As global economies and businesses continue to suffer from the effects of COVID-19, mandated shutdowns and social distancing, businesses across industries and across the globe are facing unprecedented financial stress. Companies have been forced to shut down or cut back operations, but employee, lease and debt service obligations continue to exhaust dwindling cash reserves, and debt covenants continue to be broken
To survive, firms are considering all available restructuring options; operational, financial, and legal when developing strategies to weather the COVID-19 landscape. Earlier this year, leveraging our experience in corporate recovery and restructuring, Ocean Tomo launched the Corporate Restructuring Center to share our thought leadership around this topic.
Given the unprecedented impact of COVID-19, operational changes alone are unlikely to satisfy the immediate need for cash; and in any restructuring plan, short-term liquidity is a priority. Accordingly, borrowers are looking for innovative ways to raise cash.
For many companies, liquidity will be funded with debt. Access to additional debt, however, can be challenging when revenues and profits are severely impaired; and it is further challenged when the borrower has existing collateralized debt obligations.
In the face of these challenges, we have seen a sharp increase in the use of intellectual property (“IP”) and special purpose vehicles (“SPV”) by corporate borrowers when raising debt capital. A SPV is a legal unit or entity that can issue debt and own assets such as trademarks, brands, patents, technology, copyrights, etc. on behalf of a company.
The firm transfers selected IP assets into the SPV; and if the transaction is structured properly and the exchange is completed at fair market value, the assets can be moved out of reach of current lenders, and used as security for new debt that can be used for liquidity and which would be paid off first in the event of a bankruptcy.
Although the transfer of assets to an SPV can be challenging where there are pre-existing debt covenants, the relaxed lending standards of many loan fund managers in recent years, has created opportunities for innovative debtors take advantage of “loose” loan documents to move intellectual property outside of the reach of their creditors; and once the asset has been moved, the borrower can then use the assets to create liquidity.
The most frequently pledged assets are trademarks, copyrights and patents. However, contrary to popular belief, the use of IP as collateral is not limited to technology or brand driven consumer facing companies. As firm value continues to transition from tangible to intangible assets, firms across industries have been able to use the value of their IP to access much needed liquidity.
Ultimately, as global economies and businesses continue to suffer from the effects of COVID-19, more and more companies will be forced to consider all available options to raise the cash needed to survive. Their success will hinge not only on an understanding their IP asset portfolio, but also, an ability to package those assets in a way that maximizes value and enhances its desirability and value as collateral to new lenders.
To explore this topic and how it could influence your IP strategy, please contact me at +1 415 946 2605 or firstname.lastname@example.org.