dip financing: structuring roll-overs, cross...

DIP Financing: Structuring Roll-Overs,

Cross-Collateralization, Priming Liens,

Junior DIP Financing and More

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WEDNESDAY, APRIL 11, 2018

Presenting a live 90-minute webinar with interactive Q&A

Eric W. Anderson, Partner, Parker Hudson Rainer & Dobbs, Atlanta

Douglas J. Lipke, Shareholder, Vedder Price, Chicago

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DIP FINANCING:

STRUCTURING ROLL-

OVERS, CROSS

COLLATERALIZATIONS,

PRIMING LIENS, JUNIOR DIP

FINANCING AND MORE

Douglas J. Lipke

Vedder Price P.C.

[email protected]

▪ Automatic Stay after the commencement of a bankruptcy case

stays the pre-petition creditors from obtaining their collateral

and collecting their debts. § 362 of the Bankruptcy Code

▪ Debtor, however, typically requires credit to operate its

business

▪ Cash on hand or a secured creditor’s “cash collateral” (cash,

accounts receivable, proceeds of collateral and other cash

equivalents) may not be used by a Debtor unless (a) the

secured creditor with an interest in the “cash collateral”

consents to such use or (b) the Bankruptcy Court authorizes its

use after notice and a hearing. § 363 of the Bankruptcy Code

DIP Financing in General

6

continued

▪ In rare instances, a Debtor “flush with cash” can

adequately operate by using its cash collateral as

authorized by the Bankruptcy Court

▪ Typically, the Debtor will require additional credit through

debtor-in-possession financing (“DIP Financing”), with

special incentives and protections for the DIP Financing

Lender

▪ Cash Collateral Orders and Debtor-in-Possession

Financing Orders set forth the terms, protections and

provisions of such use of cash collateral and DIP

Financing


7

continued

▪ Unlike cash collateral, DIP Financing under Section

364 of the Bankruptcy Code contemplates

additional “new money” advances not otherwise

available to the debtor

▪ This “new money” can be made available by the

Debtor’s pre-petition lender (“Defensive”) or from a

new lender who begins lending money to the debtor

after the commencement of the case (“Offensive”)

▪ Due to a tight credit market, there are more

“Defensive” DIP facilities than “Offensive”


8

continued

▪ If the Debtor is unable to find a lender willing to

extend unsecured credit allowable as an

administrative expense, Section 364(c) authorizes

the court, after notice and a hearing, to grant to

such lender (a) a super-priority administrative claim

(having priority over all other administrative

expenses); (b) a lien on property of the estate that

is not otherwise subject to a lien; or (c) a junior lien

on property of the estate that is subject to a lien


9

10

▪ Post-Petition DIP Financing will be secured by a

lien on all POST-PETITION ASSETS (existing as of

the Petition Date and created thereafter) of the

estate

▪ The Pre-Petition debt will be secured only by Pre-

Petition collateral, which the Debtor will likely be

using: inventory, receivables and proceeds thereof

existing as of the Petition Date

▪ Snap Shot as of the Petition Date

Rollover of Pre-Petition Secured Debt

continued

11

▪ How does the Debtor determine whether a payment

received from an account debtor should be applied to

the Pre-Petition Debt or Post-Petition Debt?

▪ A Roll-up presumes that all collections are allocated to

the Pre-Petition Debt until paid in full, than to the Post-

Petition Debt

▪ Advantage: allows payment of Pre-Petition Debt when

accounts receivable are paid, and replaces the Pre-

Petition Debt with Post-Petition DIP Financing secured

by all assets with a super-priority administration claim,

and possibly higher interest rate


continued

12

▪ Objections:

• Could cure a Pre-Petition perfection flaw, by replacing with

Post-Petition Court ordered perfected secured collateral

• Could cure a Pre-Petition secured lender’s under secured

position

• Could preclude Pre-Petition Debt from being crammed

down with a Plan of Reorganization


continued

13

▪ Courts:

• Certain Judges will not allow roll-ups

• Certain Judges allow roll-ups to the extent of significant

(not nominal) new money only (over and above the Pre-

Petition amount)

• Roll-ups seldom allowed in Interim Orders, only Final

Orders


14

▪ Allows “bootstrapping” by granting the DIP

Financing Lender with a security interest in all Pre-

and Post-Petition Collateral (accounts receivable

and inventory)

