Public Knowledge

Continuing on my theme of the value of debt restructuring and recapitalization, I wanted to make note of a recent transaction by the public telecommunications company Knology. Knology recently closed on a credit facility amendment that extended the term of its facility by two years and increased its unused revolver by 40%. The result: it's market cap (market value of its equity) increased approximately 35+%. All this, even though the interest rate was increased by more than a full percentage. Ohh but wait, the new terms allow for dividends and stock re-purchases; read recapitalization. The market run-up is an endorsement for the value of longer-term debt and flexible terms (money security) over lower rates (money expense).

While the typical small business is not managing their balance sheet for the public markets, there is a lesson to be learned here. If a company's current bank has increased their credit line review frequency to quarterly and the LOC is at risk despite positive financial performance; the equity value is being squeezed. If a small company can find another lender willing to extend longer-term loans conventionally or via an SBA program, management could add significant value to the equity of the company just by restructuring the debt even in the face of higher rates. This is no easy task these days but not impossible.