Deal structuring questions

Hi guys,

We are raising capital and we are offered money for preferred shares in the company.
These shares have a liquidity preference, a yearly dividend and can be participating or not (pricing differs depending on whether we choose participating or not).

As we are looking at raising some debt at the same time from another provider, I was wondering how would a debt fund consider these preferred shares and if they will have any bearing on covenants (unitranche debt or not)

In essence these preferred shares look like a loan with an equity component providing the upside.

Thanks !

Comments (8)

 
Mar 21, 2019 - 2:00pm

Hi choubix, any of these discussions helpful:

  • Medley Capital structure loans and utilize debt/equity investing Reputation 4. Compensation They seem to structure loans and utilize debt/equity investing (no surprise.) ... Hi all, Wanted to see if anyone had any insight into the firm above. 1. Culture 2. Deals 3. ...
  • Refi and changes in debt structure modeling I'm trying to figure out how to model debt structures into a deal. This may be a stupid ... question, but how would you go about modeling in a refinance after construction... That is, if your first ... tranche is looked at as the construction loan, but goes from say 8% to 4% during first year of being ...
  • CRE loan structures Quick question I'm looking a little deeper into understanding the debt on some of the deals ... that we look at in our investment sales brokerage shop. So if a loan term is 5-7 years what happens ... after you refi or renew loan, do you ever actually pay off the loan if it's not a fully amortizing ...
  • Debt and Structured Finance Brokerage Exit Opps structured finance brokerage team in a major metro area. The group has relatively robust deal flow and my ... out various sorts of loan structures (mezzanine financing, term loans, construction financing, etc.) ... I am currently about 6 months into my first full-time role working as an analyst on a debt and ...
  • Deal Structure For First Deals Hey everyone, I was curious to know how you structured your first deals that you did on your own ... or how you would structure deals you do on your own in the future? (This is assuming you have ... investors and it wasn't all your own money) Some additional questions for those of you that have done ...
  • Any CMBS folks here? I have a structuring question at loan closing, there will be a lease signed to a tenant for 30 years, so extending well beyond the ... loan term. The tenant is solid and I believe the sponsor will use year 1 to use some of the proceeds ... a bridge to perm deal but can this be a CMBS execution? How will rating agencies look at this? I am ...
  • Origination Fees on +$100MM Loans mortgage brokers will place debt on deals that typically range between $1MM and 30MM and will charge ... anywhere from 1-2% in fees for doing so. My question is what is the typical market fee for placing +$100MM ... of debt on a project? to Wednesday, March 6, 2019- 10:55am ...
  • Toughest Technical Interview Question?-- How do you structure an M&A/IPO deal?, "How do you structure an M&A / IPO deal?" After days of discussions we still could not find ... a top-tier bulge bracket investment bank (in Hong Kong) got completely shattered by this unexpected question ... a plausible answer to this question. Would really appreciate if anyone on the forum can share any idea on this ...
  • More suggestions...

I hope those threads give you a bit more insight.

 
Mar 27, 2019 - 1:15pm

The liquidation preference and the participation themselves shouldn't have too much of an impact on whether or not a lender wants to be involved. The dividend, however, assuming it's cash pay, will create more of an issue as lenders do not like to see dividends going out the door when their obligations are outstanding (at least in my experience). If the dividend could be restructured as PIK, then it's a different story.

 
Mar 29, 2019 - 10:52pm

How attractive is the deal? Anything is negotiable. We have a deal that is PIK and one that has a current pay dividend.

The one with the current pay was obviously more attractive to the lender.

Won't have much impact on convents, maybe minimum required cash balance.

 
Mar 30, 2019 - 4:56pm

I would say the prefs impact creditors in at least 3 major ways:
1. Cash leakage: any cash payment to press holder of course is cash away from senior lenders, and thus increases credit risk. Typically such cash payments are restricted in size through the covenant package, in either bond or loan form. You might want to think about a PIK feature, or PIYC.

  1. Governance: the presence of another investor set, albeit subordinated, just creates a new set of incentives that many conflict with either creditors or the equity's. If the prefs have some form of governance rights, then creditors will want comfort that conflicts can be managed without gridlocking the business. Further, creditors would typically want a put if there is a change of control, so again potential changes in governance say if the prefs had conversion rights to equity would be scrutinised.

  2. Security: of course the prefs need to be both contractually and structurally subordinated, ideally unsecured with long dated maturity. Would be hard if the prefs enjoyed security interests over company assets, even if second secured.

Hope this helps. Happy to chat further.
Jean

 
Apr 6, 2019 - 8:06pm

in your pt 3, what's the difference between contractually subordinated and structurally subordinated? thanks

Array

 
Apr 7, 2019 - 4:08am

Contractually subordinated means there is a legal obligation for one creditor to receive recovery proceeds ahead of another, when certain conditions are met. This is achieved through the intercreditot agreement, notably through its turnover provisions.classes of capital. It will say who gets to enforce when, who gets to release security when, etc. Its common in LBOs.

Structurally subordinated means a creditor is sitting in a holdco one layer further than another creditor. So for instance we could have trade creditors, who contract with an opco somewhere. And a senior lender, who lends at topco. Then, the lender is structurally subordinated to trade creditors. This is offset typically with security interests, which allow the senior lender to get recovery proceeds before unsecured creditors.

A creditor can be both structurally and contractually senior btw.

Typically the prefs would be issued by a holdco, and would be structurally subordinated to the expos.

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