Leveraged Lending

The Role of Deal Sponsors

Private equity firms, parent holding companies, and individuals invest in companies through leveraged transactions and act as their financial sponsor. The debt is extended in the name of the operating company, typically without any contractual guarantee of the financial sponsor. The sponsor’s primary role is to enhance investor return by increasing cash flow and, ultimately, the value of the company. Sponsorship can provide tangible and intangible benefits to the levered company. This can include access to markets or managerial expertise not available from the prior ownership structure and financial support. Although sponsors do not generally guarantee company indebtedness, they can provide financial support through maintenance agreements to support deficient cash flows and through additional capital support under certain conditions. Their ability to provide maintenance to cash flow levels can be limited by the sponsoring firm’s legal charter, its financial capacity, and its economic incentive to support the company.

Informal sponsor support is not a replacement for a thorough analysis of the credit on its own merits.

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