Commercial Debt Consolidation: 6 Tools Mid-Size Companies Use

Past a certain size, commercial debt consolidation stops being a product anyone sells and becomes a negotiation among creditors who can read one another's positions on the public index. A company with a revolving line, two term lenders, equipment financing and a seller note does not shop for one loan to replace them all. It rearranges the order in which they are paid.

Six tools do most of that rearranging. Each is described below by what it requires the existing creditors to sign, since at this size the signatures, not the interest rate, determine whether the plan closes.

1. Amend and Extend Buys Time From the Lenders Already in Place

The quietest tool is an amendment. The existing lenders agree to push out a maturity, reset an amortization schedule or loosen a covenant, and in exchange they may receive a fee, a higher margin or tighter reporting. No new lender arrives and no lien moves.

It consolidates nothing, strictly. It is, if one is being precise, the decision to keep the current structure while changing its calendar, which is often the correct decision for a company whose problem is timing rather than size. Each lender whose consent the credit agreement requires must sign, and a single dissenting lender in a small group can hold the amendment hostage for its own price.

2. A Refinancing With an Intercreditor Agreement Rewrites the Order of Payment

When a new lender takes out some, but not all, of the existing debt, the creditors who remain must agree on who is paid first and who may act first after a default. That agreement is the intercreditor agreement, and it is the document mid-size refinancings live or die on.

The statutory background is short. Under New York's UCC 9-322(a)(1), conflicting perfected security interests "rank according to priority in time of filing or perfection," which would leave the newest lender last. UCC 9-339 then provides, in one sentence, that Article 9 "does not preclude subordination by agreement by a person entitled to priority." Everything a mid-size refinancing needs is built in the space that sentence opens: payment waterfalls, standstill periods during which a junior lender may not enforce, limits on amending the senior loan, and the treatment of each creditor if the company later files for bankruptcy.

An intercreditor agreement resembles the seating chart at a wedding where two of the families are suing each other. Everyone must be placed, the placement is negotiated in advance, and no one will remember it kindly if the evening goes badly. The borrower is sometimes not a party to the most important provisions and should still read every one of them, since the standstill clause decides how long the company has to fix a default before a junior creditor may act.

The existing lenders sign because the alternative, a company that cannot refinance its maturing senior debt, is worse for them. That is the pressure the borrower holds. It is also the limit.

3. Asset-Based Lending Replaces Several Lenders With One Borrowing Base

An asset-based line advances against receivables and inventory under a formula, and a company with strong receivables can use one to retire several smaller facilities. The OCC's guidance on receivables and inventory financing describes it as collateral-based commercial lending, with its own credit and administrative risks, which in practice means field examinations, reporting on eligible receivables and the lender's close attention to who else claims them.

That last point matters when merchant cash advances sit in the stack. A funder claiming an interest in receivables may, where its agreement and the law support it, notify the company's customers to pay the funder instead; under the uniform text of UCC 9-406(a), an account debtor that receives an authenticated notice of assignment may no longer discharge its obligation by paying the company. An asset-based lender will not lend against receivables that another creditor can redirect, so those positions must be retired or released at closing.

4. A Sale-Leaseback Turns Owned Property Into Cash and Rent

A company that owns its building or major equipment can sell it to an investor, lease it back, and use the proceeds to retire debt. The balance sheet trades a secured loan for a lease obligation, and the rent is a fixed charge the company must meet in good quarters and bad.

The existing lenders sign here too.

A security interest generally continues in collateral after it is sold unless the secured party authorized the sale free of its interest, as New York's UCC 9-315 provides, so the lender holding the property's lien must release it as part of the closing. The proceeds pay that lender first.

5. Subordinated Debt Fills the Gap the Senior Lender Will Not

A junior lender, a mezzanine fund or the company's own owners can supply capital that ranks behind the senior loan by written subordination. It costs more than senior money because it is repaid later and recovers less in a failure. The senior lender will insist on the subordination terms, and those terms (which tend to specify whether the junior creditor may receive any payment while the senior loan is in default, how long it must wait before suing, and whether it may object to the senior lender's handling of collateral, all of which determine whether the junior money is patient or merely quiet) deserve as much reading as the rate.

6. An Exchange Offer Asks Creditors to Trade Old Claims for New Ones

The most ambitious tool is an out-of-court exchange: creditors trade their existing claims for new debt with a later maturity, a reduced principal, equity, or a combination. It works when enough creditors agree and fails at the edge where holdouts sit, because a creditor that declines the exchange keeps its original claim and may be paid in full by a company that others have just rescued.

Bankruptcy law supplies the backstop. Under 11 U.S.C. 1126(b), acceptances solicited before a chapter 11 filing count if the solicitation complied with applicable disclosure law or, where none applies, followed disclosure of adequate information. Under 1126(c), a class accepts when creditors holding at least two thirds in amount and more than one half in number of the claims actually voting accept. A company that nearly succeeds out of court can sometimes carry the same terms into a prepackaged plan that binds the dissenters in an accepting class, and the prospect of that can be what persuades the holdouts before any petition is filed.

Whether a creditor that refuses an exchange is protecting its rights or merely waiting to be paid by everyone else's concessions is a question each side answers differently. The exchange documents rarely say.

The company's lawyers will want the voting math on a spreadsheet by the second meeting.

Where a Settlement Company Fits, and Where It Does Not

Most of these tools belong to restructuring counsel, financial advisers and the lenders themselves. A company with syndicated or intercreditor-bound debt needs those professionals, not a settlement company. Delancey Street, not a law firm, works on a narrower problem that mid-size companies sometimes carry anyway: merchant cash advance positions that block an asset-based line or an intercreditor agreement. Its first review of those contracts is confidential and free, and legal matters go to independently licensed attorneys; no reduction is assured, and canceled debt can carry tax consequences. Where advances are the obstacle to a larger refinancing, a conversation with Delancey Street can clarify whether they can be resolved before the lenders sign.