What Is Debt Advisory and How Does It Work?

Debt advisory services offer specialized financial guidance to organizations seeking to manage, structure, or raise debt capital. These services assist entities in navigating debt markets, optimizing their financial positions, and securing funding under favorable terms. The primary objective is to enhance an organization’s financial strength and flexibility.

Core Services of Debt Advisory

Debt advisors provide a range of specialized services designed to meet diverse financial needs, helping organizations optimize their debt portfolios and secure necessary funding.

Debt Restructuring and Refinancing
A significant area of focus involves debt restructuring and refinancing, where advisors help companies modify existing debt terms or replace old debt with new, more advantageous arrangements. This process often includes adjusting financial covenants, which are conditions borrowers must meet, such as maintaining a minimum debt service coverage ratio (DSCR) or interest coverage ratio (ICR).

Debt Capital Raising
Another core service is debt capital raising, where advisors assist in securing new loans or issuing bonds from various sources. This includes identifying suitable lenders, such as commercial banks, institutional investors, or direct lending funds. Advisors prepare detailed financial models and comprehensive information memoranda (IMs) to present to potential financiers. An IM provides a thorough overview of the business, its financial performance, and funding requirements for the proposed transaction.

Balance Sheet Optimization
Advisors also engage in balance sheet optimization, working to improve a company’s debt-to-equity ratio and overall financial health. They focus on key metrics such as the debt-to-EBITDA ratio, which illustrates how many years it would take a company to repay its total debt using its earnings before interest, taxes, depreciation, and amortization (EBITDA). A lower debt-to-EBITDA ratio, often considered healthy when below 2.0, signifies a company is less leveraged and possesses a stronger capacity to manage its obligations.

Lender Relationship Management
Lender relationship management forms another important aspect of debt advisory. Advisors maintain positive relationships with creditors and negotiate on behalf of their clients. This includes assisting with ongoing financial reporting and ensuring continuous compliance with existing debt covenants. These covenants are contractual requirements within loan agreements designed to protect the interests of lenders by setting specific financial or operational thresholds that borrowers must adhere to throughout the loan term.

Financial Modeling and Analysis
Finally, financial modeling and analysis are foundational to all debt advisory services. Advisors use sophisticated analytical tools to forecast debt capacity, analyze various financial scenarios, and present optimal funding options. This typically involves developing detailed financial projections, including income statements, balance sheets, and cash flow statements, to clearly demonstrate the company’s ability to service its debt obligations.

Who Utilizes Debt Advisory

Debt advisory services are sought by a diverse range of organizations, each with unique financial objectives and capital structure needs.

Corporations
Corporations, spanning from small and medium-sized enterprises (SMEs) to large multinational enterprises, frequently engage debt advisors. These businesses may seek financing for strategic growth initiatives, such as funding a significant expansion, or for acquisitions that require substantial capital investment. Debt advisory is also utilized by companies facing financial distress, assisting them in managing their liabilities and potentially restructuring to avoid default.

Private Equity Firms
Private equity firms represent a significant client segment for debt advisors, particularly for executing leveraged buyouts (LBOs). In an LBO, a substantial portion of the acquisition price, often ranging from 60% to 80% of the total purchase price, is financed through various forms of debt. This debt structure typically includes multiple tranches, such as senior debt (e.g., Term Loan A and Term Loan B), mezzanine debt, and high-yield bonds, each carrying different maturities and risk profiles to support the transaction.

Real Estate Developers
Real estate developers also frequently rely on debt advisory for project-specific financing and refinancing needs. Real estate projects often involve a complex “capital stack” of funding, which can include senior debt like construction loans and permanent loans, along with mezzanine financing and equity. Different types of capital are typically deployed at various stages of a project’s development lifecycle, from initial land acquisition to construction completion.

Government Entities and Public Sector Organizations
Government entities and public sector organizations also utilize debt advisory, primarily for financing large-scale infrastructure projects or issuing municipal bonds. Municipal bonds are debt obligations issued by states, cities, counties, or other public authorities to fund public works such as roads, schools, and sewer systems. These bonds can be structured as general obligation bonds, backed by the issuer’s taxing power, or as revenue bonds, which are repaid from the specific revenues generated by the funded project, such as tolls from a highway. Debt advisory helps these entities navigate the public finance market to secure favorable terms for public benefit projects.

The Debt Advisory Process

The engagement between a client and a debt advisor typically follows a structured process, beginning with a thorough evaluation of the client’s financial standing.

Initial Assessment and Strategy Development
During the initial assessment and strategy development phase, advisors meticulously review historical financial statements, current projections, and other pertinent business documents. This comprehensive review enables the advisor to develop a tailored debt strategy, which outlines the target debt amount, the desired tenor (loan term), and the optimal interest rate structure, whether fixed or floating, to align with the client’s long-term objectives.

Preparation of Materials
Following the strategic assessment, advisors proceed with the preparation of materials essential for attracting potential lenders. This involves creating detailed financial models that forecast future performance and crafting comprehensive information memoranda (IMs) and presentations. The IM serves as a crucial marketing document, offering prospective lenders an in-depth overview of the business, its operational framework, historical financial performance, and the specific terms of the proposed debt transaction.

Market Outreach and Lender Engagement
The process then moves into market outreach and lender engagement, where advisors identify and approach a select group of suitable lenders or investors. Advisors manage the distribution of the IM, coordinate responses to due diligence requests, and facilitate negotiations. The objective at this stage is to solicit competitive term sheets, which are non-binding documents outlining the preliminary terms, pricing, and overall structure of the proposed debt financing.

Due Diligence and Structuring
Subsequently, advisors provide support during the crucial due diligence and structuring phase. They guide clients through the rigorous due diligence process conducted by lenders, who meticulously investigate various aspects of the borrower’s financial, legal, and operational health. Concurrently, advisors assist in finalizing the specific debt terms, including the nature of collateral, the repayment schedule, and the detailed financial and operational covenants that the borrower must adhere to throughout the life of the loan.

Execution and Closing
The concluding phase involves the execution and closing of the financing arrangement. This stage encompasses the preparation and review of all necessary legal documentation, such as loan agreements, security agreements, and intercreditor agreements, ensuring all legal requirements are satisfied. Once all conditions precedent are met, the funds are disbursed, officially completing the transaction.

Some advisory engagements may extend to post-deal support, which can include ongoing monitoring of covenant compliance, assisting with regular financial reporting, and providing further advice on capital structure adjustments.