Report From the Front: Private Equity Restructuring in the COVID Era
We have been busy, since the pandemic started, with the Sponsor community, with both new and repeat Sponsor clients. Our advice has been used for private equity firms experiencing portfolio company capital structure issues, as well as at the overall fund-level, looking over the portfolio. We also continue to work with public and private boards faced with restructuring during these uncertain and unpredictable times.
Given this experience, we thought it might be helpful to our friends to both flag some themes that seem to be a constant in this new environment (see below) and provide detail around the outcomes our clients have been able to achieve (see recent case studies of these engagements here).
Themes Driving Private Equity Restructuring
- Companies are running afoul of certain covenants, most usually liquidity and leverage covenants, as COVID-19 takes its toll in their marketplaces.
- Lenders are fearful of uncertainty and want Sponsors/owners to inject new equity beneath the existing capital structure (or as we call it, “Mt Debt”) – all in return for only short-term waivers (three to six months).
- Sponsors with vision, and will, are rejecting this approach, and instead are requiring either (a) an advantageous (to shareholders and management) capital structure overhaul and/or (b) a multi-year covenant and debt service holiday.
- In connection with achieving number 3 above, Sponsors are willing to inject new capital if they have it available.
How We Help and Recent Outcomes
Gordian, working with counsel, devises bespoke private equity restructuring strategies – usually comprising what we term “carrots and sticks” – to encourage lenders to be accommodative of the Sponsor’s goals.
PRESENTATION: COVID Case Studies
Our unique lack of creditor clients among investment banks in our space (we alone eschew creditor representations) has always allowed us to recommend, and implement, various aggressive and credible sticks to benefit our Sponsor and board clients. Together with our creative development of certain carrots, our clients have been able to achieve extremely shareholder-favorable outcomes, and in a short amount of time.
RELATED: Creating Advantageous Restructuring Tactics for Debtors
Conclusion
While all of these situations are unique in their respective circumstances, the common denominator for Gordian success is a client that is prepared to reject the lenders’ demands of “give us more money, we will give you a little time and there is no change to the capital structure – just kick the can”.
And that is because doing so (kicking the can) will inevitably result in the Company and Sponsor losing much of their negotiating leverage when they are back at the table with their lenders later this year or early next, having done much of the heavy lifting in stabilizing and improving the business, weathering the COVID storm and avoiding a fire sale in the interim. With the current dip in implied valuation due to COVID, working for the benefit of creditors to rebuild value is not an appealing prospect for our clients.
Instead, we work with and for our clients, together with counsel, to use the COVID crisis as an opportunity to right-size the capital structure with minimal shareholder dilution and obtain covenant runway for 18 months to two or more years and meaningful principal and amortization relief. In this uncertain environment, we believe our Sponsor clients can be much more nimble than their lenders, so we use the lack of market clarity to great advantage.
We are also always looking for opportunities for our sponsor friends to go on the offensive – for example, purchasing debt at advantageous prices on account of the COVID crisis, or having Sponsor money available for someone else’s distressed situation. While this has not materialized yet in our deals, it is always an option we flag for opportunistic Sponsor clients.
We would welcome the opportunity to set up time to discuss these issues – and opportunities – with you. Please contact Leslie Glassman to set up a discussion.