How special situations financing can help businesses facing liquidity issues

Businesses seeking capital are currently facing dual challenges in the wake of multiple high-profile bank failures. Current borrowers are seeing an interest-rate squeeze and reluctance for traditional senior lenders to extend credit. Banks have not been aggressively expanding their balance sheets through addition of assets (loans). The result for businesses seeking credit is that borrowing has become more expensive and often alternatives are not obvious to seek relief. That’s led many business owners to ask where else they can get the capital they need.

Smart Business spoke with Robert Berdanier, Managing Director at Riveron, about capital options for businesses facing liquidity issues.

When might a business need to look beyond traditional lenders for capital?

Businesses often find themselves outside the traditional ‘credit box’ when looking for expanded liquidity. Non- traditional lenders often fill this void. Special situation advisers know where to find these sources of funds and are often used to assist when a primary lender proves to be inflexible.

Situations of intransigence by the banking community are characterized by either a murky business outlook, that same organization is preparing for a major capital expansion, or a new line of business in advance of the liquidity being present to justify the investment. Often there’s not a lot of appetite on the part of traditional lenders to make loans into these situations. Businesses are forced to look to non-traditional lenders to get to the capital they need, either by replacing the senior lender, or bring in a junior debt to inject operating liquidity, and remove risk from the senior lender.

Non-traditional lenders who deal with special situations financing can include mezzanine funds, non-bank lenders and even wealthy individuals who put money into funds when lending markets are flat and will look to generate a return by lending to the right risk profile. In some cases, insurance companies looking for rate and duration will provide capital as long as they’re generating return on a performing asset.

What should companies know about the financing terms?

Non-traditional lenders will likely require non-standard terms. Oftentimes, they’ll be tight on covenants, requiring a minimum amount of liquidity to stay in compliance, restricting the amount of compensation that senior executives can draw out, or restricting the amount of dividend payments or extraordinary payments that are going out to related parties. In exchange, they’ll often agree to be in an interest-only payment structure or will ‘PIC’ the interest where there’s no cash payment but the interest is accruing to the principal. These arrangements are crafted as long as the special situation lender is confident in an exit and the ability to achieve their return.

Junior or higher-risk debt want to be first money out, so they’re going to set conditions that put them in that position. In many of these circumstances, the lender knows that there’s a higher risk of default and loss. For acceptance of this risk, these same lenders are going to charge risk premium reflected in the rate or upfront fees.

When negotiating terms, the rate might not be up for discussion. So, the focus instead should be on duration, amortization, principal repayment and covenants. Generally, special situation lenders are likely to try to put a borrower in a tight box, with any signs of a technical default quickly leading them to pull levers that would secure their position.

Who can help with special situations financing?

Accessing non-traditional investors requires plugging into their network, something that can be done through an adviser who works with these lenders often, such as those who specialize in financial restructuring.

Special situations financing is not like working with a traditional lender. There is a lot more underwriting, a lot more diligence involved, and the debt is going to be expensive and come with significant compliance requirements. Potential borrowers shouldn’t try to negotiate these deals alone. Bring in professional help. Business owners are only likely to do this once, whereas professionals in this field do this every day, are connected to this world of lenders and know how to get the best terms for the circumstance. ●

INSIGHTS Restructuring is brought to you by Riveron.

Robert Berdanier

Managing Director


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