Actionable Ideas for Companies and Sponsors
Rights Offerings Are Effective Financing Tools in Distressed Situations
The use of rights offerings has become an increasingly popular means of acquiring a company in distressed situations, including, without limitation, pursuant to a Plan of Reorganization in a Chapter 11 proceeding. Rights offering provides a debtor and participants with many benefits including (i) providing access to capital, (ii) resolving valuation disputes, (iii) allocating control, and (iv) a potential exemption from registering new securities with the SEC.
In bankruptcy, a rights offering allows a company to offer creditors or equity security holders the right to purchase equity in the post-emergence company, usually at a discount to the assumed value of the reorganized enterprise. Because the new equity is typically sold at a discount to plan value, interested parties often have a strong incentive to participate in the offering to avoid dilution. Moreover, since the capital being raised via the rights offering is necessary to fund the Plan of Reorganization, rights offerings are almost always backstopped by a third party, ensuring that the requisite capital is fully committed. Furthermore, the parties providing the backstop typically receive a fee for providing the commitment; on average, backstop fees range from 3% to 10% of the financing.
Rights offerings also have proven to be an especially effective tool for junior creditors or equity holders to support their position on the value of the debtor due to their willingness to invest new money.