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NON CONVERTIBLE DEBT SAMPLE TERM SHEET Inspired by @privateinequity I recently started working on slides to share here on Twitter. The first one is an indicative term sheet of what a non convertible debt investment looks like. Here is a breakdown 🧵 Like, RT and Bookmark!
2/ To start, non convertible debt is a hybrid instrument that sits between senior debt and common equity within the company waterfall. More commonly, non convertible debt is referred to as "junior capital". It is junior in the cap structure, BUT more senior to common equity
3/ Non convertible debt can be provided by one party or multiple parties in a company. Typically, there will be some form of dividend or interest payment. Non convertible debt is flexible in that the interest payment can be cash or "PIK" (payment in kind)
4/ Non convertible debt is perpetual. So while your bonds or term loans have maturities within 5 or 7 years, there is no maturity on non convertible debt. Instead, there is a mandatory redemption that forces the company to take out the instrument and repay principal.
5/ Non convertible debt typically contains a construct for minimum MOIC. This is a minimum return for the investor. If this return hurdle has not been met, then proceeds cannot go to common equity. This is downside protection for the investor, which is very important.
6/ Non convertible debt works similarly in that it contains covenants. Leverage covenant is important because all senior debt sits in front of the non convertible investor. You cannot allow unlimited senior debt. Liquidity is important, especially in cases with PIK interest
7/ Even though this instrument is a form of debt, there is usually some form of equity consideration. This can either be in the form of penny warrants or at strike warrants. Warrants = option value in the company. Allows the investor to participate in equity upside.
8/ Penny warrants = investor allowed to purchase equity in the company for the cost of a penny, aka no cost. Strike warrants = investor allowed to purchase equity only once the company has hit a specific equity or enterprise value. Once the valuation strikes, you can purchase.