Since 2016 I have been leading COREDO and have personally supported dozens of cross-border projects — from company registrations in the EU and Asia to licensing payment and crypto services and complex M&A. Over the years the LBO transaction — a leveraged buyout (LBO) — has become one of the key topics where entrepreneurs and CFOs simultaneously see potential upside and significant risks. I often hear the same questions: how to structure debt, which covenants to include, how to protect creditors, when mezzanine makes sense, how to minimize tax and comply with AML/FDI. In this article I systematize the best practices used by the COREDO team and share concrete tools that can be implemented already at the planning stage.
LBO Structure: HoldCo, OpCo and Risks
In a client-centric LBO I always start with the target structure. The HoldCo–OpCo model remains the baseline: the holding company (HoldCo) raises financing and acquires the operating companies (OpCo), and then implements a debt push‑down where it is lawful and economically justified. This arrangement simplifies governance, eases the security package and reduces the risk of “cross-contamination” within the group. It also clarifies accounting, which is important for the subsequent exit and W&I insurance.
Finally, the allocation of risks between banks, bondholders and the sponsor. In the intercreditor agreement we fix the waterfall, pari passu/priority of claims and voting protocols so that no decision vacuum arises in stress scenarios. This is not “paper for lawyers” but a working tool that, at a critical moment, determines who and how manages enforcement.
Buyout financing: debt financing
Often clients underestimate the variety of debt instruments in the EU/UK/Singapore/Dubai. It’s not only about term loans and revolvers, but about a set of modular elements that we combine to fit the target’s specific cash‑flow profile.
- Senior secured debt. The base layer secured by shares (share pledge) and assets (asset pledge). It is cheaper but imposes strict financial covenants and requires a well‑thought security package.
- Senior unsecured debt. Used for flexibility and speed; however, it is more expensive and requires careful covenant management so as not to overburden reporting and not to block capex.
- Subordinated debt and mezzanine finance. These instruments increase leverage capacity but carry higher cost and often include PIK interest and options. I use them when the senior layer hits covenant headroom and business growth covers the risk.
- Revolvers and credit lines. They smooth working capital and seasonality. With a proper cash sweep and dividend restrictions (dividend lock‑up), a revolver reduces the risk of default on principal payments.
- Bridge financing and variable lending. Suitable for carve‑out LBOs and a fast transaction pace, when part of the financing is brought in after closing.
Security package: collateral and trustee
A good security package is not “the more collateral the better”, but “exactly as much as will allow quick and lawful enforcement”. I build a multi-level structure: a share pledge on HoldCo/OpCo, asset‑backed security on key assets and security over intellectual property (IP) if IP is a revenue driver. In cross-border deals it is important to ensure that pledges and guarantees are enforceable in each jurisdiction and comply with insolvency laws.
Additionally, I always include a negative pledge, prohibitions on new security and carve-outs for operational needs. Such provisions protect lenders from “dilution” of collateral, but do not strangle the OpCo’s working capital. The balance is achieved through well-drafted incurrence tests and agreed perimeter exclusions.
Intercreditor: priority of creditors
Intercreditor agreement regulates priority, the payment waterfall, the standstill period and the voting procedure for amendments. In multi-layered financing it resolves the conflict between senior and mezzanine creditors, and also eliminates «grey areas» where each creditor expects someone else to act first.
Templates don’t work the same in the EU, UK and Asia, so I adapt the structure of voting protocols and the thresholds for amendments. In some countries certain amendments require the unanimous consent of senior creditors, and it’s better to take that into account upfront.
Covenants: covenant management
The key to a stable LBO is realistic financial covenants and well-considered maintenance vs incurrence covenants. I recommend combining a leverage covenant and an interest coverage ratio with DSCR and the setting of headroom, taking seasonality and the capex‑profile into account. Such a basket reflects the real ability to service the debt, not just a ‘pretty’ EBITDA.
Negotiating a covenant‑lite approach is appropriate when the borrower’s profile is stable and lenders understand the business model. I push for covenant‑lite not for the sake of a ‘tick-box’, but to reduce the likelihood of technical breaches while keeping the lenders’ risk profile unchanged.
Taxes and debt push-down: efficiency
Tax‑efficient holding structures allow you to simultaneously reduce the tax burden and meet economic substance requirements. Together with tax advisers we set up transfer pricing, analyze withholding taxes and apply interest allocation rules to avoid exceeding local thin capitalization limits.
As part of tax planning for an LBO, I build in dividend restrictions (dividend lock‑up) and cash sweep mechanisms. They accelerate deleveraging and improve ROI over a 24–36 month horizon, and are also viewed positively by lenders and W&I insurers.
