Debt Capital Renegotiation

It is often the case that existing debt capital structures are inappropriate for a company, for instance:

  • Debt may not be able to be amortised limiting the value of the debt and company.
  • Covenants (such as maintaining a benchmark EBITDA/interest ratio) are not achievable due to the current trading performance of the company.

Where refinancing is not an option, the terms of the lending may need to be fundamentally renegotiated with respect to:

  • Interest and default rates.
  • Time period for the facilities.
  • Amortization of the debt.
  • Assets over which security is taken.
  • Specific actions such as:
      – Asset sales to fund debt reduction.
      – Appointment of a CRO
  • Covenants eg relating to EBITDA and leverage and the testing of those covenants.
  • Financial performance information to be provided by the company on an ongoing basis eg forecasts and business plans.
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In addition to the types of renegotiation described above, other debt transactions with existing financiers include:

  • Debt for equity transactions, particularly where:
      – There is limited interest from purchasers in the company’s operations and assets at values acceptable to the company and debt providers.
      – The debt provider is unwilling or unable to sell out of their position.
      – The financier is willing to write down their debt to its true or a more serviceable value in view of potential upside from the subsequent sale of the equity.
  • “Haircuts”. Rather than convert debt to equity, a debt provider may simply write of that part of its debt which is not able to be serviced/amortised. This may support ongoing viability and achieving an equity sale.
  • Amending facilities to allow priority funding/ security arrangements for new lending/ lenders.

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