Creative Alternatives to Debt Restructuring

April 24, 2014

Issue
The client acquired a struggling manufacturing business with the hopes of turning it around. After several years of operation, the client determined that new equipment, and a refinancing of its existing debt structure would be necessary. However, the current lender was unwilling to make the additional loans needed for the equipment. 

Our Approach
We worked with the client in finding a lender who was willing not only to refinance the outstanding loans, but also to extend additional loans for new equipment. But the new lender conditioned the new loans on a requirement that the client’s primary shareholders make a substantial seven-figure equity contribution to the business. Although the shareholders could lose their entire equity contribution should the business fail, the client seemingly had no other viable choice but to make the contribution to get the loans. 

Committed to protecting our client’s best interests, we presented the lender with an alternative. In addition to the new loans already anticipated, we proposed that the lender make another loan in the amount of the equity contribution. The promissory note for the “equity” loan was then purchased from the lender by the two shareholders, thus requiring no additional outlay by the lender, while still achieving the lender’s requirement for an additional cash infusion into the business. 

Result
Ultimately, the client’s business failed and went into bankruptcy. The lender collected on its first loans in full, and on most of the “equity” loan, which monies were then paid to the shareholders who had purchased the note. As a result of our restructuring proposal, we were able to save the client’s shareholders millions of dollars which would have all been lost had they made the equity contribution as originally proposed.

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