In the current elevated interest rate environment, highly levered companies with floating-rate debt are facing increased debt service burdens that can potentially strain the company’s liquidity. In these circumstances, companies that require new capital to refinance upcoming debt maturities, fund ongoing business, and/or fund incremental growth should consider raising “hybrid” capital in the form of structured/preferred equity as an alternative to raising secured debt.
This capital can be structured to meet the idiosyncratic needs of a company as “hybrid” capital providers are typically sophisticated investors with flexible mandates that allow them to design bespoke solutions. This capital can also be provided directly by sponsors. Proceeds from the financing can be used in variety of ways depending on the circumstances, including the repayment of high-cost debt, the funding of cashflow deficits, or fund acquisitions.
Hybrid capital can:
- Reduce cash interest burden to extend liquidity runway;
- Help achieve amendments/waivers from existing lenders related to covenants or upcoming maturities;
- Reduce overall leverage to facilitate the refinancing of an upcoming maturity;
- Provide financing for growth investments that otherwise might not be available under the constraints of existing debt; and
- Be structured to limit dilution to existing equity holders.