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

• 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.
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