Structured Preferred Equity: Documentation, Protective Covenants, Tax Treatment, Use in Debt Restructuring

Note: CPE credit is not offered on this program

A live 90-minute premium CLE video webinar with interactive Q&A


Wednesday, September 22, 2021

1:00pm-2:30pm EDT, 10:00am-11:30am PDT

Early Registration Discount Deadline, Friday, August 27, 2021

or call 1-800-926-7926

This CLE webinar will examine the structuring and documentation of preferred equity investments in private companies. The panel will discuss protective covenants and the distinctions between preferred equity and debt, terms issuers and investors should consider to ensure equity treatment, and preferred equity as both a new money financing instrument and debt restructuring tool.

Description

Increasingly, fund sponsors are turning to third-party preferred equity as a financing tool. Preferred equity financings can be attractive to alternative credit providers because they are priced to provide higher returns than traditional debt investments. Still, counsel must be aware of the legal and structural differences between preferred equity and traditional debt investments.

A key feature of preferred equity financings is that there is typically no stated maturity date and no mandatory redemptions or put rights unless there is a change of control or IPO. The uncertain exit timing should be considered by prospective investors, especially fund investors with limited lives.

Investors may negotiate certain rights to effect an exit, such as the right to appoint directors or demand a sale of the issuer after the anticipated investment period has run. They will not have the same rights to enforce payment as holders of debt, the benefit of collateral or guarantees, or the ability to act as a creditor in a troubled situation. Prospective investors must be sensitive to how their interests may differ from the lenders and structure the covenant package accordingly.

Investors should consider whether the coupon on the preferred equity investment will generate phantom income. The tax status of the issuer, the specific terms of the preferred equity, and the nature of the investor and its owners will figure into structuring from a tax perspective.

Listen as our authoritative panel discusses the structuring nuances of preferred equity investments. The panel will also discuss the use of preferred equity in certain workout scenarios, including a debt for equity swap to right-size the balance sheet or to hand over control to the lender.

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Outline

  1. Preferred equity: key features
    1. Straddling the line between debt and equity
    2. No maturity date: lack of control over exit
    3. Limited enforcement rights
    4. Subordinate to company debt and subsidiary equity
  2. Protective covenants
  3. Tax treatment: phantom income
  4. Preferred equity as a debt restructuring tool

Benefits

The panel will review these and other important issues:

  • How does preferred equity differ from traditional debt, and when is it a desirable alternative?
  • What protective covenants are typically included in preferred equity documents?
  • Can the dividend and repayment terms be structured to avoid phantom income?
  • What are the potential uses of preferred equity in restructuring company debt?

Faculty

Hillman, David
David M. Hillman

Partner
Proskauer Rose

Mr. Hillman is co-head of the Private Credit Restructuring Group and a member of the Business Solutions,...  |  Read More

Peck, Steven
Steven M. Peck

Partner
Proskauer Rose

Mr. Peck is a partner in the Corporate Department and member of the firm’s Private Equity and Mergers &...  |  Read More

Attend on September 22

Early Discount (through 08/27/21)

Cannot Attend September 22?

Early Discount (through 08/27/21)

You may pre-order a recording to listen at your convenience. Recordings are available 48 hours after the webinar. Strafford will process CLE credit for one person on each recording. All formats include program handouts.

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