Liability Management
Distinguishing the ‘True’ Double Dip From the ‘Pari Plus’
Thu 11/09/2023 14:26 PM
Relevant Documents:
Oct. 4 Webinar Replay
Oct. 4 Webinar Slides
On Nov. 15, Reorg will host a webinar with Schulte Roth & Zabel focusing on the potential in-court treatment of double-dip financings, including possible litigation by nonparticipating creditors and creditors’ committees aiming to eliminate the benefits of these structures for participating creditors. The upcoming panel discussion follows, and will expand upon, our Oct. 4 webinar, in which our legal and financial analysts walked through the structure and rationale behind the double-dip transactions completed by Trinseo and Wheel Pros.
Double dips, whether “true” double dips or of the “pari plus” variety discussed below, generally share the same three ingredients: (1) a new debt issuance by a nonguarantor subsidiary, (2) an intercompany loan from the nonguarantor subsidiary to the existing credit group (the first dip) utilizing some amount of the proceeds of the new debt, and (3) a direct or indirect guarantee of the new debt by other entities within the borrower’s organizational structure (the second dip).
The first deliberate double dip to hit the market was the At Home transaction followed shortly after by Sabre Corp. In a July report, Americas Covenants compared and contrasted certain aspects of the At Home and Sabre transactions, focusing specifically on the type of subsidiary that each company used to issue the new debt. (In At Home, the subsidiary borrower was a nonguarantor restricted subsidiary, whereas in Sabre, the subsidiary borrower was an unrestricted subsidiary.)
While the type of borrower remains an important consideration for purposes of analyzing double-dip capacity under a company’s debt documents, there is another potentially more salient distinction between At Home, Sabre and their progeny, which is the difference between what we call “true” double dips and “pari plus” financings.
In a true double dip such as the At Home transaction, the intercompany loan (the first dip) and the new-money guarantee (the second dip) are asserted against the same entities at the existing credit group.
By contrast, in a pari plus financing such as the Sabre transaction, the intercompany loan is still made to the existing credit group (the first dip, which is pari on existing credit group assets), but the new-money guarantee is made by an entity outside of the existing credit group (the second dip, which is structurally senior to existing creditors).
Because both the true double dip and the pari plus financing are made up of the same three components, it is analytically useful to group them together for purposes of determining whether they are permitted under a company’s debt documents. From a practical perspective, however, these transactions are more like cousins than siblings as they benefit new creditors (and harm existing creditors) in quite different ways.
In the archetypal true double dip, the new creditors benefit primarily from duplicate claims against the same credit support, and the harm to existing creditors is that they are diluted by the duplicate claim. In a pari plus financing, however, the new creditors benefit primarily from the extra credit support provided by the additional guarantors that do not guarantee the existing debt.
Examples of true double dips include At Home and Wheel Pros whereas Sabre and Trinseo are more properly considered pari plus financings. Other transactions that have employed elements of these structures but do not fall so neatly into either category are Rayonier Advanced Materials (a true double dip enhanced by a contribution of foreign equity into the subsidiary borrower) and Lumen’s refinancing proposal (which has a pari plus element in that the intercompany loan - but not the new money - receives the incremental guarantee from Qwest).
To speak to one of our analysts about these names or about double dips and other liability management transactions more generally, click HERE. To sign up for the upcoming webinar on Nov. 15, click the registration link below.
Oct. 4 Webinar Replay
Oct. 4 Webinar Slides
On Nov. 15, Reorg will host a webinar with Schulte Roth & Zabel focusing on the potential in-court treatment of double-dip financings, including possible litigation by nonparticipating creditors and creditors’ committees aiming to eliminate the benefits of these structures for participating creditors. The upcoming panel discussion follows, and will expand upon, our Oct. 4 webinar, in which our legal and financial analysts walked through the structure and rationale behind the double-dip transactions completed by Trinseo and Wheel Pros.
Double dips, whether “true” double dips or of the “pari plus” variety discussed below, generally share the same three ingredients: (1) a new debt issuance by a nonguarantor subsidiary, (2) an intercompany loan from the nonguarantor subsidiary to the existing credit group (the first dip) utilizing some amount of the proceeds of the new debt, and (3) a direct or indirect guarantee of the new debt by other entities within the borrower’s organizational structure (the second dip).
The first deliberate double dip to hit the market was the At Home transaction followed shortly after by Sabre Corp. In a July report, Americas Covenants compared and contrasted certain aspects of the At Home and Sabre transactions, focusing specifically on the type of subsidiary that each company used to issue the new debt. (In At Home, the subsidiary borrower was a nonguarantor restricted subsidiary, whereas in Sabre, the subsidiary borrower was an unrestricted subsidiary.)
While the type of borrower remains an important consideration for purposes of analyzing double-dip capacity under a company’s debt documents, there is another potentially more salient distinction between At Home, Sabre and their progeny, which is the difference between what we call “true” double dips and “pari plus” financings.
In a true double dip such as the At Home transaction, the intercompany loan (the first dip) and the new-money guarantee (the second dip) are asserted against the same entities at the existing credit group.
By contrast, in a pari plus financing such as the Sabre transaction, the intercompany loan is still made to the existing credit group (the first dip, which is pari on existing credit group assets), but the new-money guarantee is made by an entity outside of the existing credit group (the second dip, which is structurally senior to existing creditors).
Because both the true double dip and the pari plus financing are made up of the same three components, it is analytically useful to group them together for purposes of determining whether they are permitted under a company’s debt documents. From a practical perspective, however, these transactions are more like cousins than siblings as they benefit new creditors (and harm existing creditors) in quite different ways.
In the archetypal true double dip, the new creditors benefit primarily from duplicate claims against the same credit support, and the harm to existing creditors is that they are diluted by the duplicate claim. In a pari plus financing, however, the new creditors benefit primarily from the extra credit support provided by the additional guarantors that do not guarantee the existing debt.
Examples of true double dips include At Home and Wheel Pros whereas Sabre and Trinseo are more properly considered pari plus financings. Other transactions that have employed elements of these structures but do not fall so neatly into either category are Rayonier Advanced Materials (a true double dip enhanced by a contribution of foreign equity into the subsidiary borrower) and Lumen’s refinancing proposal (which has a pari plus element in that the intercompany loan - but not the new money - receives the incremental guarantee from Qwest).
To speak to one of our analysts about these names or about double dips and other liability management transactions more generally, click HERE. To sign up for the upcoming webinar on Nov. 15, click the registration link below.
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