Credit crunch meaning

Borrowers can choose from a broad range of debt and capital structuring routes. Traditionally, senior debt (typically provided by banks) sat at the top, then mezzanine finance, followed by junior debt, each ranking ahead of unsecured creditors and shareholders/equity holders. After the 2007/8 credit crunch, businesses increasingly tapped capital markets and non-bank sources (eg private credit) to widen their funding, adding further layers of indebtedness. This Practice Note offers a straightforward overview of the different tiers of debt and security a restructuring lawyer may encounter. It outlines the financing layers and the forms of security commonly seen in practice by a restructuring lawyer. It also sketches how those tiers now sit together in practice. Capital structures and interplay between creditors Typically, external borrowings sit at the operating company (Opco) level. The Opcos own the core business assets (eg premises, key manufacturing equipment and valuable intellectual property), produce most of the profits, and lenders seek security over those assets. In some arrangements, high-value items such as intellectual property or...

Informal creditors' committees In numerous restructurings, creditors often convene informal (ad hoc or unofficial) committees instead of formal ones (see Practice Note: Formal creditors' committee in a restructuring), which can significantly support discussions between the debtor company and its creditors. Since the 2007/8 credit crunch, the emergence of alternative finance providers, such as hedge funds and other investors, has amplified the influence of these informal groups. Typically assembled by bondholders, noteholders or unsecured creditors, they are playing a bigger part in the current surge of informal liability management exercises (LMEs) (see Practice Note: FAQs on Liability Management Exercises). There are no statutory provisions or best practice standards governing how such committees are set up, and their make-up and operation are even more flexible than for formal committees. Informal committees possess no defined powers, and their members owe no fiduciary obligations to fellow members or to other creditors. Members are not, by default, entitled to recover their expenses unless the finance documentation provides for it, or it is agreed as...

What is a rescue buyout? A company or business in a rescue scenario is typically facing potential financial strain, for example when it: has a short-term inability to meet its debts, or lacks capital or alternative finance to support medium to long-term development In private equity terms, following the 2007–2008 credit crunch, many funds actively sought to acquire troubled companies, with the intention of engineering turnarounds and folding them into their portfolios. This sort of distressed investment is counter-cyclical and can be a practical way to spread risk and balance exposure within a portfolio. By contrast, incumbent private equity investors backing distressed businesses could themselves become targets if a portfolio company moved into the ‘zone of insolvency’. The following types of company are commonly viewed as suitable for turnaround by private equity firms, in particular those that: need operational and financial reshaping face structural issues possess a sound core business (i.e. a strong product/service with clear...