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This Mintz memo says that although the Covid-19 crisis has created significant disruptions for pending & planned M&A deals, it has also created opportunities for PE funds to answer middle-market companies’ need for debt financing. Many of these companies are now facing financial covenant and payment defaults under existing financing arrangements, and need to reset covenants & add tranches of new debt to provide the liquidity that they need.

The current uncertainties in the financial markets have created opportunities for new investors to provide debt financing to companies on attractive terms. This excerpt discusses the opportunities for PE funds to participate in refinancings of senior term debt:

From the perspective of a distressed company with a senior credit facility in default, or in danger of default, it is preferable to amend or refinance the existing debt to obtain terms that it can comply with on a go-forward basis. This is the fastest and most straightforward method of both solving for ongoing defaults and providing liquidity.

Distressed companies may seek to amend or refinance to revise the following provisions, among others, of their senior documentation:

– Principal payments (amortization holidays, or reductions)
– Interest payments (interest payment holidays or PIK toggle)
– Waiver of certain mandatory prepayments to preserve liquidity
– Financial covenant reset or elimination of certain burdensome financial covenants
– EBITDA add-backs relating to market conditions (non-recurring COVID-19 items)

A refinancing may also be preferable from the perspective of a potential new lender. A refinancing removes the senior term lender as a competing creditor with greater collateral rights in a downside and puts the new lender in the control position.

There are also situations where an existing credit facility may not be in default and the existing senior lender is not anxious to be taken out, but is still unwilling to provide additional liquidity. This additional liquidity may be necessary for a company to maintain its business plan (permitted acquisitions, for example) and can be provided as an additional tranche or incremental term loan by a potential new lender. The new lender would receive the benefits of a senior secured position and would share in any collateral pro rata with the existing senior lender.

The memo notes that because the senior lenders sit on top of the heap when it comes to payment & security arrangements, these financings provide a lower return that some alternative ways of providing debt financing, including mezzanine and DIP financings & “credit bidding” in bankruptcy Section 363 sales – all of which the memo also addresses.

– John Jenkins