.
- Bridge financing. A short-term facility covers the period until permanent financing is arranged.
The choice depends on the terms of existing debt, the buyer’s financing capacity and the attitude of existing lenders. Corporate transaction advice in Iraq can help integrate the refinancing strategy into the acquisition structure.
Coordinating repayment and release
Where existing debt will be repaid at completion, the steps must be coordinated so that the lender receives payment and releases security simultaneously. The seller will want guarantees released. The buyer will want shares transferred free of pledges. The new lender will want first-ranking security. A funds flow memorandum setting out each payment and release, with a sequence agreed by all parties, reduces the risk that one party performs without receiving what it is owed.
Release of registered security, such as mortgages over real estate, requires registration of the release. This can take time, so the parties may need interim arrangements, such as undertakings by the existing lender to release security promptly after receiving payment.
Substituting guarantors
Where the facility will continue, the seller will want its guarantees released and the lender will want replacement support from the buyer. The lender will assess the buyer’s creditworthiness and may require additional security. The substitution should be documented so that the seller’s release and the buyer’s guarantee take effect at the same time. Commercial contract advice in Iraq can help document guarantor substitution.
Managing the period between signing and completion
Between signing and completion, the business must continue to operate and may need funding. The acquisition agreement should address whether the seller will continue to support existing financing, whether the business may draw on facilities and whether new financing can be arranged. A new lender may lend before completion only if it is comfortable with the seller as owner and with the risk that the acquisition may not complete. Bridge financing may be structured to fall away or be refinanced at completion.
Addressing regulatory approvals
Where the business is regulated, the ownership change may require approval. The refinancing timetable should reflect the approval timetable. A new lender may make its financing conditional on approval, and existing lenders may be reluctant to extend facilities while approval is pending.
Considering tax consequences
Refinancing and acquisition may have tax consequences, including on prepayment fees, interest deductibility and any debt forgiveness. Payments to foreign lenders may be subject to withholding. Tax advisory services in Iraq can identify tax issues in the refinancing structure.
Managing information flow and confidentiality
Refinancing during an acquisition requires information to flow among several parties: the seller, the buyer, the existing lender, the new lender and their advisers. The target’s financial and legal information may be needed by the new lender to make its credit decision, while the seller may be reluctant to disclose it until the acquisition is certain.
Confidentiality agreements should permit disclosure to financing sources on appropriate terms. The acquisition agreement should require the seller and target to cooperate with the buyer’s financing, including providing information and assisting with security preparation. The existing lender should be approached carefully, since premature notice of the acquisition may lead it to take protective steps.
Where the target is a listed company, information flow must also respect insider trading rules and disclosure obligations. Lenders receiving price-sensitive information should be made aware of their obligations.
Protecting the business if the acquisition fails
Not every acquisition completes. Regulatory approval may be refused, financing may fall through or the parties may disagree. If the business has taken steps toward refinancing in anticipation of completion, such as giving notice of prepayment to its existing lender or drawing on a bridge facility, a failed acquisition can leave it exposed.
The business and the seller should ensure that refinancing steps are conditional on completion wherever possible. Prepayment notices should be revocable or timed to take effect only on completion. Bridge facilities should be structured so that the business is not left with debt it cannot service if the buyer walks away. The acquisition agreement can require the buyer to bear break costs if the transaction fails for reasons within its control. Planning for failure in this way protects the business and preserves its relationship with its existing lender.
Illustrative example. A buyer agrees to acquire an Iraqi logistics company whose bank facility is guaranteed by the seller’s parent and secured by a mortgage over the company’s warehouse. The facility allows the bank to accelerate on a change of control. The buyer plans to refinance with its own bank, but its bank requires first-ranking security over the warehouse. The parties agree a completion sequence in which the buyer’s bank advances funds to repay the existing facility, the existing bank releases the guarantee and undertakes to release the mortgage, and the new mortgage is registered immediately after release.
Conclusion & how Etihad Law Firm can help
Refinancing an Iraqi business during an ownership change requires coordination of change of control provisions, security releases, guarantor substitution, regulatory approvals and funding. A clear strategy and an agreed completion sequence protect the business, the parties and the lenders.
Etihad Law Firm advises buyers, sellers, borrowers and lenders on refinancing in the context of acquisitions and ownership changes in Iraq. We help clients coordinate financing and transaction steps to avoid funding gaps and defaults.