Special Situations: 102 - McDermott Will & Emery


During these unprecedented times, many funds seek opportunities to deploy capital, with a particular focus on the “special situations” space. A certain amount of heightened risk (or risk perception) in this economic climate can be attractive, particularly to those funds with higher return needs. Businesses evaluate a wide array of investments, ranging from purchasing heavily discounted paper for credits with short-term issues where the business is ultimately sound and debt pricing will improve, to credits with a view to taking control of the underlying asset. Below are some of the salient issues that organisations should consider as part of their strategic debt and distressed equity investments.

In Depth


Transfers – Can You Get In?

  • How freely transferable the instrument is
  • Consent typically required for private loans; generally not for bonds
  • Whitelists, blacklists and event of defaults
  • Prohibitions on transfers to industrial competitors, loan-to-own/distressed funds, and PE houses and similar businesses
  • Treatment of sub-participations and other synthetic transfers
  • Minimum holds/transfer amounts
  • Standardised trading terms (e.g., LMA distressed or par, LSTA)

Additional Debt and Lien Capability

  • Debt capacity – ratio debt, “freebies”, hard caps and soft cap “growers”
  • Ability to secure debt and ability to prime; negative pledge restrictions
  • Ability to incur (and secure) structurally senior debt through non-guarantor restricted subsidiaries and temporally senior debt through inside maturity baskets
  • Reclassification and carry forward/carry back
  • Incremental term/revolving debt – who can provide, sidecars, MFN issues
  • Reserved indebtedness

Financial Covenants

  • “Cov lite” (springing covenant) or “cov loose” (single leverage covenant)
  • “Springing” RCF covenant, i.e., only tested if RCF drawn to a certain per cent with certain exclusions taken into account
  • Definitions – Consolidated Net Income, EBITDA, add-backs (including with regard to extraordinary items and restructuring costs, topical in current environment); material exclusions from indebtedness calculations; IFRS treatment
  • Pro forma adjustments – total caps, independent verification and realisation periods
  • Testing – timing and election for certain permissions
  • Equity cures, deemed cures and auto-cures

Credit Support

  • Guarantor coverage test and material deficiencies
  • Transaction security; material asset security/qualifying floating charge
  • Agreed security principles
  • Jurisdictional issues

Other Key Covenants/Leakage

  • Restricted payments
  • Permitted acquisitions/permitted investments
  • Unrestricted subsidiary designation and non-guarantors
  • Asset sales/disposals

Events of Default

  • Grace periods/other available cures
  • MAE/audit qualification/cessation of business


  • Consent, waiver and amendment thresholds
  • All lender matters
  • Ability to change scope/nature of security package
  • Structural adjustments
  • Sponsor/sponsor affiliate disenfranchisement
  • “Snooze/lose” and “Yank the bank”

Debt Buybacks

  • Sources of cash available
  • Disenfranchisement

Intercreditor Issues

  • Who drives enforcement
  • Ranking of claims and security
  • Option to purchase
  • Release mechanics for non-distressed disposals/value safeguards for distressed disposals
  • Standstills/payment stops for junior creditors

Path to Control

  • Control strategies
  • Fulcrum security/optimal enforcement point
  • Intercreditor issues
  • Holdout risks – under transaction documents and in practice
  • Cram down/in risk
  • Potential restructuring tools

Securitisation and Structured Product Considerations

  • Public and private securitisations and the ability to access cheaper, scalable institutional funding at an earlier point of portfolio or business growth
  • Diversity in capital structure
  • Refinancing ability without sufficient cashflow amortisation
  • Methods of complementing existing credit routes to maximise efficiency and returns


Initial Key Considerations

  • Timing concerns, including “anti-phoenix” considerations
  • Valuation and value-breakage, including prospects for recovery
  • Ability to conduct diligence and obtain protections (such as W&I insurance on a synthetic basis), including geographical restrictions arising out of COVID-19
  • Protections for corporate carve-outs and seller insolvency or other future unwind
  • Antitrust, regulatory, creditor jurisdictional or other frustrating factors
  • Share versus business sale or other creative structures (e.g., acqui-hire, licensing), including tax structuring and investment structuring vehicles (pref, government schemes, convertible equity)

Common Transaction Issues

  • Existing shareholder dynamics
  • Key contracts and leases, change of control provisions and third-party consents
  • Related party arrangements
  • Potential litigation
  • Tax and pension liabilities


  • Identification of key employees, including those outside the executive and management teams, and termination of under-performing executives and associated cost
  • Impact of TUPE
  • Works councils or similar institutions
  • Management rollover and incentive arrangements

Ongoing Governance – Control or JV

  • Rollover
  • Key shareholder agreement provisions:

Future funding obligations
Board representation and reserved matters
Deadlock and exit
Management incentives and waterfall