Dividend recap: the lender room and solvency support
In a dividend recap a company borrows and pays the proceeds to shareholders. Lenders underwrite the business's ability to carry the new debt, and the board needs evidence that the dividend is lawful and the company stays solvent, so the room carries both lender diligence and solvency support.
Folder index
- 01 Transaction overview Amount, use of proceeds, pro forma capital structure.
- 02 Financials Audited statements, monthly results, quality of earnings report.
- 03 Forecast Base and downside cases, debt service and covenant headroom.
- 04 Existing debt Current credit agreement and payoff or amendment terms.
- 05 Board materials Board approvals, surplus analysis, solvency opinion or analysis.
- 06 Business diligence Customers, contracts, management, operations.
- 07 Legal Corporate documents, litigation, liens.
How this raise works
Private equity owned companies use dividend recaps to return capital to their funds without selling. Lenders are commonly direct lenders, banks or the syndicated loan market. Because the money leaves the company, lenders look hard at cash flow coverage, debt relative to EBITDA and the quality of earnings.
State corporate law limits dividends. A Delaware corporation may pay dividends out of surplus, or if there is none, out of net profits for the current or preceding fiscal year, and directors can be personally liable for unlawful dividends under section 174. Boards commonly obtain a solvency opinion or analysis, partly because of fraudulent transfer risk if the company later fails.
Diligence looks like a refinancing plus a check on the earnings adjustments behind the deal. A quality of earnings report, forecasts with downside cases and a clear covenant package are central.
Best data rooms for this raise
The 16 rooms re-ranked with this raise's weights. Permission control carries the most weight here.
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- Raise workflow 24%
- Investor onboarding 15%
- Cost of a raise 16%
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Folder index for the room
A starting index for this raise. Number the folders so the order survives exports and investors can cite them in questions.
- 01 Transaction overviewAmount, use of proceeds, pro forma capital structure.
- 02 FinancialsAudited statements, monthly results, quality of earnings report.
- 03 ForecastBase and downside cases, debt service and covenant headroom.
- 04 Existing debtCurrent credit agreement and payoff or amendment terms.
- 05 Board materialsBoard approvals, surplus analysis, solvency opinion or analysis.
- 06 Business diligenceCustomers, contracts, management, operations.
- 07 LegalCorporate documents, litigation, liens.
- 08 Lender proposalsTerm sheets and commitment papers per lender.
- 09 Q&ALender questions and answers.
Features this raise needs
| Feature | Why | Ellty | iDeals | Ansarada | Datasite | Intralinks | SecureDocs |
|---|---|---|---|---|---|---|---|
| Q&A module | LPs and lead investors post questions on a file; the deal team routes each one, drafts a reply and decides who sees it. | ||||||
| Investor activity log | A per-investor record of opens, pages and minutes, which tells the IR team who is in diligence and who stalled. | ||||||
| Dynamic watermarks | Stamps the reader and a timestamp over every page, so a PPM that leaks carries its source with it. | ||||||
| Built-in redaction | Masks fee splits, investor names or personal data in place, with no edited duplicate to keep in sync. |
Setting up the room
- 01
Start with earnings quality
Commission a quality of earnings report so lenders can trust the adjusted EBITDA figure.
- 02
Prepare board support
Have the surplus and solvency analysis ready before the board approves the dividend.
- 03
Model the downside
Show that the company can service the new debt if results fall.
- 04
Run lenders in private folders
Keep each lender's terms separate and track their diligence activity.
- 05
Archive the record
Export the final room and board materials. They support the board if the dividend is challenged later.
Common mistakes
- Paying a dividend without a documented surplus and solvency analysis.
- Adjusted EBITDA that lenders cannot reconcile to the statements.
- Covenants set with little room under a downside case.
Calculators for this raise
Or take the four-question quiz and check the raise checklist.
Questions and answers
Who provides dividend recap debt?
Commonly direct lenders, banks and the syndicated loan market, depending on size.
Why does the board need a solvency opinion?
It supports the decision that the company can pay its debts after the dividend, which matters if creditors challenge the payment later.
Do lenders see board materials?
Usually the approvals and solvency certificate, not the internal deliberations.