Put Right in Debt-Like Pref

This is not a thing, right? I'm just imagining it as a mezz loan. Why would anyone accept mezz with that feature? Seems like you are giving the company away to a potentially predatory party, especially because, in an EOD, the investment will most likely be structured to sever the existing equity if need be.

Just sanity checking this. Would be great to hear if you have seen something like this (even in heavily structured circumstances) or if it's just not a thing.

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Comments (6)

  • Intern in HF - EquityHedge
Sep 24, 2020 - 5:07pm

Depends who the Pref investor is. My group will provide pref to existing portfolio companies to facilitate a transaction with a put to another investor if they breach a certain covenant. It helps us get comfortable with the investment by adding additional downside protection

Sep 24, 2020 - 5:24pm

I have actually seen this before (from mezz lenders lending to a private, non sponsor backed business). Basically the logic was that the put right allowed the investor to monetize any equity upside that was embedded in the pref (instead of just getting repayment of the face value). I.e. if the pref had a fixed dividend, but was convertible to common to allow for upside participation, the put right helps the investor exit without being at the mercy of other shareholders.

It is a pretty aggressive structure for sure though.

  • Prospect in IB-M&A
Sep 25, 2020 - 1:25am

aggressive structuring for sure but it lets investors get comfy with otherwise light structure prefs, esp. in change of control situations 

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