Structured Preferred Equity: Documentation, Protective Covenants, Tax Treatment, Use in Debt Restructuring
Course Details
- smart_display Format
On-Demand
- signal_cellular_alt Difficulty Level
- work Practice Area
Banking and Finance
- event Date
Wednesday, September 22, 2021
- schedule Time
1:00 p.m. ET./10:00 a.m. PT
- timer Program Length
90 minutes
-
This 90-minute webinar is eligible in most states for 1.5 CLE credits.
This CLE course will examine the structuring and documentation of preferred equity investments in private companies. The panel will discuss protective covenants and the distinctions between preferred equity and debt, terms issuers and investors should consider to ensure equity treatment, and preferred equity as both a new money financing instrument and debt restructuring tool.
Mr. Hillman is co-head of the Private Credit Restructuring Group and a member of the Business Solutions, Governance, Restructuring & Bankruptcy Group. He has 24 years of experience with an emphasis on representing private credit lenders, private funds, sovereign wealth funds, and other alternative lenders and distressed investors in special situations and restructurings both in and out-of-court, whether the lender is secured or unsecured, unitranche or structured preferred. He has substantial experience in every phase of restructuring and distressed investing, including credit bid sales under section 363, debt-for-equity swaps, chapter 11 plans, out of court restructurings, foreclosures, and navigating inter-creditor issues involving the relative rights of majority and minority lenders. He also litigates the issues facing private credit lenders, including issues involving plan confirmation, solvency, valuation, inter-creditor disputes, financing, and cash collateral disputes, fraudulent transfers, equitable subordination, recharacterization, breach of fiduciary duty and similar disputes.
Mr. Peck is a partner in the Corporate Department and member of the firm’s Private Equity and Mergers & Acquisitions Group and its Structured Private Capital Group. He represents sophisticated private investment funds, multi-national corporations and other market participants in their most challenging transactional matters.
Mr. Boyko's primary focus is in finance transactions, particularly those involving private sources of capital. He represents one of the largest client rosters in the industry, including an array of specialty finance companies, private debt funds, business development companies (BDCs), CLOs, sovereign wealth funds, insurance companies, hedge funds, private equity investors and issuers in connection with leveraged buyouts, growth capital investments, acquisition financings, going-private transactions, management buyouts, as well as other finance-related transactions, including innovative, first-in-kind transactions across the U.S. and in the UK.
Increasingly, fund sponsors are turning to third-party preferred equity as a financing tool. Preferred equity financings can be attractive to alternative credit providers because they are priced to provide higher returns than traditional debt investments. Still, counsel must be aware of the legal and structural differences between preferred equity and traditional debt investments.
A key feature of preferred equity financings is that there is typically no stated maturity date and no mandatory redemptions or put rights unless there is a change of control or IPO. The uncertain exit timing should be considered by prospective investors, especially fund investors with limited lives.
Investors may negotiate certain rights to effect an exit, such as the right to appoint directors or demand a sale of the issuer after the anticipated investment period has run. They will not have the same rights to enforce payment as holders of debt, the benefit of collateral or guarantees, or the ability to act as a creditor in a troubled situation. Prospective investors must be sensitive to how their interests may differ from the lenders and structure the covenant package accordingly.
Investors should consider whether the coupon on the preferred equity investment will generate phantom income. The tax status of the issuer, the specific terms of the preferred equity, and the nature of the investor and its owners will figure into structuring from a tax perspective.
Listen as our authoritative panel discusses the structuring nuances of preferred equity investments. The panel will also discuss the use of preferred equity in certain workout scenarios, including a debt for equity swap to right-size the balance sheet or to hand over control to the lender.
- Preferred equity: key features
- Straddling the line between debt and equity
- No maturity date: lack of control over exit
- Limited enforcement rights
- Subordinate to company debt and subsidiary equity
- Protective covenants
- Tax treatment: phantom income
- Preferred equity as a debt restructuring tool
The panel will review these and other important issues:
- How does preferred equity differ from traditional debt, and when is it a desirable alternative?
- What protective covenants are typically included in preferred equity documents?
- Can the dividend and repayment terms be structured to avoid phantom income?
- What are the potential uses of preferred equity in restructuring company debt?
Related Courses
Structuring Uptier and Drop-Down Financing Transactions: Crafting Loan Terms to Manage Exposure and Mitigate Risks
Thursday, May 29, 2025
1:00 p.m. ET./10:00 a.m. PT