Options to explore in challenging times
While credit markets are improving, liquidity remains a challenge for many businesses. They find themselves unable to access funds at reasonable rates or on acceptable terms. Before entering into disadvantageous financing arrangements, or even exploring the possibility of insolvency proceedings, it’s often helpful to consider a number of market-based options for refinancing current facilities.
Financing options to consider
Here are a few possible sources of liquidity for businesses that need additional funds.
New bonds. The public markets are beginning to see new issuances of convertible and investment-grade bonds, and non-investment grade bonds may become marketable soon. You may find it useful to review existing financing arrangements to be sure you are in a position to issue new debt securities as the markets turn.
Debt buy back. Your company may be able to repurchase or exchange existing bonds or debt at a significant discount, reducing the cash flow required to service debt and improving your balance sheet. It is important to review regulatory restrictions that may apply to the method and timing of repurchases (e.g., on the open market or through a tender offer or exchange offer) and to conduct due diligence on existing debt finance documents.
Underwater convertible bonds. Many companies have issued convertible bonds with "put" features giving investors the right at a future date to tender the bonds to the issuer at a predetermined price. If you have done so, you may wish to restructure or refinance the bonds to reschedule payouts.
Bank credit facilities. Companies faced with refinancing bank credit facilities face a tight credit market. Forward start facilities – facilities arranged now that become operative when existing facilities mature – are one method for bringing certainty to future financing needs.
Novel financing methods. Vendor financing is another area you may wish to explore to access credit. Consider offering accounts receivable as loan security or factoring debts.
Private equity. Explore financing through sector-specific private equity funds in a private transaction. A number of private equity funds are currently well funded and looking for the right investment opportunities.
Rights offerings. Existing shareholders may be more willing than the broader market to make equity investments. Consider giving shareholders the opportunity to raise their equity stake in your company through a rights offering.
Dividends. Suspending or cutting dividends, or paying dividends in stock, can improve liquidity in the short term. But it’s important to understand your investor base. If your equity is largely in the hands of investors seeking current income, you may inadvertently encourage them to reduce or divest their shares if dividends are reduced.
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