The Subordinated Debt Solution

While banks provide traditional debt, particularly during these challenging times a growing company’s financing needs may be beyond what banks can provide. And while private equity funds are still flush with capital to invest in or acquire companies, private equity can be expensive, usually requiring shareholders to relinquish significant ownership and control. However, subordinated debt provided by specialized funds is an alternative that may well help companies and shareholders accomplish their financing objectives. By utilizing subordinated debt to recapitalize the business, shareholders can take a dividend to diversify a portion of personal wealth yet retain control of the company and still benefit from its future growth. Subordinated debt can also be used to buyout shareholders or to finance acquisitions or growth.

Subordinated debt fits between senior debt and equity in the capital structure and has characteristics of each. Like senior debt, subordinated debt has a principal obligation in the form of an interest-bearing note that must be repaid by a specified maturity date and it is usually interest-only for a term of from five to seven years with the principal balance due at the end of the term of the loan. Subordinated debt typically has an equity feature structured as warrants, or is convertible to preferred or common stock to align the subordinated debt investor’s long-term goals with those of the borrower. Utilizing subordinated debt generally results in minimal ownership dilution and subordinated debt providers usually do not seek board of directors’ representation enabling the business shareholders to maintain operational control.

Please contact us at Wood Warren if you would like to learn more about subordinated debt or if we can be of assistance in exploring the financing alternatives available to enable middle-market company owners to achieve their objectives.