Lincoln International provides an overview of structured capital and its potential benefits in uncertain credit markets.

What is Structured Capital?

Structured capital fits between traditional debt and common equity in the capital structure continuum and can be an attractive alternative to raising common equity when traditional debt options have been exhausted and incremental capital is needed. Structured capital investments have a higher cost of capital compared to traditional debt, but offer lower dilution than a common equity issuance.  Structured capital investors are willing to accept a lower rate of return (vs. common equity) as a result of various features these securities provide. This can include receiving contractual payment in kind (PIK) interest or dividend payments (i.e., non cash), having a specified liquidation preference or having a defined maturity date.

Structured capital can be designed to include both debt-like and equity-like features, and can take the form of PIK notes, term debt with warrants, convertible debt or preferred equity.  Debt-like securities typically seek total returns more heavily weighted towards fixed return components, while equity-like securities seek a more balanced combination of fixed return with equity upside. Structured capital transactions are highly bespoke, with key economic and structuring terms tailored to each unique fact pattern. The universe of structured capital investors is broad and includes debt-like security providers such as credit opportunity funds, insurance companies and pension funds. It also includes equity-like security providers such as family offices, dedicated structured equity funds and private equity firms with structured equity capabilities.

Lincoln Perspective

As traditional debt markets continue to traverse a period of uncertainty further evidenced by tighter market liquidity widening spreads and increased transaction selectivity, structured capital solutions have various attributes which make it a potentially attractive option for incremental liquidity during times of credit market uncertainty.

If a company has exhausted all traditional senior debt options and is still in need of additional debt capacity, needs to reduce senior leverage, navigate a pending maturity or is experiencing financial hardship, structured capital could be a solution. Lincoln’s Capital Advisory Group has significant experience executing structured capital transactions and unlocking incremental liquidity for companies during times of credit market uncertainty.