As global lockdown measures trigger revenue losses across a broad range of sectors, private equity sponsors are actively assessing means for introducing new liquidity into the capital structures of affected portfolio companies. Aside from the obvious step of revolver draws and equity injections, the erosion of debt incurrence and lien covenant protection across the syndicated loan and high yield bond markets offers sponsors a broad range of options.

We have been advising both sponsors and debt investors on potential new debt issuance solutions to introduce liquidity in a relatively cheap and efficient way that takes advantage of loose covenant protection.  New debt can often be introduced through the 'baskets' such that it is secured pari with or junior to existing senior secured debt on the collateral package but also such that it is secured on assets that are not part of the collateral package, is incurred at non-guarantor subsidiaries such that it is in a structurally better position to existing secured debt or is incurred at unrestricted subsidiaries where it has sole recourse to their assets.

The ability to prime existing TLB and HYB investors in this way presents a clear opportunity for sponsors and opportunistic credit funds, and we anticipate an uptick in such financing structures towards the back end of Q2 and through Q3.  Sponsors may even take the opportunity to participate in such structurally senior debt instead of introducing new equity behind the existing debt stack...