▪ As with roll-ups, can fix a flaw in the perfection of

the Pre-Petition obligations secured by the Pre-

Petition Collateral

▪ Pre-Petition “defensive” lender could improve its

Pre-Petition position through the use of cross-

collateralization in the Post-Petition DIP Financing

Cross-Collateralization

continued

15

▪ Most Courts will only allow cross-collateralization

with:

• Significant “new money” advanced Post-Petition

• To the extent of actual diminution in the value of the

secured lender’s Pre-Petition collateral, as adequate

protection

Cross-Collateralization

16

▪ Priming of Pre-Petition Liens is allowed under 364(d) of the

Bankruptcy Code if:

• Debtor is unable to obtain needed credit otherwise

• Adequate protection is provided to the holder of the pre-existing

lien for the interest on the property of the estate which the priming

lien or equal lien is granted

▪ The “priming” is credit secured by a senior or equal lien on

the property already subject to a lien

▪ Priming liens are rarely granted because of the difficulty of

providing adequate protection for the lien being primed

▪ Often threatened, but seldom attempted

Priming Liens

continued

17

▪ Courts:

• Priming is extraordinary and should only be allowed as a

last resort

• At times allowed if sufficient “equity cushion” to the primed

lienholder only where such equity cushion is sufficient to

protect both the Pre-Petition lender and the DIP lender

• 20% equity cushion should never be enough; 50% might

be enough, depending on the case

Priming Liens

DIP FINANCING: Structuring Roll-Overs, Cross-Collateralization,

Priming Liens, Junior DIP Financing and More

By Eric W. Anderson

Parker, Hudson, Rainer & Dobbs LLP

303 Peachtree Street NE

Suite 3600

Atlanta, Georgia 30303

(404) 420-4331 © 2016 Parker, Hudson, Rainer & Dobbs LLP

IV. Liens or Superpriority Claims on

Avoidance Actions

• What are avoidance actions?

• Preferences (§ 547)

• Fraudulent Transfers (§§ 544, 548)

• Unauthorized Post-Petition Transfers (§ 549)

• "Strong Arm" claims (§§ 544, 545)

- 19 -

These materials are copyrighted and may not be distributed or quoted from (absent attribution) without the

express written consent of the author.

DIP Lenders and Avoidance Actions

• DIP Lenders want liens on avoidance actions

• Blanket liens cover all property of the estate

• Avoidance actions may not necessarily be construed as property of the estate, but rather are powers granted to the trustee or debtor in possession to prosecute claims for the benefit of all creditors. See, e.g., In re Cybergenics, 226 F.3d 237, 244 (3d Cir. 2000).

• But creditors argue that purpose of avoidance provisions is to give at least some recovery to unsecured creditors

• And the recipients of potentially avoidable transfers are typically unsecured creditors

• Committees argue against liens on avoidance actions altogether, but particularly on limited/short notice given for interim DIP Financing hearing

- 20 -


• Restrictions/Responses in Rules

• Fed.R.Bankr.P. 4001(c)(2) – now requires motion to make specific listing of, and justification for, laundry list of "extraordinary terms"; for example:

• Grant priority liens

• Stipulation to perfection and validity of pre-petition claims/liens

• Waiver of automatic stay provisions

• Plan and sale milestones

• Release or waiver of §506(c) surcharge

• Grant of liens on avoidance actions

• Local Rules – may amplify this, with very specific requirements for highlighting such terms – e.g.; Del. Bankr. L.R. 4001-2(a)(i)

• And may limit those to only FINAL orders

- 21 -


• ABI Commission Report [to be addressed later] recommends prohibiting liens on avoidance actions in favor of lenders.

• Lien on Avoidance Claims vs. Proceeds – Question is whether lender has standing to enforce lien and prosecute avoidance action (language in relevant sections of Code refers to "The Trustee may avoid . . ."

• Lien may therefore somewhat illusory in practice

• Accordingly, lenders may only seek lien in proceeds of avoidance actions

• Superpriority Claim – same effect?

• Or share with other § 503(b) claims?

- 22 -

V. Releases and Waivers of Challenges to

Liens and Other Future Borrowings

• Two issues here:

1. Challenge deadline and waiver.

2. Attempt to prohibit (by waiver of rights) any future borrowings or cash collateral use that may be inconsistent with DIP orders.

