Navigation of PFAS issues in Acquisition Financing

Posted on: October 25th, 2024

acquisition-financing

Acquisition financing underwriting usually focuses on business and financial issues that underpin the stability of cash flow. Providers of acquisition financing usually validate the durability of a company’s competitive advantage and the depth of its resource base. Environmental issues are usually not a major part of the analysis in today’s service and technology-based economy.

Increasingly, a new EPA focus on PFAS has become a hot button issue for certain industries such as manufacturing, government contractors and textile companies. PFAS are widely used, long lasting chemicals which break down slowly over time. PFAS are present everywhere including clothing, environment, water, and within the human body. The regulatory focus on PFAS is an increasing deal risk for companies seeking acquisition financing. Some private equity funds and acquisition financing lenders have blacklisted companies who use PFAS.

Navigating PFAS Deal Risks in Acquisition Financing: A Collaborative Approach for Mitigating Environmental Liability

This is likely an uninformed overreaction given the unknowns as to the magnitude and timing of any future regulation. Other groups have developed a balanced view as to how to think about PFAS deal risk including pre-closing and post-closing liabilities. This involves additional diligence steps and requires the lender to look holistically at the entire issue. Successfully navigating PFAS issues requires both the borrower and the acquisition financing lender to work collaboratively on the following aspects:

Developing a base line of PFAS levels in the current wastewater.
Developing a remediation plan to address any weaknesses in the current plant flow.
Resetting the deal structure to provide for escrows or cost assumption by the seller or borrower.
Establishing an insurance approach to box the liability from the lender’s perspective.

The key in managing these steps is a collaborative, aligned approach on behalf of the Company and the acquisition financing party. A pragmatic environmental consultant is needed to lead this effort along with various specialist subcontractors and equipment companies. The goal is to mitigate this risk and to future proof the company against future regulatory changes. The successful adoption of this balance navigation approach will not only facilitate the closing but will position the company for growth with modern, best-in-class technology and production.

In the acquisition financing arena, capital availability is destiny as companies require reliable access to capital to grow over the long term. Unforeseen capital needs usually arise when acquirers least expect it. This can cause some concern for the acquisition financing provider, especially when covenants tighten up and that working capital availability is utilized faster than expected.

Mezzanine debt borrowing is usually a straightforward activity that many companies use for funding of transitional growth. Mezzanine debt lenders are highly transparent about their due diligence approach and their post-closing loan management making it easy for companies to engage with.

Elections have consequences and positive ones at that for the acquisition financing middle market. While much media attention is paid to the direction of the yield curve and the Fed’s likely rate cuts, scant attention is paid to the more important drivers of the acquisition financing market – business psychology and regulatory climate.