May 18, 2023

Debt Download

Welcome to Debt Download, Goodwin’s monthly newsletter covering what you need to know in the leveraged finance market. We hope you are enjoying the Spring weather!

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As companies continue to face economic uncertainty caused by a variety of factors, larger leveraged companies in particular may begin to foresee difficulties refinancing or maintaining compliance with their existing debt facilities. Below we provide some high-level considerations for large cap and upper-middle market companies with broadly-syndicated debt facilities for when distress may be on the horizon (please note that this is not legal advice, but rather general observations and any possible action taken would require review of actual relevant documentation and consultation with necessary legal, tax and other advisors).

  1. Identify what the catalysts are in advance of any discussions with lenders or other stakeholders and when any may occur, including, for example, potential financial covenant breaches, liquidity concerns and upcoming maturity on material debt.
  2. Consider engaging the company’s board regarding debt facility issues and outside counsel to advise on fiduciary duties of directors during a distressed scenario. Discussions may include the preparation of cash flow projections and budgets, use of equity cure provisions, entering forbearance arrangements as the company works on potential solutions, funding separate company payroll and benefit accounts, and assessment of alternative restructuring pathways, refinancings and deleveraging scenarios.
  3. Prepare for messaging to lenders and other stakeholders (including timing of the initial conversation and the information to be provided to various constituencies) and follow up negotiations. Companies should acquire all relevant materials, monitor compliance with debt documents and consider confidentiality and leakage risks.
  4. Evaluate liquidity (including access to any revolving loans or delayed draw term loans, and whether the company has an option to pay-in-kind any interest or fees), review the company’s cash management systems and accounts, including the ability of the company to operate during a restructuring, and assess whether the company has adequate cash to cover debt service.
  5. Consider retaining a financial advisor and/or bankers, and have outside counsel gather referrals and make informal contact with potential candidates.
  6. Pay attention to assignments of loans, including whether there has been increased frequency. Companies should also review the register of lenders and consider what voting thresholds are needed for different actions under the loan documents.
  7. Monitor the company’s ratings (including inquiries from rating agencies) and any references to the company in trade publications, particularly in any restructuring-specific publications (or request that outside counsel do so).
  8. Consider whether refinancing the company’s existing credit facilities or other indebtedness, or engaging in deleveraging transactions, would ease pressure on the company. Assess whether debt buybacks or debt-for-equity exchanges are options.
  9. Consider whether the company’s liquidity position may be strengthened (including cost vs. yield, any flexibility under the loan documents or approvals that may be required from lenders, equity investors or otherwise) through various transactions such as asset sales and sale-leasebacks, equity offerings, debt capacity and waiver of mandatory prepayments, including excess cash flow.
  10. Consider establishing infrastructure for a restructuring and/or a strategic transaction. Understand the legal, regulatory and contractual requirements and limitations related to any such transaction and any tax implications.

Public companies should also consider regulatory and stock exchange compliance requirements, and be aware that events of default or execution of forbearance agreements, loan agreement amendments, waivers, and binding term sheets will likely trigger an 8-K filing. In addition, Regulation FD limits the sharing of material non-public information with lenders without wider disclosure, and an inability to trade stock may impact whether and for how long lenders are willing to be subject to an NDA. Further, downward stock movement and/or other 8-K disclosure triggers (e.g., potential delisting, quarterly earnings or departure of executive officers or directors) may result in additional negative press and put pressure on discussions with lenders.

For more detail, be on the lookout for a forthcoming article from Goodwin diving into these items with more depth. Please reach out to anyone on the Goodwin Debt Finance team, or your usual Goodwin contact, to discuss any of the options above or for any other questions you have on your existing or new credit facilities.

In Case You Missed It – Check out the Goodwin Bank Failure Knowledge Center which includes helpful FAQs (including for First Republic Bank), webinars, articles and more, and these recent Goodwin publications: Federal Reserve Announces Results From the Review of the Supervision and Regulation of SVB and An Emerging Credit Crisis Could Reshape Real Estate.

For inquiries regarding Goodwin’s Debt Download or our Debt Finance practice, please contact Dylan S. Brown, Nikolaus J. Caro, and Robert J. Stein.

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