Pari Plus Transactions: Advancing Beyond Double Dips in Liability Management Transactions

As discussed previously, “Double Dip” financing transactions have gained significant traction in the last year as a new liability management tool that highly levered companies use to raise incremental capital to fund liquidity and/or refinance existing debt. Companies in need of new capital that are evaluating a Double Dip transaction should consider whether structuring the Double Dip as a “Pari Plus” financing is a viable alternative.

Like a Double Dip, a Pari Plus financing is structured to provide a new money loan with additional credit support beyond a pari passu secured claim in the amount outstanding on the loan. The difference is in the nature of the additional credit support provided to the new money loan.

• In a Double Dip transaction, the new loan receives a pari claim against the credit group’s assets via an intercompany loan (1^st dip), and duplicate claims in the form of a pari guarantee from the existing credit group (2^nd dip).

• In a Pari Plus financing, the new loan receives a pari claim against the credit group’s assets via an intercompany loan (1^st dip), PLUS a guarantee from additional guarantors outside the credit group (2^nd dip).

In both instances, recovery on the new money loan remains limited to the amount owed on the loan, but the additional claims/guarantees provide significant credit enhancement for lenders, particularly in distressed situations where there is a risk of below par recovery.

A Pari Plus transaction would have different considerations for existing creditors and new money lenders as compared to a Double Dip:

• New money lenders would have a more favorable view of a Pari Plus structure, as the new loan’s recovery benefits from the value of additional assets from outside the credit group in addition to the pari claims.

• Existing lenders would have a less favorable view of a Pari Plus, as the additional guarantees provided in the 2^nd dip are structurally senior to existing debt.

A Pari Plus transaction provides many benefits for companies, sponsors and creditors over the traditional liability management tools (uptiers and dropdowns):

• Allows company to raise new capital which might not otherwise be available;

• Lower cost of capital than would be available for pari secured debt;

• Not required to be implemented in a non-pro rata fashion;

• In contrast to an Uptier, the new loan does not prime existing secured creditors on their collateral; instead the new loan has a structurally senior claim on assets outside the credit group; and

• In contrast to a Drop Down, no assets are transferred away from the existing secured creditors’ collateral package.

Similar to a Double Dip, a company’s ability to implement Pari Plus transaction largely depends on a company having sufficient secured debt capacity, flexibility on how pari debt capacity can be used, and asset value outside the credit group.

Sponsor-backed companies that employed the Pari Plus variant of Double Dip transactions in 2023 include Sabre and Trinseo.

The recent wave of Double Dip and Pari Plus transactions have not yet been tested in bankruptcy court. In the meantime, companies, sponsors and creditors should incorporate the Double Dip and Pari Plus structures into their liability management playbooks.