Both 2023 and 2024 have seen an increase in liability management transactions, which can encompass asset dropdowns, asset sales and numerous other types of transactions that attempt to move assets out of the reach of creditors. Driving this increase, in large part, are upcoming debt maturity walls. Large, frequently excess, amounts of debt were taken out at low interest rates and minimal covenants, in the not-so-distant borrower-friendly past. A combination of not performing as expected in certain industries and rising interest rates is making it difficult for many companies to refinance. Fortunately for these borrowers, the debt agreements are often flexible and allow for unique transactions to solve their maturity wall problems.
In an asset dropdown transaction, a highly levered company will move assets to an unencumbered subsidiary, at which higher entities do not have claims on the assets, thus allowing the unencumbered subsidiary to borrow debt. Since the unencumbered subsidiary does not have any existing debt, it is able to take on debt with lower interest rates and longer maturities than the consolidated parent. This allows for the paydown of higher rate debt with near-term maturities at parent, in the form of a cash distribution made from the subsidiary to parent.
Similar to the asset dropdown transaction is an asset sale. Instead of moving assets to a new subsidiary to borrow more debt, the assets could be sold to a third party to raise cash. This cash can then be used to repay debt, buyback debt at a discount or whatever the board of directors determines is appropriate.
The type of transaction is limited to only the existing credit documents and the creativity of the management team and its advisers. However, boards of directors can be held personally liable for distributions made in excess of surplus. Obtaining a solvency opinion is evidence of the board’s discharge of its fiduciary duty of care. Due to the nature of liability management transactions, and the fact that boards of directors can be held personally liable, it is crucial to receive a reputable solvency opinion. Duff & Phelps has provided over 1,207 solvency opinions totaling over $7.7 trillion in deal value since 2005 and was the number one ranked US and global fairness opinion provider in 2023.
