Peter S. Kaufman, President, David L. Herman, Partner & Liam D. Ahearn, Managing Director Co-Author Op-Ed: OpEd: Restructuring With Debt Spring-Backs and Spring-Downs
Part Two of a two-part series, The Deal
August 4, 2021
This article was originally published on TheDeal.com (subscription required)
Springing debt strategies provide optionality to debtors in times of uncertainty and can assist in bridging negotiating gaps with lenders in restructuring scenarios.
The following article, Restructuring With Debt Spring-Backs and Spring-Downs, is Part Two of a two-part series and was written by Gordian Group LLC president Peter Kaufman, partner David Herman and managing director Liam Ahearn. The views expressed here are entirely their own.
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As we have seen, portfolio companies experiencing capital structure challenges give private equity firms opportunities. Gordian, working with counsel, devises bespoke private equity restructuring strategies — usually comprising what we term “carrots and sticks” — to push lenders to be accommodative of the sponsor’s goals.
One novel carrot strategy that we have employed in these situations involves the “debt spring back” and “debt spring down” structures. Of course, any form of “spring” only works if the sponsor has conveyed “stick” strategies that the lenders will fear, and hence a spring approach connotes a superior outcome than the more draconian alternatives for the lenders.
While having certain roots in the old “cash flow note” concept, these spring structures go much further in terms of recapitalization strategies and have regulatory and tax implications. Notably, the upside for creditors does not need to include warrants or equity. This limits creditor upside. Instead, lenders gain the option of having debt reinstated should the company meet certain financial metrics.
The springing debt strategies provide optionality to debtors in times of uncertainty and can assist in bridging negotiating gaps with lenders in restructuring scenarios.
The debt spring-back is part of an overall immediate right-sizing of a company’s capital structure, which can also be accompanied by permanently shedding a portion of the lender’s debt stack through a simple write-down ($X).
The debt spring-back, in its basic form, works as follows:
1. A portion of the debt facility ($Y) is allocated into a contingent liability that effectively sits in the ether.
2. If the company achieves certain agreed-upon operational benchmarks down the road, the lender “springs back” into preexisting debt up to the full amount of the contingent liability.
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