Your bank is taking all of the downside risk, and your PE House is taking most of the upside benefit – what do you do?
You try and persuade your PE House to invest some more cash reducing the bank’s exposure and increasing the PE House’s exposure. But what if they are not prepared to do so?
Given that the PE House wasn’t prepared to support the business further and the only other alternative was liquidation, the PE House supported the deal (not least because they knew that they would want to borrow money from them in the future).
This project did involve a formal insolvency of an intermediary holding company with the bank calling in its loan, appointing an administrator who sold the trading company to a newco owned by management and the bank.
As with so many of the transactions we did in the last recession, none of the creditors or employees even knew that there had been an insolvency (and many times there was no formal insolvency).
Contrast the previous recession where time and time again as well as the bank losing out, many of the unsecured creditors lost a lot of money and many employees lost their jobs.
You need to act swiftly to try and achieve an outcome that works for all involved.