Due diligence: what I check and prepare
Legal due diligence for an LBO is not a rewrite of corporate history, but a search for points that turn into price, terms and the structure of security. In focus are titles to assets, IP, key contracts with change of control, licenses and permits, employment/compensation agreements and unresolved disputes. The COREDO team persistently checks beneficial ownership (UBO) and sanctions risks, since banks and insurance companies have made this standard.
Separately, I note completion accounts and post‑closing adjustments. For an LBO they are critical, as they change net debt and working capital, and therefore: leverage. I provide for a clear methodology and an independent expert in case of dispute, to avoid protracted proceedings after closing.
antitrust, FDI, AML/KYC and sanctions
Competition/antitrust clearance and foreign direct investment (FDI) screening often determine the timing of the LBO. In the EU and UK I assess thresholds in advance and submit notifications before signing if this affects CP conditions. In Asia and the Middle East we check sectoral restrictions and local ownership requirements to avoid a “surprise” after the financing has been agreed.
AML/KYC for lenders and investors is part of the mandatory track. I conduct independent AML screening, identify beneficial ownership and verify sanctions screening and compliance. These processes are integrated into the CP list and reduce the risk of a tranche being halted due to a non-obvious link to sanctioned persons.
COREDO case studies
- Secondary buyout in Central Europe with a mezzanine component. The COREDO team implemented a HoldCo–OpCo structure with senior secured and mezzanine finance, providing share pledge and IP pledge on the key software. The intercreditor agreement fixed a standstill and waterfall, and covenant‑lite was applied only to incurrence tests, retaining maintenance covenants for leverage and DSCR. As a result the sponsor gained flexibility for growth, and the banks: managed risk.
- Carve‑out LBO of a technology subsidiary in the UK/EU. Our experience at COREDO showed that bridge financing and escrow arrangements allow closing the deal before completion of IT migration and licensing agreements. W&I insurance mitigated the risk of historical tax liabilities, and the dividend lock‑up and cash sweep accelerated de‑leveraging without harming R&D.
- Cross‑border LBO involving Singapore and Dubai. We structured upstream guarantees taking into account restrictions in local law and agreed negative pledge carve‑outs for trade finance. Debt push‑down was implemented in stages after FDI clearance so as not to breach CP conditions and not expose creditors to regulatory risk.
MAC, default and remedial playbook
Risks in an LBO are predictable if you name them and set out the remedies. I build material adverse change (MAC) clauses that realistically reflect the business profile rather than copying generic templates. This reduces the likelihood of disputes and gives the parties a transparent “traffic light.”
Contingency planning covers refinancing, currency risks and supply risks. I use sensitivity analysis and stress tests to check the debt capacity analysis and to ensure that even with a 20% decline in EBITDA the company maintains a DSCR above the agreed threshold.
Debt restructuring after a buyout
Not every restructuring is a failure. Sometimes it is a planned optimization stage after growth, where a pre-pack and a consensual reorganization give the business a second wind. The COREDO team conducts intercreditor negotiations, coordinates DIP financing and interim financing, and reallocates covenants in favor of flexibility without losing creditor control.
I review insolvency laws and priority of claims at early stages. This allows, if necessary, quickly agreeing on enforcement and avoiding loss of asset value due to procedural uncertainty and disputes among creditors.
Management motivation and control
Agreements between shareholders and MIP (management incentive plan), top-5 documents by impact on results. I insist on clear KPI, vesting and clawback so that management has “skin in the game” and shares long-term goals. This reduces the risk of aggressive dividends and incentivizes investments in growth.
Governance changes post‑LBO often include strengthening the roles of audit and risk committees, a schedule of covenant updates and quarterly stress sessions. This regime increases predictability, and lenders appreciate the discipline and respond by improving terms on refinancing.
What to include in a sponsor’s guarantees
Which legal guarantees to require from the sponsor in a buyout is a common question. I set out capital commitments, support in case of a covenant breach, restrictions on additional encumbrances and penalties for unauthorized transactions. These provisions hedge creditors against “dilution” of interests and discipline investment decisions.
In the disclosure schedules I recommend transparently describing all side letters, intercompany loans and obligations to management. Honesty at this stage saves months of disputes and tens of basis points in the cost of financing.
Due diligence and integration checklist
The documentation checklist for the legal team I keep as a “battle map”. It includes draft versions of the purchase agreement, loan agreement, intercreditor agreement, security package, corporate approvals, AML/KYC packages, sanctions certificates, antitrust notifications, FDI files, W&I policy and schedules, escrow instructions and the closing set.
What documents a lawyer prepares at each stage of the LBO is a frequent request from the CFO. I detail it on the project timeline, assign owners and prioritize by criticality so management spends time on decisions, not on correspondence.
Antitrust and FDI control in LBO
In cases where FDI may impose conditions, I ask banks to build flexibility into the CP list and price formulas. This eases tension and leaves room for constructive dialogue with regulators.
