Business Law Today

Make-whole provisions in most debt instruments traditionally are structured either as a make-whole based on simple interest or a straight percentage premium that ratchets down over time. 

Authors: Maggie Deutsch

In the current market, in which many private equity sponsors and other investors are leveraging debt as a means of avoiding repricing their investments, we are noticing a convergence of the characteristics of debt and equity return hurdles: debt financing parties are now more likely than ever to dip into the private equity toolkit by utilizing equity-like economic sweeteners for lenders. These provisions can appeal to both borrowers and lenders because they enable borrowers to conserve near-term cash and incentivize debt investments while hardwiring lenders’ returns on their debt investments in anticipation of a near-term exit or other realization event. While equity-like sweeteners can be useful tools under the right circumstances, they may pose heightened risks for lenders in a downside scenario. These risks, as well as the tax implications of such equity-like sweeteners, should be taken into account when negotiating debt financing transactions.

This article will examine some of these equity-like sweeteners, why they have become popular, and the risks and structuring considerations for investors considering including such provisions in their financing terms.

To read the full article, please visit americanbar.org.