David L. Herman, Partner; Peter S. Kaufman, President; & Liam D. Ahearn, Managing Director of Gordian Group Write Feature Article for Jan / Feb TMA Journal of Corporate Renewal, the official publication of the Turnaround Management Association (TMA)
Leveraging Market Uncertainty in Restructuring Private Equity Investments
There is necessarily a tension that exists in any financial restructuring, and this is particularly so in the current environment considering that:
1. Creditors want both to (a) avoid an immediate write-down, particularly if they believe the business may rebound in the near- to mid-term, and (b) have shareholders/sponsors fund additional equity to support the business, all while keeping the company on a short forbearance leash.
2. Conversely, boards, shareholders, and management do not want to work solely to preserve, and create, value for the benefit of their creditors or to invest additional capital
underneath “Mt. Debt,” particularly given uncertainty as to the timing, and extent, of a turnaround.
This is especially relevant in situations involving private equity firms, which have their own financial return expectations, investment horizons, and—most critically in workouts— perhaps additional capital available to invest under the right circumstances.
Today, nimble companies and sponsors want to take advantage of market uncertainty to achieve advantageous global capital structure solutions, while creditors seek to avoid that. The exogenous market today presents an opportunity to restructure to the benefit of sponsors— and even for sponsors concerned about lender relationships, there may well be a necessity to do the same.
Drivers of Private Equity Restructuring Certain themes are consistently being seen across restructurings, including the following:
- COVID Operational Impacts. Companies are running afoul of certain covenants (e.g., leverage, coverage) and/or require incremental liquidity as COVID-19 takes its toll in their marketplaces.
- Lender Wants. Lenders fear uncertainty and want sponsors/ owners to inject new equity beneath the existing capital structure (Mt. Debt)— all in return for only short-term waivers (three to nine months).
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