Safeguarding the value of cyber and IP assets
How to create a pledge over intangible assets (IP) in an international group: a separate area. I inventory the rights, check registration in key countries, coordinate licensing flows between the OpCo and the IP‑holding and ensure security over IP taking into account local registries. This is important for technology companies where IP is the main collateral asset.
Escrow arrangements and retention mechanisms are useful when some risks are disclosed only post-closing. We use them together with W&I to avoid keeping large contingent liabilities on the buyer’s balance sheet and to avoid provoking a covenant breach.
Questions executives ask when preparing an LBO
- How to assess debt capacity and leverage for an LBO? I conduct a debt capacity analysis based on stress‑testing of cash flow, DSCR and industry shock scenarios. This creates a reliable framework for negotiating price and debt terms.
- Which covenants should be included in a loan agreement to protect creditors? I choose a combination of maintenance and incurrence covenants, tie baskets to metrics, and limit investment activity through tests so as not to strangle growth. Such a set balances interests and reduces the likelihood of default.
- How does the debt structure affect ROI in an LBO? The larger the share of cheap senior secured debt and the more disciplined the cash sweep, the higher the equity IRR, all else equal. Nevertheless, an excess of debt reduces headroom and increases the risk of covenant breaches.
- What legal measures reduce the risk of credit default after an LBO? Clear MACs and default remedies, a clear cure mechanism, a structured intercreditor agreement and an enforceable security package provide time and tools for a managed response.
How the COREDO team builds the process
We start with a strategic session with the owner and the CFO. I clarify goals for ROI and timing, the regulatory map (licenses, FDI, AML/KYC), the presence of carve‑out factors and management’s readiness for MIP. Then I create the roadmap: due diligence, documentation, financing, regulatory matters, closing and a 100‑day plan.
After closing, the COREDO team supports covenant management, prepares reports for creditors, implements tax planning and helps management integrate debt restructuring into the company’s growth and scaling plan. This format reduces «transactional noise» and speeds up progress toward the target deleveraging.
mezzanine instead of senior debt
Mezzanine makes sense when:
- Operational growth and margins cover the higher cost of capital, and senior limits have already been reached. These are common cases in technology and niche services, where the growth rate exceeds banks’ risk appetite.
- Flexibility of covenants is critical for an M&A roll-up strategy. Mezzanine often provides leeway in incurrence tests and permits more aggressive capex without the risk of technical default.
The COREDO team weighs these factors through financial LBO modelling and sensitivity analysis. This approach makes the choice of mezzanine not a dogma, but a deliberate investment in speed and scale.
Enforcement of Cross-border Security by a Lawyer
How does a lawyer ensure enforcement of cross‑border security? The secret is in three steps: the right choice of governing law and jurisdiction, perfecting the security in the required registries, and a contractual enforcement architecture that takes local procedures into account. We use a security trustee and agency agreements, coordinate debtor notices and check priority in local collateral registers.
The role of escrow and retention mechanisms also increases in cross‑border cases. They insure payment of the price during registration and help bridge regulatory gaps without changing leverage.
Exit strategies and reallocation
Exit strategies in LBO: trade sale, IPO and secondary buyout. Each option dictates its own emphasis in governance, reporting and covenants. I prepare the company for refinancing or sale, aligning the capital structure and removing “legacy” restrictions that can reduce the multiple.
Our experience confirms: a proper 100‑day plan after an LBO accelerates reaching the target ROI and increases the likelihood of a favorable exit. This is not a theoretical statement, but the result of dozens of projects in the EU, UK, Singapore and Dubai.
Recommendations for the CFO and owner
- Carry out a debt capacity analysis before engaging with banks. Create stress scenarios for revenue and costs to demonstrate the resilience of DSCR and interest coverage. This will speed up the move to discussing pricing and covenants and increase counterparties’ confidence.
- Set up covenant management as an operational process. Define responsible parties, monitoring frequency and escalation thresholds. This will reduce the likelihood of technical breaches and make communication with lenders predictable and constructive.
- Integrate AML/KYC and sanctions screening into the CP track. Prepare standardized packages for lenders and investors to avoid tranche delays and reputational risks.
- Early dialogue on antitrust/FDI. Determine thresholds, timelines and the risks of conditional measures. Build this into the SPA and LOAN as a managed variable, rather than as a risk to closing and penalties for non‑performance.
Conclusions
LBO is a powerful tool for accelerating growth and increasing equity value, provided it is built on a solid legal and financial architecture. At its core is a rational HoldCo–OpCo structure, an appropriate mix of senior/subordinated/mezzanine debt, an executable security package with a clear priority of creditors, and a transparent system of covenants. Equally important are tax efficiency without loss of substance, properly calibrated due diligence, and regulatory discipline in antitrust/FDI and AML/KYC.