Distressed Firms Have a New Controversial Way to Get Rescue Cash

A new complex maneuver that can help rescue companies in financial trouble is likely to gain steam as firms grapple with maturity walls and weaker earnings, according to Barclays Plc strategists.

The move, known as a “double-dip,” helps struggling firms raise cash by issuing debt out of an empty subsidiary, having the parent company guarantee that debt, and sending the proceeds from the debt deal back to the parent company via an inter-company loan, which then becomes another form of collateral for the obligation.

Struggling companies including chemical company Trinseo Plc, software maker Sabre Corp., and retailer At Home Group Inc., have deployed the strategy to raise money this year, opening the door for other companies to follow suit even though the deals haven’t yet been tested in court, strategists led by Bradley Rogoff wrote in a note Wednesday.

The strategists identified several companies that have potential to use double-dip financing if needed. Office supplies retailer Staples Inc. is one of them, and the strategists don’t see the company in a position to grow into or cut its debt load. Staples has $7.6 billion of debt outstanding, with its 7.5% notes due 2026 trading in the low 80s, according to Trace.

Mauser Packaging Solutions also has hefty obligations to address, with $3.5 billion of secured debt due by 2026. The company’s covenants are lenient enough to pull off a double-dip if needed, they wrote.

Representatives for Staples and Mauser didn’t immediately respond to requests for comment.

Creative and sometimes-controversial financing maneuvers have grown more common in recent years as rising interest rates have sent a new batch of companies into financial distress. Many of the companies have permissive debt documents that allow them leeway to take on new financing in an effort to stay afloat.

Double-dips can improve creditors’ prospects for recovery in a default by giving them more or different claims on a company’s assets, the strategists wrote. The maneuver differs from transactions like priming — which pushes existing creditors back in line for repayment — by allowing the existing creditors to participate in the deal. And unlike drop-down financings, where a company moves assets out of reach of some creditors, no assets are transferred.

The strategists noted that while “all credit documents have their idiosyncrasies,” a company generally needs to be permitted to incur additional secured debt, guarantee the new debt and take on an inter-company loan to pursue the double-dip strategy.

Source from: Bloomberg