CHALLENGE DEADLINE

• Lender may request that debtor waive any challenges to pre-petition liens.

• "The Dive"

• Debtor stipulates to enforceability, validity, and perfection of lenders' pre-petition claims and liens

- 23 -

Releases and Waivers of Challenges to Liens and Other

Future Borrowings

• Of course, while debtor (a) is party to the pre-petition loan agreements and therefore is familiar with them, and (b) has the benefit of time prior to filing petition to review documents, filings, perfection, and the like, the other constituents in the bankruptcy case will not have had that opportunity prior to interim hearing, or probably by final hearing.

• Accordingly, courts have required, and practice has developed, of providing for a specified investigation period and a "challenge deadline" for the committee or other parties in interest to raise any disputes, defenses, or other challenges to the validity, enforceability or perfection of pre-petition claims and liens.

- 24 -


Future Borrowings

• Challenge periods frequently governed by local rules or at least custom and practice

• Typically 60-90 days after final hearing, or at least 60 days after committee formation

• Very often, parties will agree thereafter to extend the deadline, to avoid potentially costly and likely unnecessary litigation

• However, for lender, every effort should be made to narrow the issues if extending the challenge deadline:

• E.g., committee should have done initial investigation and if they have laundry list of possible issues, limit committee's ability to raise challenges to just those issues

• Noranda Aluminum example

- 25 -


Future Borrowings

• Significant reasons for wanting challenge period and "blessing" of lenders' liens and claims sooner rather than later in the case:

➢ Lenders may be increasing exposure to debtor and are entitled to know if debtor or creditors are going to fight against underlying claims

➢ Lenders have credit bid rights and all parties must be able to know what precise liens and claims lenders hold to assess any credit bid and allow lenders to know extent of such credit bid rights

➢ Plan voting – lenders and other parties in interest benefit from understanding if claims and liens are valid

- 26 -


Future Borrowings

WAIVER OR LIMITATIONS ON FUTURE BORROWINGS

• Lender may ask debtor to waive right to seek to use cash collateral or to obtain other borrowings without Lender's consent

• Frequent caveat is that debtor may seek borrowings only if such borrowing will result in DIP loan being paid in full

• If not an outright waiver, frequently built in to the default provisions

• Courts may be cautious or reluctant to approve such waivers at interim hearing, because other parties have not had sufficient notice or opportunity for hearing

- 27 -

VI. Section 506(c) Waivers

• Section 506(c) of the Bankruptcy Code allows the trustee to recover the "reasonable, necessary costs and expenses of preserving, or disposing of" property that constitutes a secured creditor's collateral, "to the extent of any benefit to the holder of such claim, including payment of all ad valorem taxes with respect to the property."

• The US Supreme Court has held that this section only allows the trustee (and, by extension, the debtor in possession) to exercise this surcharge remedy, and not individual administrative claimants. See Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 120 S.Ct. 1942, 147 L.Ed.2d 1 (2000).

- 28 -

Section 506(c) Waivers

• Accordingly, unlike preservation of lien challenge rights for committee or other constituents, this statutory right cannot be preserved for others, and so court may be reluctant to allow debtor to give it up without notice to creditors and opportunity to be heard.

• Many courts and parties have satisfied this concern by providing in DIP orders that the §506(c) waiver of the right to surcharge the lender's collateral may only be effective upon entry of the final order.

• Some lenders also provide that any surcharge against lender's collateral will constitute an event of default under the DIP loan.

- 29 -

.

Section 506(c) Waivers

• Some local rules (e.g., Del. Bankr. L.R. 4001-2(b)) prohibit the approval of §506(c) waivers in interim financing orders.

• Lender's argument for waiver:

• DIP financing provides for payment of all anticipated administrative expenses in accordance with budget prepared by the debtor and so the DIP lender's collateral already is being used to fund the case.

• Allowing surcharge would negate carefully crafted and negotiated borrowing base formulas and other collateral protections in the credit facility.

• Further, if lender has superpriority claim, arguably any monies recovered by a surcharge would be paid directly back to lender, rendering the surcharge pointless.

- 30 -

.

VII. Carve-Out Issues

- 31 -

• In re Molycorp Inc., Case No. 15-11357-CSS, Doc. No. 2096 (Bankr. D. Del. Jan. 5, 2017)

• Does a committee "investigation cap" in carve-out provision in DIP Order act as a cap to disallow fees in excess?

