The Latest Tool to Refinance Short-Term Debt: Double-Dip Financing

Some companies facing a cash crunch are turning to so-called double-dip loans to refinance short-term debts and improve liquidity amid rising interest rates.

Many companies with floating-rate debt are burning more cash than roughly 18 months ago, when interest rates were much lower, to cover the rising cost of debt, creating a need for more financing. But raising new debt or refinancing through traditional means has grown increasingly challenging.

Now, a small but growing array of businesses are turning to double-dip loans to bolster liquidity, giving new lenders additional and sometimes superior claims on assets compared with existing lenders. “The goal for companies using these structures has been to survive today in order to live another day,” said Scott Macklin, director of leveraged loans at investment manager AllianceBernstein Holding.

Companies often pursue these deals to avoid running out of cash and lenders usually purchase the loans for increased collateral and potentially higher returns.

Here’s how a double-dip loan generally works: A company creates a subsidiary that issues new loans and it lends loan proceeds to its parent on a secured basis, meaning the proceeds are backed by collateral. The parent also guarantees the new loans, creating a second claim on the assets. New lenders often get collateral not pledged to existing lenders. Such a transaction is called double-dip because the loan to the parent company, along with the loan guarantee, creates separate claims on company assets.

A double-dip provides additional claims against existing collateral via an intercompany note and guarantee. Double-dips must be allowed by a company’s credit agreements, and they usually are because contractual provisions have weakened over the last several years, Macklin said.

Companies drawn to these transactions generally have a significant amount of leverage and few options for refinancing short-term debt. Potential new lenders often are concerned a heightened bankruptcy risk for many of these companies would prevent recovering the par value of debt they provide, so they require additional protections, Macklin said.

The debt structures have existed for years, traditionally for multinationals to move money internationally, but have resurfaced as interest rates continue rising.

Double dips don’t fix companies’ underlying fundamental operational issues alone, said Lisa Donahue, co-head of Americas and Asia at consulting firm AlixPartners. “These types of liability management exercises are one small piece of the puzzle because at the end of the day, it’s just a Band-Aid,” said Donahue, former global co-head of the turnaround and restructuring practice at the firm.

“I think folks will do it until they can’t,” she added.

The pool of businesses seeking these loans is expanding beyond those owned by private-equity firms into the publicly traded sphere, which typically have less leverage. For instance, materials manufacturer Trinseo in September landed $1.08 billion in secured term-loan financing, with funds managed by Angelo Gordon, Oaktree Capital Management and Apollo Global Management as lenders.

Trinseo said proceeds would refinance its outstanding 2024 term loan and $385 million of its $500 million 2025 senior notes. The company gave additional protections to its new lenders while lessening protections for existing debt, S&P Global Ratings said.

S&P said Trinseo’s new debt increased annual debt servicing costs by more than $75 million, weighing on free operating cash flow while the company’s operating results remained weak. The credit-rating firm held Trinseo’s rating at CCC+, or seven notches below investment grade, because the new structure didn’t fully address concerns about the business.

In another double-dip deal, travel technology provider Sabre in June said it raised $700 million to help refinance its 2025 debt maturities. Sabre provided new lenders with a double-dip claim on U.S. assets along with the value of foreign subsidiaries as collateral. About 62% of Sabre’s revenue came from outside the U.S. in 2022, a regulatory filing showed.

The financing, when combined with a tender offer on the majority of April 2025 bonds, helped Sabre reduce a significant portion of its nearest term bond maturities, Chief Financial Officer Michael Randolfi said on an earnings call in August. Sabre has said it expects to book positive free cash flow for full-year 2023—for the first time—and annually thereafter.

Meanwhile, home-decor retailer At Home, which is owned by private-equity firm Hellman & Friedman, in May issued $200 million in new senior notes through a deal that granted a new lender two claims on the same collateral pool.

At Home declined to comment. Sabre and Trinseo didn’t respond to requests for comment.

Double dips that involve funding new money may increase leverage or certain debt service that risks making a borrower’s capital structure unsustainable, potentially months or years down the line, said Scott Greenberg, global chair of the business restructuring and reorganization practice group at law firm Gibson, Dunn & Crutcher.

“You’re effectively giving lenders more credit support, which gets them comfortable with the risk profile of the new money loan and often puts them in a structurally senior position as it relates to their claim,” Greenberg said. “If these things do go sideways, they’re at the top of the stack.”

The deals risk upsetting prior lenders because they tend to dilute the value of collateral for existing loans. These lenders bear the cost of double dips and the new lenders benefit at their expense. That may spur lawsuits, lawyers said.

“You might have some lenders who are not thrilled that they are not part of the transaction,” said Leonard Klingbaum, co-head of the global capital solutions and private credit group at law firm Ropes & Gray. “Doing it in a way that is unassailable and not punitive to other lenders is really the art of the science.”

Larger companies will likely increasingly issue double dips or similar structures soon, lawyers and advisers said, as debt taken on before the Federal Reserve’s interest-rate increases approaches maturity and rates continue to bite.

“The market is currently littered with companies that have too much leverage and have floating rate debt that is coming to roost in a higher interest rate environment,” said Damian Schaible, co-head of restructuring at law firm Davis Polk & Wardwell. “There’s going to be more and more companies that run into liquidity pressures and are looking for ways to bring in additional capital.”

Write to Mark Maurer at mark.maurer@wsj.com