In Parts 1, 2 and 3 we covered some easy traps to fall into when trying to execute a distressed financing transaction but we can’t stop ourselves from pointing out one more potential pitfall:
Halting Trading Prior to Filing for Bankruptcy
Although halting loan trading is a common strategy in the distressed transaction playbook, whether trading will be halted and on what timeline is sometimes an afterthought. Not knowing beneficial lenders and their holdings at crucial points may cause numerous issues, and open trades that may or may not settle only complicate the administration of a filing. For instance, failure to arrange trading halts can cause serious complications for identifying which lenders are entitled to participate in DIP financing and in what amount. Moreover, it can also make pre-packs or pre-negotiated plans expected to be implemented on a tight timeline very difficult.
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Before we provoke too much anxiety, we thought that we would provide some recommendations as to how to avoid execution pitfalls:
- Address Issues ASAP. As early as the term sheet stage, counsel should endeavor to anticipate when a transaction might lead to complex operational situations and initiate communications with agency operations groups. Agency operations teams should confirm what internal institutional permissions a situation may demand and whether institutional permission is required to override normal agency procedures.
- Develop a Working Plan. Shaped collectively by all relevant stakeholders and their advisors (plus agency, operations and workout teams), the plan should cover all deal mechanics. The plan should identify where manual processes are necessary or prudent and provide operations teams with enough time to put them in place.
- Communication with Lenders and Noteholders. We recommend paying unique attention to communications in out of the ordinary transactions. Lenders and noteholders should receive adequately detailed notices, especially with respect to the flow of funds.
- Recognize Dual Capacities. Sometimes the agent holds loans or commitments that are part of a minority group receiving disparate undesirable treatment. If the agent’s position is in this minority group, stakeholders should be aware that they will still need to communicate with the agent regarding mechanics to get the deal properly closed. We have been in adversarial situations where participating creditors dump unfeasible post-COB information requests entailing manual calculations for over a hundred lenders when the borrower is trying to close a transaction the following morning (this, of course, lead to a delay).
Ultimately, in attempting to meet all stakeholders’ objectives in distressed transactions, increased communication and planning by and among all parties will play a pivotal role in managing operational hurdles and successfully consummating transactions.
Bonus suggestion for Agents: Negotiate for Greater Compensation. Normal agency procedures and software is not typically designed for use in distressed situations. Agents who signed up for a non-distressed “business as usual” credit should consider additional compensation in the form of an arrangement fee or extraordinary services agency fee, especially if more manual agency procedures will be necessary to get the deal to the finish line. It is in the interest of all stakeholders to have a motivated agent receiving adequate compensation for their work.
