January 26, 2024

Ten Considerations for Large-Cap and Upper-Middle-Market Borrowers in Early Stages of Distress

Companies continue to face economic uncertainty caused by a variety of factors such as high interest rates, changing consumer spending habits, a tight debt and equity environment, labor market and inflationary pressures, continued supply chain disruption, domestic political and geopolitical risk, and sector challenges. Larger leveraged companies in particular may be exposed to one or more of those risk factors, and they may begin to foresee difficulties maintaining compliance with or refinancing their existing debt facilities.

Considerations When Distress Is on the Horizon

If you are a senior officer at a large-cap or upper-middle-market company with broadly syndicated debt facilities, and it is becoming apparent that there may be a mismatch between your business and your current capital structure, what should you be considering when distress is on the horizon?

  • Identify the catalysts for discussions with lenders or other stakeholders and when these conversations may occur:
    • Is there an upcoming financial covenant breach?
    • Is there or will there be an inability to deliver financial statements in accordance with the credit agreement, including an inability to deliver an unqualified audit opinion?
    • Does the company have liquidity needs that will be difficult to satisfy?
    • Are there upcoming maturity dates of a credit facility or other material debt?
    • Is there a potential material adverse effect (MAE)?
    • Is there a potential cross-default resulting from material debt, material contracts, or other matters, or does the default under the facility create defaults under other agreements, permits, or contracts?
    • Is there a potential sector or regulatory trigger for an MAE or other covenant breach?
    • Is there an intercreditor agreement that includes restrictions on additional financings?
    • Are there earnouts or other contingent payments that can be deferred?
  • Consider engaging the company’s board regarding debt facility issues:
    • Determine which stakeholders, including lenders, are entitled to have observers in board meetings or are entitled to receive board materials. Consider what confidentiality, conflict-of-interest, and privilege protocols should be implemented.
    • Prepare 13-week and 26-week rolling cash flow projections, together with projected debt facility compliance, sensitivity analyses, and operational contingency plans.
    • Consider obtaining a briefing from outside counsel on fiduciary duties of directors and officers in a distressed scenario and on alternative restructuring pathways, including a potential bankruptcy filing (assessing costs, timing, practicality, etc.).
    • Identify and develop alternative refinancing, deleveraging, and liquidity scenarios.
    • Develop a holistic restructuring strategy that can effect long-term solutions rather than short-term fixes.
    • Understand the mechanics of any equity cure provisions, including timing, amount, and how such provisions affect the financial covenants (e.g., whether any such payments are added back to EBITDA and whether they will reduce the amount of funded debt because of a debt paydown).
    • Consider whether the company has a proper hedging strategy (e.g., interest rates, commodities, and currency).
  • Prepare to communicate with lenders and other stakeholders (including timing of initial conversations and information to be provided to various constituencies) and prepare for follow-up negotiations:
    • Make sure that the company and its advisers have all relevant and material information, including:
      • Access to a full set of loan documents, material contracts, and governance documents.
      • The updated status of any open collateral deliverables. Are there any assets (e.g., cash, real estate, or joinders of new entities) that are still in the process of being pledged or perfected as collateral? Are there classes of unencumbered assets?
    • Monitor compliance with debt documents, equity documents, contracts, licenses, and regulatory matters, and identify any red flags.
    • Consider discussing any refinancing, deleveraging, or liquidity transactions described in the other items below.
    • Consider confidentiality and leakage risks.
    • Consider entering into a forbearance agreement as the company works on potential solutions.
  • Assess liquidity and the company’s cash management, including the ability of the company to operate during a restructuring:
    • Identify any bank accounts that are not subject to a control agreement and review requirements for maintaining those accounts outside of the control arrangement.
    • Is cash swept automatically in the ordinary course to pay down debt? If so, which accounts are subject to a cash sweep?
    • Does the company use dedicated payroll, trust, sales, or other tax accounts? If not, and if consistent with the credit agreement, consider whether it is advisable to establish them.
    • Do cash flow projections include additional advisers, default interest expenses, increased working capital needs, and other costs of a restructuring?
    • Does the company have access to revolving loans or delayed draw term loans? If so, what are the conditions to drawing on such facilities (including any leverage restrictions and the ability to make the solvency and no-default representations)?
    • Review relevant material contracts, regulatory matters, and litigation.
    • Assess industry trends and marketplace chatter.
