Revisiting New Value Restructuring in Today’s Middle Market
Atlanta, GA — When middle-market companies face financial distress, lenders often feel trapped between two difficult choices: force a sale at a likely low point in value or take full ownership and assume complete operational responsibility. Configure Managing Director Jay Jacquin proposes a third way: New Value Restructuring, which can create better outcomes for all stakeholders involved.
In the piece, Jay explores how a competitive sponsor selection process can bring fresh capital and expertise while allowing lenders to retain upside participation without operational burden. He also explains how this approach benefits lenders, new sponsors, and companies alike.
In today’s challenging economic environment, where financial distress is becoming increasingly common, having additional tools in your restructuring toolkit isn’t just valuable — it’s essential for protecting investments and creating sustainable outcomes.
Read the full article below.
Facing the Two Traditional Paths for a Distressed Investment
When a middle-market company runs into financial distress, lenders are often thrust into an uncomfortable position. Covenant breaches mount, liquidity evaporates, and sponsor support dries up. Suddenly, the company’s lender(s) find themselves at a crossroads where they effectively become the economic owners of the company.
Lenders often perceive that they have two choices. One option is to sell the distressed company at a financial low point. The other is to take full possession as the outright legal owner and assume the responsibility of overseeing the company’s stabilization and recovery in anticipation of a future sale under more favorable conditions.
As a lender, taking ownership brings with it a long list of additional considerations and complexity. Lenders-turned-owners are then entirely in charge of governance, management, and operations, all of which take significant amounts of time from their normal jobs, as private credit and bank lenders are not typically staffed with the resources to provide these competencies to their borrowers.
Therefore, the choice between forcing a distressed sale or taking ownership is a difficult one, fraught with deep and long-term repercussions. However, we propose a third option.
New Value Restructuring Provides Another Option to Consider
Another compelling option for lenders to consider — one that Configure believes creates a more balanced, win-win outcome — is a New Value Restructuring. This involves creating a competitive process to seek a new sponsor, bringing fresh capital, restriking the balance sheet, and partnering with lenders to create shared upside participation for the potential rebound in value.
A New Value Restructuring was once more common in the middle market (although it was often referred to by the more colloquial name of a “sweat equity” deal), and it remains a common occurrence in larger restructurings today. The equivalent in the large-cap restructuring world is when a third-party investor buys into a distressed company’s publicly traded debt securities at a discount, creates a plan of reorganization where the third party will provide incremental capital, take a large ownership stake, and dictate the outcome for other stakeholders and tranches of debt through the proposed reorganization plan.
The downside for legacy lenders in this large-cap scenario is that, because the securities are publicly traded, they do not have the opportunity to choose who buys into the distressed company’s capital structure and sponsors the plan. However, in the middle market, this problem can be avoided through a privately run process that specifically targets the right potential sponsors.
In a middle-market scenario, an auction-style process would reveal a plethora of interested new sponsors with fresh capital to realign the balance sheet and team up with the existing lenders. The prior, run-dry sponsor is replaced with a new sponsor that likely brings with them a new operational and strategic playbook — all of which is intended to spark new and improved returns as the business rebounds.
In this privately run process, sponsors compete on two levels:
- First and foremost are the economics — the capital invested by the new sponsor, the process of resetting the balance sheet, and the sharing that would take place between the new sponsor and the legacy lenders as value rebounds.
- Secondly, it is how the sponsor demonstrates its experience with similar companies, operating models, or sector expertise, as well as the specific situation that led to the company’s underperformance — this way, legacy lenders can feel comfortable with their new financial partner.
Instead of being forced to own the business and therefore make all of the key decisions, lenders reduce their risk and own a smaller piece of paper, but share in the upside created by a partner who is designed and equipped with the right resources to succeed.
Why Does This Work for all Stakeholders?
Lenders can avoid full ownership and operational risk, returning to their accustomed role as primarily lenders. They also get to retain upside participation without day-to-day management. Additionally, competitive tension in a privately run process will yield the best economic terms and the most favorable choice of sponsor.
New sponsors also benefit from this third option, as not only do they likely receive built-in financing from incumbent lenders, but they can write a smaller equity check to gain control of the distressed company from an operational, managerial, and governance standpoint than if they otherwise purchased the company outright in a sale process. This also allows sponsors the opportunity to apply their value creation playbook, having deployed less capital, and utilize their resources to improve businesses and achieve a higher return on investment.
Lastly, the company benefits by virtue of a thorough reset on the balance sheet and perhaps strategy, as well as the ability to work with a new sponsor to rebuild value instead of being owned by the lender outright, or going through a Chapter 11 or similar bankruptcy process.
An Advisory Firm’s Value Add
Configure maintains relationships with a wide array of private equity firms, all of which possess a variety of investment philosophies. We speak to sponsors on a daily basis who are prepared to engage in this type of transaction.
Configure combines transactional expertise with financial advisory to develop holistic, solution-driven advice. Common issues include over-leverage, negative market perception, and constrained liquidity. We overcome these issues with best-in-class client service and transparent alignment of interests with our clients.
By running a sponsor selection process, we can drive competition and ensure the best terms for the next phase of the company’s life. Lenders, remember: You’re not limited to selling or owning. There is a third way — New Value Restructuring — and it can produce better outcomes for lenders, companies, and sponsors alike.
Please feel free to reach out to any of our Configure team members or visit our website at https://configurepartners.com to discuss our experience in more detail.
About Jay Jacquin
Jay brings over twenty-five years of investment banking and advisory experience at market-leading firms. Prior to joining Configure Partners, he established the Middle Market Special Situations practice at Guggenheim Securities. Before joining Guggenheim, he was a senior member of the Recapitalization & Restructuring Group at Morgan Joseph TriArtisan for approximately five years.
Previously, he was a Senior Director with Alvarez & Marsal Corporate Finance, prior to which he spent eight years in Houlihan Lokey’s Corporate Finance and Financial Restructuring practices.
Jay holds a bachelor’s degree in Commerce, with concentrations in finance and marketing, from the McIntire School of Commerce at the University of Virginia. He is a FINRA General Securities Principal (Series 24, 7, 79, 63) and a Certified Insolvency and Restructuring Advisor (CIRA).