The Levers of Control: Lenders Tightening Their Grip on Failing Firms

Lenders are increasingly structuring deals that give themselves more influence over troubled companies and potentially an easier path to taking control in times of financial distress. This trend has been playing out behind the scenes as investors capitalize on lessons learned from past defaults.

Recent cases involving Tailored Brands, LATAM Airlines, and Aeroméxico demonstrate how lenders are using sophisticated deal-making to gain more control over their investments. In these instances, lenders have negotiated ownership structures that facilitate the conversion of debt into equity in times of distress. According to Joshua Sturm, a partner at Proskauer, this approach is becoming more appealing for lenders.

Lenders are now negotiating ownership structures that include stacked holding companies above the borrower. This structure allows lenders to foreclose on equity at the top layer and sell it cleanly at the next level, providing a tidy exit strategy in times of crisis. Borrowers may not even notice these structural protections, which appear as innocuous additions to their organizational charts.

Lenders are also using liability management exercises (LMEs) to gain more control over corporate governance. As Daniel Shamah, a partner at Debevoise & Plimpton, notes, lenders are reserving the right to delegate key business decisions to lender-appointed directors. This strategic maneuvering is not driven by a desire for control but rather a pragmatic recognition that equitization can be a smoother process if anticipated and planned for.

By preparing for contingencies and structuring deals with a view to potential failure, lenders are effectively pre-wiring alternative scenarios – bypassing the need for bankruptcy if restructuring doesn’t succeed. This trend has significant implications for businesses operating on thin margins, where even minor missteps can lead to financial disaster.

Companies must reassess their relationships with investors and consider the long-term consequences of these shifting power dynamics. In an era marked by increasing economic uncertainty, the ability to navigate complex deal structures will become a crucial asset for businesses – or perhaps even a liability if not managed carefully.

As we move forward in this uncertain climate, it’s essential to keep a close eye on the levers of control that lenders are quietly pulling – and the potentially far-reaching consequences for companies caught in their orbit. The implications of these changes are worth exploring further: What does this mean for the role of investors in corporate governance? How will these new structures affect the relationships between lenders, borrowers, and other stakeholders?

The balance of power has shifted, and companies must adapt to survive. The levers of control that lenders are pulling represent a fundamental shift in the landscape of corporate finance – an intriguing development with far-reaching implications for businesses and investors alike. As we navigate this new terrain, it’s essential to remain vigilant about the subtle yet significant changes taking place behind the scenes.

The consequences of these deals will be telling – a reminder that control is often exercised through insidious means. As lenders continue to pull the strings from behind the scenes, it’s time for businesses and investors to take note: the levers of control are shifting – and with them, the very fabric of corporate finance itself.