Special situations and rescue financing

Special situations lending means lending where normal lenders won't: a company in the middle of a turnaround, one that's lost money for a year, one that needs cash fast to finish a big project, or one that can't refinance a loan coming due. These rescue loans are expensive, because the risk is real.

The question that matters most is downside protection: if the plan fails, how does the lender get its money back? Lenders look at what the business or its assets would sell for in a bad case, take a senior secured position, keep the loan small against that value, and set tight terms: covenants on liquidity, milestones the company must hit, and close monitoring. They may also take fees, warrants or a small equity stake for upside.

A recovery analysis works through a bad-case sale. Take what the company would fetch, pay each layer of debt in order, and see what's left for each.

value = 70_000_000      # a bad-case sale price
claims = [("revolver", 15_000_000), ("first lien", 45_000_000), ("second lien", 30_000_000)]
left = value
for name, owed in claims:
    paid = min(owed, left)
    left -= paid
    print(f"{name}: {paid / owed:.0%}")

Payment-in-kind (PIK) interest is added to the loan instead of paid in cash, which keeps cash in a struggling company but makes the debt grow. At 12% PIK, a $20m loan is about $25.1m two years later if the interest compounds once a year.

When a borrower gets into trouble, lenders and the company usually try a workout before anything formal. A waiver excuses a covenant breach, usually for a fee. A forbearance agreement means the lenders agree not to use their rights for a set time while the company fixes things. An amendment changes the terms: looser covenants, higher pricing, more reporting. An amend-and-extend pushes the maturity out, usually in exchange for a fee, a higher spread or some repayment, so a company that can't refinance in a bad market gets more time.

If that fails, a restructuring may swap some debt for equity, so the lenders end up owning the company. In the US, a company may file for Chapter 11 bankruptcy, where it can keep operating and borrow a debtor-in-possession (DIP) loan that a court can rank ahead of the existing lenders. Those details vary a lot by country.