In Interview With The Deal, Partner Robert Stark Demystifies Liability Management Transactions

Partner Robert Stark was interviewed by The Deal for an analysis of how liability management transactions, or LMTs, failed to save an auto parts provider backed by a private equity firm from bankruptcy.

The Sept. 20 article reported that there has been a wave of LMTs, through which borrowers reshuffle their capital structure and access new financing by rearranging the capital stack. But there has also been a broad uptick in corporate bankruptcy filings, with August marking the highest total for the first eight months of the year since 2020.

"If you retract the lens and ask yourself, are we doing these exercises to do something productive for the company, to provide liquidity to save jobs, to enable the company to grow back into an extended capital structure?" Stark mused.

On Sept. 8, Clearlake Capital Group portfolio holding Wheel Pros Inc. filed for Chapter 11 in Delaware to hand ownership to lenders and reduce its debt a year after using a "double-dip" LMT to secure $235 million in new money from those same lenders. Although the performance of Wheel Pros improved in the following months, challenges lingered, leading to the bankruptcy filing.

"The other way of thinking about it in a more angled way, is maybe a lot of these transaction are ways to put capital in at the top of the capital structure," Stark said. "Either with an acquisition mindset or knowing full well that these structures, as sophisticated as they now are, create a leverage position that requires substantial payoffs."

Stark added, "Maybe, this style of transacting and working out corporate restructuring problems will come under a closer level of scrutiny if there's a moment in time where there's a fair number of these things that collapse."

Read the full article here.