Deploy Buyout in UAE: Debt-Financed Acquisition Strategies

A leveraged buyout works on a simple premise: the buyer contributes a modest slice of equity, borrows the rest, and the target's own cash flows service the debt. Everything difficult about doing one in the UAE follows from the second half of that sentence. The lender is being asked to look at the target's assets for security and the target's earnings for repayment, while the borrower is a newly formed holding company with no trading history and nothing on its balance sheet but the shares it is about to buy.

What follows is what has to be solved between signing and completion: whether the target can lawfully support the debt raised to acquire it, what security can actually be taken and perfected here, how the debt layers rank against each other, and which covenants are worth arguing about.

Can the target support its own acquisition?

This is the question to answer before the term sheet, not after. The Commercial Companies Law, Federal Decree-Law No. 32 of 2021, contains restrictions on a company providing financial assistance for the acquisition of its own shares — lending to the buyer, guaranteeing the acquisition debt, or granting security over its assets to support it. Free zone companies are governed by their own companies regulations, and the DIFC and ADGM regimes take their own approach.

The practical consequence is that the classic structure — borrow at holdco, push the security down onto the operating company — cannot be assumed to work. Counsel needs a view, entity by entity, on what each member of the target group may lawfully give and when. Where the target cannot grant security at completion, the alternatives are a share pledge over the target only, security granted after a permitted post-completion step, or a debt package sized to what the structure can actually support. All three change the price the buyer can pay, which is why the analysis belongs at the start.

Related: Our mergers and acquisitions team advises on buyout structures, share purchase agreements and completion mechanics.

The security package, and whether it is perfected

A security interest that is documented but not registered is a promise, not a priority. In UAE-seated financings, perfection is the step that most often goes wrong, because each asset class has its own formality and its own registry.

• Shares in a mainland LLC. A share pledge is documented and notarised, and the pledge is noted on the commercial register. In free zones the equivalent is a filing with the registrar of that zone; the DIFC and ADGM each maintain their own security registers.
• Real property. A mortgage is registered with the land registry of the emirate concerned — the Dubai Land Department in Dubai, the equivalent authority in Abu Dhabi. Unregistered mortgages do not bind third parties.
• Movable assets, receivables and bank accounts. Security over movables is registered in the federal register for security over movable property, which is what gives a lender priority against later-registered creditors.
• Contracts and insurances. Assignments require notice to the counterparty and, where the contract restricts assignment or the grant of security, its consent. Consent takes time, and key contracts with government or quasi-government counterparties may not give it at all.

Some assets simply resist security. Free zone licences are generally not capable of being charged. Regulatory approvals and certain concessions cannot be transferred to a lender on enforcement, which means the collateral that looked valuable in the model may be worth much less in a distressed sale. Test each item against the question a lender should always ask: on enforcement, who buys this, and what do they need in order to operate it?

Senior, mezzanine, and the intercreditor agreement

Senior debt is usually a term facility, frequently syndicated across several banks, secured on the package described above and repaid first. Mezzanine sits between that and the sponsor's equity: subordinated in ranking, priced for the additional risk, and often carrying an equity feature such as a conversion right, a warrant, or a participating return.

Two points recur on mezzanine in the UAE. The first is the form of the return. Instruments structured as profit participation or as preferred equity interact with the Commercial Companies Law rules on share classes and distributions, and conversion rights need to be checked against the target's constitutional documents and against any sector-specific ownership conditions attaching to its licence. The second is that Islamic finance tranches, where used, have their own documentation and their own security mechanics, and the intercreditor position between conventional and Sharia-compliant tranches has to be worked out explicitly rather than assumed.

The intercreditor agreement is where the money is really allocated. It sets payment priority, the order of application of enforcement proceeds, the standstill period during which junior creditors cannot act, who controls enforcement, and the terms on which security can be released in a distressed sale. Sponsors negotiate the acquisition agreement hard and sign the intercreditor with less attention; in a workout it is the intercreditor that decides who is in the room.

Related: Our financing and refinancing practice covers senior and mezzanine facilities, security packages and intercreditor terms.

Covenants worth arguing about

Financial covenants are the lender's early warning system. The usual set is a leverage ratio, an interest cover ratio, a cash flow cover test and, in asset-backed deals, a minimum net worth or asset cover requirement. What matters more than the headline levels is the definitional detail: what counts as EBITDA, which items may be added back, whether the test is measured on rolling twelve months or on a financial year, and how long the borrower has to cure a breach before it becomes an event of default.

Alongside those sit the undertakings that constrain the business: limits on further borrowing, a negative pledge, restrictions on disposals, restrictions on distributions to the sponsor, a cash sweep applying excess cash to prepayment, and controls on changes to the group structure or the management team. A buyout that will need capital expenditure or bolt-on acquisitions has to carve out room for them at the outset, because consent requests to a syndicate are slow and are not free.

Reporting obligations deserve the same attention. Monthly management accounts, audited annual accounts and compliance certificates are only useful if the target's finance function can actually produce them on the agreed timetable. Agreeing to a reporting schedule the business cannot meet manufactures defaults out of nothing.

Lender-side and regulatory constraints

UAE banks lending into a buyout apply Central Bank prudential requirements, including limits on exposure to a single borrower or connected group, and their own credit policies on acquisition finance. Those constraints shape how large a single-bank facility can be and are one reason syndication is common in this market.

Where the buyer or the financing is offshore, add the mechanics of getting funds in and distributions out, the currency in which the debt is denominated against the currency in which the target earns, and any sector-specific restriction on who may hold shares in the target. Activities on the strategic-impact list, and licensed activities in regulated sectors, may require prior approval for a change of control — an approval that has to be built into the conditions precedent rather than discovered during signing.

Tax has become part of the structuring conversation as well. Under Federal Decree-Law No. 47 of 2022, the deduction of net interest expense is restricted, so a structure that assumed full deductibility of the acquisition debt should be modelled again. Where the group intends to sit within a tax group or to rely on relief for a qualifying share disposal, the conditions need checking against the actual structure rather than the intended one.

Diligence that changes the deal

Legal diligence on a leveraged deal is not the same exercise as on a cash acquisition, because the findings feed the security package as well as the price. The items that move the structure are: change-of-control clauses in material customer contracts, leases and licences; existing security and negative pledges given to incumbent lenders that must be released at completion; ownership and title to the assets being offered as collateral; employment liabilities including end-of-service entitlements under Federal Decree-Law No. 33 of 2021; and any pending litigation or regulatory action against the target.

Each of those either becomes a condition precedent, a specific indemnity, a price adjustment, or a reason to reduce the debt quantum. Diligence that produces a report nobody translated into the funds flow has not done its job.

Planning for the downside

Leveraged structures are built with little headroom, so the documents should assume that at some point there will be none. Establish in advance which court or tribunal decides a dispute under the finance documents and whether the same forum decides the acquisition agreement; inconsistent clauses across a package that spans mainland, free zone and offshore entities produce parallel proceedings. Establish what happens on a covenant breach before it happens: who can accelerate, what the standstill looks like, and whether a consensual restructuring or the statutory insolvency and restructuring procedures are the realistic route. The value in that planning is that it is done while the parties still have reasons to cooperate.

Related Services: Speak to our acquisitions team or our financing and refinancing advisers about a specific transaction.

DISCLAIMER

This article is for informational purposes only and does not constitute legal advice.

Additional Resources

• Management Buyouts in the UAE: Structuring and Financing
• M&A Financing Structures and Acquisition Funding in the UAE
• Warehouse Receipt Finance and Commodity Lending in the UAE
• Syndicated Lending: Multi-Bank Financing Structures in the UAE