Debt pushdown

Debt pushdown refers to the techniques used to bring acquisition debt closer to the operating profit that must service it. In an Leveraged Buy-Out (LBO), the debt is initially borne by an Acquisition holding (NewCo) that has no activity of its own; debt pushdown consists of making the target company that generates the flows bear that debt, directly or indirectly, most often through a merger of the holding and the target.

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The aim is twofold: to align the interest charge with the results that fund it and to allow the tax deduction of that interest against operating profit, improving the overall leverage effect of the structure. This deductibility is nonetheless constrained. In France, mechanisms such as the cap on financial charges and the Charasse amendment (art. 223 B CGI) limit the benefit in certain buyout configurations.

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For example, a holding takes on 15 MCHF of debt to acquire a target generating 5 MCHF of EBITDA. After merging the holding and the target, the interest, on the order of 0.9 MCHF a year, becomes deductible from the operating profit of the merged entity, subject to the applicable tax caps.

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Debt pushdown therefore calls for financial structuring attentive to tax and company law, notably the prohibition on having the target fund the acquisition of its own shares. Poorly designed, it exposes to a risk of recharacterisation; well designed, it optimises the cost of debt without weakening the target.