It is common for highly levered sponsor-backed companies with liquidity needs and/or upcoming maturities to engage in liability management exercises, which often includes creating a new priming tranche of secured debt (an “Uptier”) or transferring assets out of the secured collateral package (a “Drop Down”).
In recent months, a new liability management transaction structure, (the “Double Dip”), has emerged and quickly gained traction as a more “creditor friendly” alternative to the traditional tools in the liability management playbook.
A Double Dip transaction is structured to use available secured debt capacity to provide a single new money loan with two separate secured claims against the credit group’s assets. The Double Dip loan receives claims from both a guarantee (the 1st dip) and an inter-company loan (the 2nd dip). As an example, lenders who provide a $100 million new money loan in a Double Dip transaction could have $200 million in total secured claims in a potential future restructuring. While lender recovery will be limited to the amount owed on the loan, the additional claims provide significant credit enhancement for lenders, particularly in distressed situations where there is a risk of below par recovery.
A Double Dip provides many benefits for companies, sponsors and creditors over the traditional liability management tools:
- Allows company to raise new capital which might not otherwise be available.
- Lower cost of capital than would be available for pari secured debt.
- Not required to be implemented in a non-pro rata fashion.
- In contrast to an Uptier, the new loan does not prime existing secured creditors; instead secured liens are diluted equally by the pari secured claims from the new loan.
- In contrast to a Drop Down, no assets are transferred away from the existing secured creditors’ collateral package.
A company’s ability to implement a Double Dip largely depends on a company having sufficient secured debt capacity and flexibility on how pari debt capacity can be used. Sponsor-backed companies that have employed Double Dips as part of liability management transactions since May ’23 include At Home Group, Sabre, Trinseo, and Wheel Pros. While there is precedent for Double Dip claims being asserted in bankruptcy court (including in General Motors, Lehman, LatAm Airlines, Delta and others) per CreditSights, the recent wave of intentionally structured Double Dips has not yet been tested in bankruptcy court. In the meantime, companies, sponsors and creditors should incorporate the Double Dip structure into their liability management playbooks.