Special situations or venture debt? How we are financing a traditionally unbankable business

Our client already had USD 40m in equity invested from a US institutional investor. It has an USD 11m annual cash burn and is pre-revenue. As an AI powered tech firm, it has secured government contracts globally to become the merchant of record for any and all payment transaction type within a particular country, from utility bill payments to restaurant, taxi, hotel and flight bookings. The business has just secured its first revenue of USD 6m but has USD 7m in debt due in 3 weeks and its current equity investor cannot fund it any further. They need a refinance urgently, but have insufficient ARR and assets for traditional lenders. Here’s how we helped.

The company

The client is a US-incorporated, AI-powered business-to-business marketplace: a single “super-app”-style platform through which businesses can transact everything from travel and hospitality bookings to utility bill payments, with the company acting as merchant of record. Its target markets are emerging economies undergoing rapid digitalisation, and it holds a number of government partnerships across the Middle East and South-East Asia. In short, it is an ambitious, well-connected, high-growth business, with a commensurately high cash burn rate.

The headline numbers set the scene:

•       Circa USD 40m of equity raised to date, all from a single venture investor

•       Circa USD 11m of annual cash burn

•       Circa USD 6m of initial revenue recently earned, invoiced and received in cash

Why conventional debt was off the table

On a traditional credit assessment, this company is close to unbankable. It is loss-making, it burns roughly USD 11m a year, its revenue is nascent, and it has no meaningful tangible assets or unencumbered receivables to pledge. Mainstream cash-flow lenders underwrite against profitability and predictable cash generation; asset-based lenders underwrite against assets. This business offered neither. Any debt solution would therefore have to be built around something other than the operating company’s own balance sheet.

The cliff edge

The situation was urgent for two reasons. First, the sole venture investor that had funded the company to date had suffered losses elsewhere in its portfolio and could no longer sustain the burn. Second, that same investor held USD 7m of debt against the company which was due to mature in three weeks. Left unaddressed, the lender could move to enforce.

Our client needed a credible refinancing term sheet it could put in front of the existing lender quickly: both to take out the maturing USD 7m and to demonstrate a path forward that would discourage enforcement.

The ask

The mandate was to arrange, quickly and subject to lender appetite, approximately USD 30m of debt to:

•       refinance and repay the incumbent lender’s USD 7m;

•       fund working capital and the cash burn until a much larger equity round closes in an estimated six to nine months; and

•       provide a minimum of six months of runway, and preferably more.

Potential collateral

With the operating company unable to support the debt on its own, the structuring question became a simple one: what else can secure a loan of this size? Two possibilities emerged, both connected to the people around the company rather than to the company itself.

The first was real estate. A board member connected to the business controlled, through a family landholding entity, a substantial parcel of prime land in a South-East Asian jurisdiction, informally valued at around USD 100m.

The second was a standby letter of credit (SBLC), which the client indicated it might be able to procure, and which certain lenders can accept as collateral in place of, or alongside, hard assets.

Lesson: Credible SBLC from US institution > emerging market land security

Our US headquartered institutional investors concluded that the real estate could not, in practice, be used as collateral, and that they could only proceed against the SBLC, subject to the standing of the issuing institution.

The exit is everything

For a bridging lender, the single most important question is not “what is the security?” but “how do I get repaid?”. A bridge is, by definition, a short-term loan taken out by a defined future event: a refinancing, a sale, or, in this case, a large equity round. The company was in active discussions with sovereign wealth, private equity and venture funds regarding equity investments of USD 100m or more, which would comfortably repay a USD 30m bridge. That is a compelling exit, on paper.

The lesson

Coupled with the right collateral, in this case an SBLC from a credible institution, the exit makes the rapid refinance become a reality.

Distressed situations reward speed, creativity and candour. The companies that survive them are rarely those with the cleanest balance sheets; they are the ones that engage the market early, present their case honestly, and structure around the assets and exits they can actually evidence.

Q&A: Key terms explained

Q: What is a bridging loan?

A: A short-term loan designed to be repaid by a specific future event, such as a refinancing, an asset sale or an incoming equity round. It “bridges” a funding gap until that event occurs.

Q: What is cash burn?

A: The rate at which a business consumes cash to fund its operations before it is profitable, usually expressed per month or per year. A company burning USD 11m a year is spending that much more than it earns.

Q: What is runway?

A: The length of time a company can continue operating at its current cash burn before it runs out of money. Six months of runway means roughly six months of cash remaining.

Q: What does “merchant of record” mean?

A: The entity legally responsible for processing a customer transaction, including collecting payment, handling tax and managing refunds and chargebacks. Acting as merchant of record places the company at the centre of each transaction.

Q: What is a standby letter of credit (SBLC)?

A: A guarantee issued by a bank on behalf of a client, under which the bank undertakes to pay a beneficiary if the client fails to meet an obligation. Because it represents a bank’s promise to pay, a suitably issued SBLC can be pledged as collateral for a loan.

Q: What does enforcement mean for a lender?

A: The exercise of a lender’s legal rights when a borrower defaults or a loan matures unpaid, which can include demanding immediate repayment or taking possession of, and selling, any assets pledged as security.

Q: What is refinancing?

A: Replacing an existing loan with a new one, typically to repay a maturing facility, extend the term, change the lender or improve the terms.

Q: What is working capital?

A: The cash a business needs to fund its day-to-day operations, bridging the timing gap between paying costs and receiving revenue.

Q: What is due diligence (DD)?

A: The detailed investigation an investor or lender undertakes before committing capital, covering a company’s financials, legal position, commercial prospects and risks.

Q: What is a term sheet?

A: A written summary of the key commercial terms on which a lender or investor proposes to provide finance. It signals serious intent and forms the basis for full documentation, though it is usually non-binding.

Q: What is a sovereign wealth fund (SWF)?

A: A state-owned investment fund that invests a country’s reserves across asset classes, often writing very large equity cheques.

Q: What is loan-to-value (LTV)?

A: The ratio of a loan’s size to the value of the asset securing it. A robust, current valuation is essential, because lenders size a secured loan as a percentage of that value.

Q: What is a joint venture (JV)?

A: A commercial arrangement in which two or more parties combine resources for a specific purpose while remaining distinct entities, here, the structure through which an operating company sought rights over land owned by a separate family entity.

Enquiries

For further information, please contact info@langdoncap.com

About the author

Sabbir Rahman is CEO of Langdon Capital. He has held prior roles with Morgan Stanley, Lazard and Deutsche Bank. He has executed over £200 billion in notional value of debt, equity, M&A and derivatives transactions with global corporates, private equity funds and financial sponsor groups.

About Langdon Capital

Langdon Capital raises debt and equity for businesses with EBITDA between £2 million and £20 million from private credit funds, banks, private equity firms, special situations funds, family offices and venture debt funds. We raise capital to fund acquisitions, organic growth and turnaround situations. We hold direct relationships with key decision makers including CIOs, Heads of Direct Lending, Partners, MDs and Fund Principals at leading multi-billion £/$/€ AUM global institutional investors and provide our clients with swift, direct market access.

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