Sidecar Credit Agreement

A sidecar credit agreement is a financial tool used by private equity firms and other investors to provide additional capital to a struggling portfolio company. This type of agreement is specifically structured to provide a higher rate of return to investors compared to traditional financing structures.

The structure of a sidecar credit agreement involves the creation of a new entity, often called a sidecar fund, which holds a subordinated debt position in the portfolio company. This means that the debt held by the sidecar fund is lower in priority compared to the debt held by other lenders, such as banks.

The subordinated debt position held by the sidecar fund can be structured in a way that allows it to receive a higher rate of interest compared to other lenders. This is because the sidecar fund is taking on a higher level of risk by holding debt that is lower in priority.

The purpose of a sidecar credit agreement is to provide additional capital to a portfolio company that is struggling to make payments on its existing debt. This can be especially valuable in situations where the portfolio company is unable to secure traditional financing due to poor financial performance or high levels of debt.

Investors in sidecar funds can benefit from the higher rate of return offered by the subordinated debt position. However, this comes with a higher level of risk, as the portfolio company must continue to generate enough cash flow to cover the interest payments on the debt.

In addition to providing additional capital to a portfolio company, a sidecar credit agreement can also provide flexibility in terms of restructuring the existing debt. This can include extending the maturity date of the debt, reducing the interest rate, or converting existing debt into equity.

Overall, a sidecar credit agreement can provide a valuable tool for private equity firms and other investors to support struggling portfolio companies and generate higher returns compared to traditional financing structures. However, it is important to carefully evaluate the potential risks and benefits before investing in a sidecar fund.