The due diligence process from the underwriter's - Fried Frank

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5. SPECIAL CONSIDERATIONS FOR EUROPEAN DUE DILIGENCE • The legal structures which govern the sale of securities differ in European countries compared to the U.S. and also differ across European countries. • Underwriting liability standards vary by jurisdiction and range from absolute liability to limited liability for managers and underwriters. Due diligence defenses may or may not be available. The law is also not very well developed in this area. • Issuers in Europe are often less accustomed to U.S. style due diligence procedures and tend to be more resistant to procedures considered standard in the U.S. 6. SEVERAL DUE DILIGENCE CONSIDERATIONS SPECIFICALLY FOR DEBT OFFERINGS • In debt offerings it is important to focus during the due diligence process on the following items: • the effects of transactions on the company’s debt rating, • the effects of transactions on the company’s cash flow, • the company’s debt repayment schedule, • the company’s worst case/downside scenario, • the use of the proceeds of the debt offering, and • the necessity of raising additional cash in order to allow the company to complete its business plan. 7. WHY DO BANK-DEBT ARRANGERS CONDUCT DUE DILIGENCE • There are six principal reasons why bank debt arrangers perform due diligence. With one exception, these are similar to the reasons underwriters perform due diligence. • Diligence helps the lender assess the borrower’s credit risk. • Due diligence will assist in understanding the company and thereby helping in drafting a more accurate bank book. 20 108
• During the due diligence process you may uncover negative information about the company which may cause the deal to be restructured, delayed or even, on occasion, pulled. • The due diligence process may indicate that third party consents or approvals are necessary in order to consummate the transaction. • Syndicate members expect the arranger to have conducted full due diligence and the arranger’s institutional reputation requires that bankers do thorough due diligence. • Although no law specifies the content of a bank information memorandum, in litigation, due diligence may establish necessary defenses to liability on the part of the arranger. a. Bank Debt Due Diligence Standards Differ From Underwriter Standards • Reduced arranger liability concerns for disclosure errors or omissions result in greater flexibility in terms of what to include in the information memorandum and how it is included. • Less labored disclosure is required. • Projections (the business model) are normally central to the information memorandum. • Although the diligence topics covered and matters reviewed are similar, the diligence focuses on identifying potential credit “black holes,” confirming matters stated in the information memorandum and confirming that known liabilities (actual or contingent) are appropriately reflected in the business model. • There can be greater flexibility in formulating an appropriate due diligence review. For example, in an acquisition financing, the arranger may choose to rely on appropriate diligence reports addressed to it from legal advisors to the borrower since (1) the legal documentation and issues that normally would be reviewed by the arranger’s own counsel would be the same, and (2) the borrower and lenders’ interests in a “good” acquisition are aligned. 21 109
Page 1: 3 THE DUE DILIGENCE PROCESS FROM TH
Page 5 and 6: 1. WHY DO UNDERWRITERS CONDUCT DUE
Page 7 and 8: or other written or oral statement
Page 9 and 10: numbers which become available for
Page 11 and 12: • interviews with senior manageme
Page 13 and 14: • revenue recognition • goodwil
Page 15 and 16: • Correspondence with the SEC or
Page 17 and 18: • In U.K. public equity offerings
Page 19: j. Audit Committee Due Diligence
Page 23 and 24: • Even though the financial state
Page 25 and 26: • “It argues in particular with

The due diligence process from the underwriter's - Fried Frank

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