Distressed Debt M&A Flashcards
Debtor’s Objectives in a Section 363 Sale
The certainty of closing a transaction
Maximizing recovery for the estate
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
exercising restraint in its approach to the transaction documents and terms
For example, consider treading lightly when negotiating the following provisions in a form of purchase agreement:
Working capital adjustment
Closing conditions
Representations and warranties and indemnification.
Declaration of a dividend generally creates a debtor-creditor relationship between the corporation and its stockholders that cannot be revoked. However…
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”).
PIPEs low or high cost source of capital?
Sponsor PIPEs high cost. Have hard time competing with traditional public equity financing, convert market and bridge financing
Benefits of PIPE?
Speed of execution
Flexibility relative to public offering reqs
“Smart money” imprimatur
What securities are used in PIPEs?
Preferred stock (most common)
Convertible debt
Straight debt plus warrants
Common stock
Transaction docs for a PIPE?
TS SPA IRA RRA Cert of designation/ indenture/ warrant agreement, as applicable
Key economic terms of a PIPE?
Dividends (yield or interest rate) Conversion price Method of exit - maturity / redemption / mandatory conversion Liquidation preference Financing fees Expense reimbursement
Dividend terms?
Cash vs PIK/accretion to liquidation preference
Adjustable rate dividends
Cumulative dividend (otherwise they don’t carry forward if not paid)
PIK dividends taxable?
Yes, taxable to the extent of the corp’s accumulated and current year E&P
Conversion price and dividend rate – go together or diverge?
These are two different levers to deliver value to investor – different sponsors have different approach.
“Different redemption structures?
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
Legal/social terms
Board representation (not greater than $ interest %) Voting rights Minority protections Antidilution protection Transfer restrictions Standstill Reg rights Preemptive rights
How to structure PIPE around SH approval?
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
How to structure PIPE around HSR approval?
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.
Difference b/t participating and non-participating preferred?
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.
What’s COD income and when might it be triggered?
If you have debt forgiveness, you have income in the amount of the forgiveness.
