Hi Chaps,
Another esoteric question from me. What would the conversion of a sponsors shareholder loan to equity indicate?
All I'm coming up with so far is that it may make their trade creditors happy as SHLs tend to be pari with trade creditors?
Cheers,
O
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Not sure exactly what you're asking, but to me it would indicate the Company is doing well and the sponsor is better off converting (vs. taking coupon from loan). For the waterfall, this would make anyone on the s/h loan level or between than and common equity happy and would dilute existing common equity holders.
Well, remember that most SHL dont pay cash coupon. it's a just another form of holding rights over the companies cash flows and considering that they hold c.100% of the equity anyway, since we're looking at a sponsor transaction, it doesn't really make much sense to me on a cash basis. But that's a good point on dilution, surely that'd piss management off since they, as is usual, hold some equity? (in the case i'm looking at though, the SHL has been converted into a holdco above managements equity in the waterfall)
In my experience most sponsor convertible loans PIK up to protect the downside
would really need to know the situation behind the conversion in order to know what to make of it.
1) Is the SHL cash or PIK? 2) Is there anything between the SHL and common equity? 3) Does the company have debt/equity covenants?
Initial thoughts: They convert the loan to improve debt/equity covenants or maybe it can act as some type of equity "cure" if they're in default?
Seems to be the most logical explanation.
SHLs are generally subordinate to all other pieces of debt though and I've seen cases where SHLs can be excluded from covenants. Just depends on the situation.
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