• Committee and Lender agreed to settlement that was incorporated into plan of reorganization

• Committee's fees exceeded cap

• Bankruptcy Court allowed fee application, and issue was whether the fees could be paid at all

• Or, was carve-out merely a limitation on the amount of Lender's collateral that could be used to pay fees?

VII. Carve-Out Issues

- 32 -

• In re Molycorp Inc. (cont/)

• Court held that DIP order provision was not absolute cap.

• Holding created interesting tension because, as we know, the Bankruptcy Code (Sec. 1129) requires all administrative expenses to be paid in order to confirm a plan of reorganization.

• If carve-out is truly intended to be an absolute cap, the language must be explicit.

Thank You

Eric W. Anderson

Parker Hudson Rainer & Dobbs LLP

303 Peachtree Street NE

Suite 3600

Atlanta, GA 30308

404.420.4331

[email protected]

4550023.1

- 33 -

.

© 2016 Blank Rome LLP. All rights reserved.

Junior DIP Financing, “Carve-Out” for Professional Fees & ABI Commission Recommendations for Reforms Impacting DIP Financing

▪Steven B. Smith, Esq.

34

“Carve-Out” for Professional Fees

35

▪ "Carve out" is often used in cash collateral and DIPfinancing agreements, but it does not derive its substancefrom any particular section of the Bankruptcy Code.

▪ A “carve out” is an agreement between a secured lender,on the one hand, and the trustee or debtor in possession,on the other, providing that a portion of the securedcreditor's collateral may be used to pay administrativeexpenses.

▪ The agreement, which is subject to court approval, usuallylimits the nature, amount, and timing of expenses covered,often by reference to a budget.


36

▪ For example, the carve out in a DIP financing order may belimited to professional fees for the debtor, for thecommittee, and for a superseding trustee.

▪ The carve out may be limited to a maximum amount thatmay be paid to professionals in toto. Or the number maybe smaller but intended to apply only to unpaid accruedamounts after default.

▪ Until the event, the debtor may pay administrativeexpenses from its operating cash flow.


37

▪ A “carve-out” generally acts to protect the downside risk toestate professionals in the event a plan is not confirmedand the estate becomes insolvent.

▪ It is typically granted by a secured creditor in recognition ofits potential exposure to surcharge of its collateral underSection 506(c) of the Bankruptcy Code.

▪ Professionals must be mindful when agreeing to a cap onfees that the cap could result in them not beingcompensated for all work performed.

– See, Molycorp, discussed above.

▪ Careful drafting and close attention to the numbers,attachments to orders and language in agreements andorders is necessary on all sides.

“Carve-Out” for Professional Fees (In re Barnes Bay Development)

38

▪ Debtors filed chapter 11 on March 17, 2011.

▪ Shortly thereafter, the bankruptcy court granted stay relief toStarwood Capital Group, the prepetition secured and DIP lender,allowing Starwood to foreclose on the resort.

▪ Starwood prevailed at the public auction of substantially all ofthe Debtors’ assets with a credit bid of $165,000,000.

▪ In November 2011, Debtors moved to dismiss the cases. Atissue was the carve-out provided for in the final DIP order andDIP loan agreement which became relevant once the Debtors’plan fell apart, and the estate had no unencumbered assets topay professionals.


39

▪ The carve-out was structured to be an amount that was not toexceed the lesser of:

– A budget line item for professional fees incurred by the Debtors;and

– The accrued and unpaid fees of such professional fees as allowedpursuant to bankruptcy court compensation orders (in each caseprior to an event of default or termination date).

▪ In a motion to determine the carve-out, counsel for the debtorsand the creditors’ committee argued that the total fees payableshould be the sum of interim fees paid plus the lesser of eitherthe budgeted amount and any amounts that were allowed inaddition.


40

▪ They argued that the $6.3 million budget line item contained inthe cash disbursement budget was not the number to look atbecause “budget” was undefined.

▪ The schedule attached to the final DIP order was just a feeaccrual schedule.

▪ The law firms also argued that the total fees payable was $10million and of that number, $4 million had accrued. $4 millionwas the lesser of the two numbers and therefore the amountremaining to be paid.

▪ Starwood argued that the carve-out in the final DIP ordercapped estate professionals’ fees at $6.3 million, of which morethan $6 million had already been paid.


