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 !
Hi choubix, any of these discussions helpful:
I hope those threads give you a bit more insight.
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.
Yes, they would mind if there are mandatory cash dividends.
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.
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.
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.
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
in your pt 3, what's the difference between contractually subordinated and structurally subordinated? thanks
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.
Perferendis dolor numquam voluptatem repudiandae natus. A amet consequatur vel dolore sit quia. Omnis necessitatibus sunt id pariatur cupiditate. Dolorum debitis doloremque est ut est repudiandae quibusdam asperiores. Necessitatibus delectus debitis cumque voluptas cumque officia. Unde voluptatem nihil unde excepturi tenetur sit.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...