The market for acquisition financing for leveraged buyouts rebounded strongly in 2010 and first-quarter 2011. Improved market sentiment and dramatically improved volume have had a profound effect not only on the process for securing financing commitments, but also on commitment terms.

The process for securing financing commitments has begun to exhibit some of the same competitive, precedent-driven and time-compressed characteristics seen during the last LBO boom. Arrangers were largely successful in defending some of the more important post-crisis changes to their financing documentation standards (such as Xerox protections and relatively robust flex and securities demand terms). However, terms that were once thought of as "frothy market features" (covenant-lite loans and equity cures, for example) have returned, and commitment papers appear in other respects to reflect to borrower-friendly standards of the 2005 to 2007 LBO boom. Let's review some recent trends and new developments.

In the years following the credit crisis, many borrowers began to look for ways to adjust their balance sheet by extending maturities, retiring loans through repurchases in the open market or through modified Dutch auctions, or refinancing debt through longer-term facilities with less restrictive or no financial maintenance covenants. In many cases, however, they found that their credit agreements either did not contemplate or did not permit such transactions.

In the recent market rebound, sponsors have sought to prewire financing flexibility for their portfolio companies when preparing mandate papers. Mandate papers now commonly include language permitting loan buybacks (by both the borrower and the sponsor), "amend and extends" (which allow extensions of maturity with the consent of extending lenders only) and "refinancing facilities."

Refinancing facilities, read alongside now-boilerplate incremental facilities, allow for the incurrence of debt that shares on a junior or equal and ratable basis in the collateral and may or may not be part of the committed facility, all without required lender approval. Although arrangers sometimes retain the right to flex these provisions away, there was little evidence of general resistance to these provisions in the loan market.

Two approaches have emerged to resolve the tension between borrowers' preference for specificity in mandate papers and arrangers' preference for flexibility. The first recycles the approach frequently taken during the 2005 to 2007 period -- namely, a requirement that definitive documentation be "consistent with sponsor precedent," subject to a few negotiated exceptions. Under the second, arrangers are asked to underwrite the terms of a specific precedent transaction.

This second approach is more novel, and replaces the tactic sometimes seen in 2005 to 2007 where lengthy, detailed covenants and definitions were negotiated and then attached to the commitment letter. It also exacerbates the procedural intensity associated with finalizing LBO financing. Underwriting covenant packages from unrelated transactions requires arrangers, with the assistance of counsel, to become familiar with those covenant packages, the precedent transaction, and the relevant company and industry for which those covenants were negotiated, and to analyze them against other comparable transactions and current market trends, all within the same compressed time frame in which diligence must be completed, internal underwriting approvals must be obtained, and commitments must be papered.

Market practice has not yet coalesced around a single approach to documentation standards, and the point continues to be negotiated on a case-by-case basis. However, desire of participants to document complex transactions on such an accelerated schedule will be one of the continuing challenges for 2011.

Regulatory changes have also affected financing. For the first time in years, many financial institutions are rewriting the tax and increased cost provisions of their forms. Concerns about costs arising from the Dodd-Frank Wall Street Reform and Consumer Protection Act and Basel III have inspired provisions designed to ensure such costs are passed on to borrowers.

On the other hand, borrowers are insisting on provisions that make it clear that Foreign Account Tax Compliant Act (Sections 1471 to 1474 of the Internal Revenue Code of 1986) costs not be passed on.

The long-awaited increase in LBO activity is upon us. If first-quarter 2011 activity levels are any guide, this will continue to have a significant impact on process and terms for arrangers, sponsors and their respective advisers.

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Jason Kyrwood is a partner in Davis Polk & Wardwell LLP's corporate department, practicing in its credit group.