Nº 1 / 2012 - enero/marzo
When debt is the new equity: capital riesgo y distressed investing en un marco de crisis económica y reforma concursal.
The current Spanish economic downturn is bringing high difficulties to private equity funds to execute traditional leveraged buyouts (LBOs) or management buyouts (MBOs) transactions with acceptable profitability levels. Although this could be considered as a dramatic scenario for the sector (especially considering that many of the LBO transactions completed during the economic boom are being subject of drastic financial restructurings or well-known bankruptcy proceedings), this paper pretends to present some new opportunities that a context of generalized economic crisis such as the current could still represent for private equity funds.
Such new opportunities are based on a broad scope of strategies, generally consisting on acquiring control stakes on the relevant target´s debt side of the capital structures, targeting companies with high levels of indebtedness but yet with adequate operating fundamentals. Such debt acquisitions are structured with the aim to convert the debt into shares of the target companies (debt-for-equity swaps) in order to take control over the target.
The anglosaxon jargon names this kind of deals as distressed investing transactions and they basically consist on building control positions in the tranche of target´s debt which will most probably become the fulcrum security (this is, such portion of debt which, for the purpose of making the company financially viable, will most probably need to be converted into equity once the company is restructured). These transactions present a great degree of complexity under a legal and financial standpoint, as they require the design of an accurate strategy to achieve target´s control, which should be structured and conceived on a case by case basis. Such strategy will require a detailed analysis of the target´s capital structure, activity sector, industry, and capability to generate future cash flows. Completing such analysis on the brink of a bankruptcy scenario can be specially challenging.
On that context, this paper tries to provide with a practical overview of the distressed investing phenomena from the private equity investor position, by analyzing the basic principles which drive this investments, the underlying strategies and the specific legal tools Spanish bankruptcy system offers to achieve such goals. The paper makes specific emphasis on the new regulations implemented by the recent reform of the Spanish bankruptcy law, in force since the last 1 January 2012, which will increase the flexibility for the distressed investor.
Keywords: Private equity, distressed investing, DIP financing, debt-for-equity swaps, exit financing, bankruptcy law.
DIRECCIÓN REVISTA ESPAÑOLA DE CAPITAL RIESGO
Catedrático de Derecho Mercantil
Universidad de Valencia
DIRECCIÓN BOLETÍN DE ACTUALIDAD DEL MERCADO ESPAÑOL DE CAPITAL RIESGO
Instituto de Capital Riesgo (INCARI)