Debt Rights Offering: A Strategic Financing Tool Explained
A debt rights offering is a type of financing transaction where a company, often in the context of bankruptcy or restructuring, offers its existing creditors or claimholders the right to purchase new debt securities or equity at a discounted price. This mechanism allows the company to raise new capital without incurring additional debt or diluting existing shareholders' interests excessively.
Key features of a debt rights offering include:
- Discounted Price: The new securities are offered at a price lower than their assumed value, making the offer more attractive to participants. 23
- Backstop Agreement: To ensure the success of the offering, certain claimants or third parties agree to purchase any unsubscribed shares, providing a guarantee that the company's capital needs will be met. 34
- Pro Rata Allocation: Eligible creditors or claimholders are offered the right to purchase new securities in proportion to their existing holdings. 13
- Flexibility: Rights offerings can include oversubscription or overallotment rights, allowing participants to purchase more securities than their pro rata share if unsubscribed securities are available. 3