Double-Dip Credit Structures: Permissibility, Enforceability, Benefits, Challenges, Risks, Key Loan Covenants

Description

A double-dip transaction is a liability management tool that allows a lender to make a single loan with multiple claims against a borrower group, which could improve the lender's position relative to other creditors in a bankruptcy or liquidation. The key difference between double-dip transactions and other liability management techniques, such as uptiers and drop-downs, is that with a double dip new-money creditors maximize their recoveries by creating new claims throughout the borrower's corporate and capital structure.

Double-dip structures are multi-phase financing transactions that come in two forms, either basic or pari-plus. A basic or true double dip allows lenders to work within existing covenants and baskets to provide a secured loan to a borrower, who then uses the proceeds to provide an intercompany loan to an affiliated entity. In a pari plus transaction, a company raises new capital, secured by both an intercompany loan and a guarantee from entities outside the existing credit group, rather than from within it, potentially enhancing the recovery position of the new lenders.

A double-dip transaction is a useful financing tool, but it can only occur if the provisions of the underlying loan documentation are flexible enough to permit it. Thus, it is essential that counsel for lenders and borrowers understand the implications of various loan provisions when determining what kind of future liability management transactions are available or permissible.

Listen as our expert panel examines the characteristics and features of double-dip transactions and provides guidance for utilizing this financing strategy.