Distressed Debt M&A

Question 1

Debtor’s Objectives in a Section 363 Sale

Answer 1

The certainty of closing a transaction

Maximizing recovery for the estate

Question 2

a prospective buyer of a business in a section 363 sale can often be best served, and can demonstrate its commitment to closing a transaction, by

Answer 2

exercising restraint in its approach to the transaction documents and terms

Question 3

For example, consider treading lightly when negotiating the following provisions in a form of purchase agreement:

Answer 3

Working capital adjustment
Closing conditions
Representations and warranties and indemnification.

Question 4

Declaration of a dividend generally creates a debtor-creditor relationship between the corporation and its stockholders that cannot be revoked. However…

Answer 4

If the record date has not yet occurred, the board may determine to defer the record date and payment date for the dividend.
If the record date has already occurred, but the payment date has not yet arrived, the board should consider whether there are any constraints that would preclude payment of the dividend (i.e., sufficient “surplus”).

Question 5

PIPEs low or high cost source of capital?

Answer 5

Sponsor PIPEs high cost. Have hard time competing with traditional public equity financing, convert market and bridge financing

Question 6

Benefits of PIPE?

Answer 6

Speed of execution
Flexibility relative to public offering reqs
“Smart money” imprimatur

Question 7

What securities are used in PIPEs?

Answer 7

Preferred stock (most common)
Convertible debt
Straight debt plus warrants
Common stock

Question 8

Transaction docs for a PIPE?

Answer 8

TS
SPA
IRA
RRA
Cert of designation/ indenture/ warrant agreement, as applicable

Question 9

Key economic terms of a PIPE?

Answer 9

Dividends (yield or interest rate)
Conversion price
Method of exit - maturity / redemption / mandatory conversion
Liquidation preference
Financing fees
Expense reimbursement

Question 10

Dividend terms?

Answer 10

Cash vs PIK/accretion to liquidation preference
Adjustable rate dividends
Cumulative dividend (otherwise they don’t carry forward if not paid)

Question 11

PIK dividends taxable?

Answer 11

Yes, taxable to the extent of the corp’s accumulated and current year E&P

Question 12

Conversion price and dividend rate – go together or diverge?

Answer 12

These are two different levers to deliver value to investor – different sponsors have different approach.

Question 13

“Different redemption structures?

Answer 13

At option of holder after X date
At option of issuer after certain events (e.g., stock trading above $X or after date Y)
Mandatory redemption with proceeds of asset sale
Redemption at option of holder after CoC or fundamental change
Redemption at option of issuer after no-c

Question 14

Legal/social terms

Answer 14

Board representation (not greater than $ interest %)
Voting rights
Minority protections
Antidilution protection
Transfer restrictions
Standstill
Reg rights
Preemptive rights

Question 15

How to structure PIPE around SH approval?

Answer 15

Buy Series A convertible into 19.9% of pre-transaction shares
Remainder of investment in Series B which converts into Series A upon SH approval

Question 16

How to structure PIPE around HSR approval?

Answer 16

Buy convertible preferred with voting rights up to HSR threshold of $94mm with the remainder in the form of non-voting stock. Non-voting stock becomes voting upon receipt of HSR approval.

Question 17

Difference b/t participating and non-participating preferred?

Answer 17

Preferred stockholders get paid their pref before the common is paid. Participating preferred get a share of any remaining liquidation proceeds on an as-converted to common stock basis after the pref is paid, whereas non-participating preferred gets either (i) their liquidation preference back or (ii) the amount they would have gotten had they converted to common.

Question 18

What’s COD income and when might it be triggered?

Answer 18

If you have debt forgiveness, you have income in the amount of the forgiveness.