What is the Challenge?
For middle market companies, it has been a challenge to obtain financing in today’s economic environment. Now, many companies are finding that current commercial credit lines are now due (or will soon expire) and accommodations with its current lender, or indemnifying a new source of credit is necessary.
The Solution
Strategies that middle-market borrowers can use to face market challenges are briefly described below.
- Start the refinancing process early, about 18 to 24 months before the debt’s maturity date.
- Identify and begin a dialogue with the middle-market finance companies and banks that are actively refinancing leveraged commercial loans.
- Explore “amend and extend” options with the borrower’s existing agent.
- Pay down debt – take advantage of opportunities to cut costs to reduce debt prior to refinancing.
- Consider a debt-for-equity swap. To the extent the amount of leverage is simply too burdensome for a company, relieving a company’s interest burden and improving cash flow by reducing debt can allow for the operating flexibility needed to generate growth and create value.
- Consider adding junior capital – if senior leverage is too high to refinance in today’s market, second-lien debt, mezzanine debt or minority equity may provide capital to partially repay senior loans.
- In some cases, the entire capital structure can be replaced by a unitranche loan, which is generally a single, senior, secured loan that can replace the entire debt structure and eliminate the need for multiple tranches with competing priorities with respect to collateral. Unitranche loans are typically priced on a blended basis, reflecting the same effective pricing that a traditional multi-tranche structure would provide.
- Investigate nontraditional lending sources. Private equity funds and alternative asset managers with available capital are likely to become more active in the corporate debt refinancing market. Most of these firms are waiting for companies to get their balance sheets back in order and for the originating lenders to liquidate and equitize troubled loans. Also, finance companies could become players again because, unlike banks, they do not have to deal with capital and regulatory restrictions emanating from financial reform.
For more information about refinancing options and the legal issues associated therewith please contact:
Harriet B. Alexson
Chair Financial Services Practice Group
Bohm, Matsen, Kegel & Aguilera, LLP
695 Town Center Drive, Suite 700
Costa Mesa, CA 92626
Tel: 714-384-6578
halexson@bmkalaw.com
info@alexsonlaw.com
www.alexsonlaw.com