What is a financing condition?
What it means and how to read it on a deal.
What it is
A closing condition that lets the buyer refuse to close if it can't raise the money to pay.
Funding and remedies depend on the agreement.
What the condition does
A financing condition makes the buyer's duty to close depend on getting the financing the agreement names. That's usually debt from banks.
Say Woodgrove agrees to buy Litware for $50.00 a share. It plans to pay partly with bank loans. Then the banks pull back, and Woodgrove can't get the financing the agreement names.
- With a financing condition
- Woodgrove doesn't have to close. The deal can end without Litware holders receiving the $50.00.
- Without one
- Woodgrove must still close once the other conditions are met. Failing to pay is then a breach of the agreement.
Why public deals rarely have one
Before 2005, private equity deals usually had a financing condition.
As competition among buyers grew, targets pushed them to take on the financing risk instead.
Of 36 going-private deals for US public targets in 2024, none had a financing condition. In these deals, a private equity firm or a similar buyer takes a public company private.
In place of a financing condition, these deals usually have:
- Equity commitment
- The fund promises in writing to put in its share of the price.
- Debt commitment
- Banks commit in letters at signing to lend the rest, on the terms those letters set.
- A reverse fee
- If the financing fails, the buyer may owe the target a reverse termination fee. In 83% of the 36 deals, the fund guaranteed that fee.
When the money doesn't come
Hexion's 2007 agreement to buy Huntsman had no financing condition. When the credit markets turned, Hexion tried to get out of the deal.
Hexion claimed that Huntsman had suffered a material adverse effect. In September 2008, the Delaware Court of Chancery rejected that claim.
It ordered Hexion to perform its obligations, including working to complete the financing. It didn't order Hexion to close.
The court also found that Hexion had knowingly breached the agreement. So its damages weren't capped at the $325 million fee.
Huntsman ended the agreement and settled with Hexion and its owner, Apollo, in December 2008.
What it means for shareholders
Without a financing condition, a buyer's trouble raising money doesn't by itself excuse it from closing.
Depending on the agreement, the target may claim a reverse fee, damages, or a court order to close: specific performance. A guarantee may back the fee.
On Tracking Alpha
When the filings say there is none, the first protection dot is solid. The tag reads No financing condition.
When there is one, the tag reads Financing condition. Financing can then show among the closing conditions, with its status.
No financing condition doesn't say where the money comes from. Funding behind the buyer does.
- No financing condition
- Financing condition
- Financing condition not in the filings
Easily confused with
- Funding behind the buyer
- Where the buyer's money comes from. A deal can have committed funding and no financing condition, which is the usual case.
- Material adverse effect
- A condition about the target's business, not the buyer's money.
Questions
What is a financing condition in M&A?
A closing condition that lets the buyer refuse to close if it can't get the financing the agreement names. That's usually bank debt.
Do public company deals have financing conditions?
Rarely. In 2024, none of 36 going-private deals for US public targets had one. Private equity buyers usually commit their financing and agree to a reverse termination fee instead.
What happens if the buyer can't get financing?
Without a financing condition, the buyer must still close once the other conditions are met. If it doesn't, the target may claim the reverse fee, damages or, where allowed, specific performance.
Sources
- Houlihan Lokey, 2024 Transaction Termination Fee Study (April 2025)
- Houlihan Lokey, 2024 Going Private Transaction Study (May 2025)
- Huntsman Corporation, Form 8-K on the Hexion merger agreement (July 2007)
- Hexion Specialty Chemicals v. Huntsman, Delaware Court of Chancery (2008), opinion
- Davis Polk on the Harvard Law School Forum, Delaware court orders Hexion to pursue financing of Huntsman acquisition (2008)
- Huntsman Corporation, Form 8-K on the settlement with Hexion and Apollo (December 2008)
Tracking AlphaBy Jera Value · Reviewed
Related terms
- Funding behind the buyerWho stands behind the company that signed as buyer, which is often one formed just for the deal.
- Reverse termination feeThe fee the buyer pays the target if the agreement ends in one of the cases it lists. Typically, a regulator refuses approval or the buyer's financing fails.