    • Does the company have adequate cash to cover debt service, and can it pay in kind any interest or fees?
  • Consider retaining a financial adviser and/or bankers and have outside counsel gather referrals and make informal contact with potential candidates:1
    • Given the nature and number of creditors, would a financial adviser or investment banker provide value, assist with a transparent process, and promote constructive engagement?
    • In recent conversations, have lenders involved members of restructuring or special-situations teams or engaged any advisers or consultants?
    • Has there been disruption in the company’s finance team, or have auditors identified material weaknesses in reporting or required any reserves?
    • Consider the value a financial adviser or investment banker may have if the company will pursue alternate financing, deleveraging, or liquidity transactions.
  • Pay attention to assignments of loans:
    • Has the frequency of requests for the company to consent to assignments increased?
    • Obtain and review the register of lenders to understand potential paths to a majority vote. Are there any new entities or otherwise unfamiliar entities that are building up positions in the loans?
    • Review debt documents to understand which actions require 100% approval.
    • Review and understand what options the credit agreement provides for the company to withhold or delay consent to any assignments of loans.
    • Review the list of disqualified lenders and competitors. If the company has the ability to update it, make sure the list is current.
  • 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 ask outside counsel do so):
    • Is the trading value of the company’s debt decreasing?
    • Is there a potential ratings downgrade of the company’s debt?
    • Are there reports of lenders organizing and interviewing or retaining legal and financial advisers?
  • Consider whether refinancing the company’s existing credit facilities or other indebtedness, or engaging in deleveraging transactions, would ease pressure on the company:
    • Identify third-party sources and high-level terms for assessing the company’s options in the market for new financing or refinancing (and potential effectiveness in addressing distress), including consideration of any existing call protection.
    • Are there any insiders or other interested parties who may have an interest in providing the company financing, including subordinated debt?
    • Gather referrals and make informal contact with refinancing sources, but note that formal discussions may require an NDA, which may require any potential financing source to stop trading the company’s debt while under such NDA.
    • Is there any potential to undertake a debt buyback or debt-for-equity exchange?
  • Consider whether the company’s liquidity position may be strengthened (including cost versus yield and any flexibility under the loan documents or approvals that may be required, including from lenders or equity investors) through:
    • Asset sales and sale-leasebacks
    • Asset-based financings (e.g., mortgage loans, royalty financings, and accounts-receivable financings)
    • Equity offerings, including at-the-market offerings
    • Debt capacity or another ability to obtain liquidity under debt documents
    • Tighter management of working capital, stretching payments to vendors, and deferring capital expenditures
    • Funding requirements under benefit plans
    • Waiver of mandatory prepayments, including excess cash flow
  • Consider establishing infrastructure for a restructuring and/or a strategic transaction:
    • Identify key employees — those who are vital to the company’s operations or who have essential experience or knowledge.
    • Understand the legal requirements for executing a reduction in force and potential consequences (including under debt facilities).
    • Is it possible to leverage any previous information-gathering efforts (e.g., data rooms for an M&A process or other equity or debt financings)?
    • Evaluate all material contracts, regulatory issues (including issues related to delaying delivery of financial statements) and actual and potential litigation.
    • Review directors and officers policy and insurance generally, including whether premiums are paid.
    • Evaluate tax implications of any such transaction.

Additional Considerations for Public Companies

  • Events of default or execution of forbearance agreements, loan agreement amendments or waivers, and binding term sheets will likely trigger an 8-K filing.
  • Inability to deliver financial statements as required by the Securities Exchange Act may trigger an event of default under the credit agreement and other material debt facilities.
  • Regulation Fair Disclosure limits the sharing of material nonpublic information with lenders without wider disclosure, and the inability to trade stock may have an impact on whether and for how long lenders are willing to be subject to an NDA.
  • Downward stock movement, issues with maintaining regulatory and stock exchange compliance, and/or other 8-K disclosure triggers (e.g., potential delisting, quarterly earnings, and departure of executive officers or directors) may result in additional negative press and put pressure on discussions with lenders.


[1] Note that a beauty contest and the formal retention of a financial adviser or investment banker will likely be reported in finance trade publications.


This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee a similar outcome.