Creditors try double dips to raise recoveries

By Charles Tricomi & Norm Rosenbaum

A new form of liability management has emerged to take its place alongside the various uptiering and drop-down transactions that have been executed recently: the so-called “double dip” financing. This refers to the situation in which a creditor can assert claims against multiple entities for the same debt, thereby increasing recoveries.

The basic scheme is as follows. First, a company creates a special-purpose vehicle or entity that holds no assets. A creditor lends funds to the SPV subsidiary. The debt of the SPV is then guaranteed by the company or by a member of the company’s restricted group. This guarantee gives rise to the creditor’s first claim or “dip” with respect to the SPV loan.

The proceeds of the SPV debt are then simultaneously loaned to the company, with the company’s loan obligation being the only asset of the SPV. This intercompany receivable is then pledged to the creditor as security for the SPV debt. The creditor’s ability to enhance its recovery against this asset of the SPV gives rise to the creditor’s second “dip” with respect to the SPV loan.

An example is the recent financing executed by Sabre on 13 June. A group of lenders led by Centerbridge now have a claim under the holdings’ guarantee of the SPV Loan (the first dip), and SPV Borrower has a claim against Sabre GLBL under the GLBL Loan. Since that receivable has been pledged to the Centerbridge lenders, it gives them a claim on the proceeds of that receivable (the second dip).

In order to construct a double dip, the company’s debt documents must contain provisions that authorise it.

Although double dip claims are not new, they have previously arisen in the context of financings that were arranged for business purposes, for example, debt incurred by foreign subsidiaries for tax reasons, rather than by the US parent guarantor. The recent iterations, however, appear to be the first instances of intentional double dip deals.

To date, we are not aware of an instance where a Bankruptcy Court has addressed the propriety of the double dip financing structure where it has been introduced solely as a liability management vehicle. There are, however, provisions of the Bankruptcy Code and other equitable remedies available for aggrieved creditors to challenge the propriety of the double dip in a bankruptcy.

It remains to be seen whether this new structure will be upheld when challenged by well-organised and funded creditor groups in bankruptcy cases, and perhaps in lawsuits outside of the bankruptcy context. If the history surrounding other liability management transactions is any guide, at some point we are likely to see the propriety of the new strategy become the subject of intense judicial scrutiny.

Charles Tricomi is head of leveraged loan research at Xtract Research, and Norm Rosenbaum is a senior analyst at Xtract Research

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Global credit funds & CLO's

September 2023 | Issue 257

Published in London & New York.