41

▪ All parties agreed that the final DIP order was unambiguous.

▪ The bankruptcy court allowed the fees of the law firms in full,but denied the related motion to enter an order determining thescope of the carve-out in their favor.

▪ In doing so, Judge Walsh found that the carve-out was effectivein capping the additional fees to paid to only roughly $28,000,rather than the $3 - 4 million that the law firms requested.

▪ On appeal, the District Court agreed with the Bankruptcy Court’sreading of the final DIP order, finding that the budgeted amountfor professional fees was clearly $6.3 million.

▪ Contra, In re Molycorp – the Barnes Bay courts construed DIPorder provisions as fee cap, not just subordination limit

“Carve-Out” for Professional Fees (In re Motor Coach, 08-12136)

42

▪ The creditors’ committee argued that the proposed carve-out for committee professionals deprived the committee ofadequate funding.

▪ Committee professionals were offered a total of$150,000/mo. The financial advisor’s fee alone was$150,000/mo. leaving no cash to pay for committeecounsel or other professional fees.

▪ By contrast, the debtors and the prepetition lenders werebudgeted close to $2.3 million.


43

▪ Here’s what Judge Brendan Shannon had to say regardingthe carve-out objection:

– “Let me ask you a question: What do I do with that? I’ve run intothis in every case … but what I’ve said in other cases is I’m at a loss… I guess all I have is a big hammer to say I’m not going to approvethis financing.”

– “I say at the outset of these cases that … there’s always a plugnumber in there for the committee, and that I regard it as nothingmore than a plug number, that you’re going to have thatdiscussion.”

– “My point is simply to say that to extent that at the outset of a case,if a lender thinks they’ve got the wind at their back because … I’vesigned an interim order that’s got a $25,000 figure for a committee,I regard that as a plug number.


44

▪ Case points out a key tension in all sorts of issues in DIP financing:

▪ The court can only approve or disapprove the financing, but cannot (orat least usually will not) get in the middle of negotiations to dictate thebusiness terms of the financing.

▪ In this case, court was unwilling to set new carve-out budget, butrather announce that it was not comfortable with what was there andallowed parties to negotiate.

Junior DIP Financing

45

▪ A new trend has been the increased use of junior tranches inDIP financings.

– Loehmann’s Holdings

– Borders Group

– MPM Silicones

– Eastman Kodak

▪ The junior tranche is provided on a “first-in, last-out” basis.

▪ Allows the debtor to receive immediate access to the entirejunior line of credit.

▪ The debtor does not repay the junior loans until the seniortranche is paid in full.

▪ Inter-creditor agreements often contain prohibitions on juniorsecured creditors offering DIP financing without the consentof senior secured creditors.

ABI Commission Recommendations for Reforms Impacting DIP Financing

46

▪ Bankruptcy Code Section 364 is structured in part toincentivize lenders to extend credit to a company inbankruptcy.

▪ Currently, this section permits a debtor-in-possession toobtain DIP financing on either an unsecured basis or, afternotice and a hearing, in exchange for administrativepriority.

▪ In addition, a debtor may also be authorized to incur DIPfinancing as a superpriority administrative claim, a securedclaim in unencumbered property, a junior secured claim ora senior secured claim.


47

▪ The Commissioners analyzed a variety of issues relating toDIP financing, including:

– The impact of the terms of a DIP facility on the chapter 11 case andthe debtor’s stakeholders; and

– The importance of a robust financing market to the chapter 11process.

▪ Some Commissioners suggested that lenders do not needadditional incentives because DIP financing has historicallybeen not only safe, but profitable.

▪ Others challenged this assumption in light of the tighteningof the post-petition credit market during the 2008 financialcrisis.


48

▪ The Commissioners acknowledged that the focus ofSection 364 should be on permitting parties to negotiatemarket agreements that do not overreach or negativelythe rights of other stakeholders beyond the termsnecessary to obtain DIP financing.

▪ To strike this balance, the Commissioners evaluated thefollowing issues:

– Roll-ups

– Cross-collateralization

– Liens on Avoidance Actions

– Inter-creditor or Subordination Agreements


49

▪ Roll-Ups: The greatest opportunity for abuse in the contextof roll-up provisions occurs when a prepetition lenderprovides a post-petition facility and the true “new credit”extended by such facility may be nominal.

▪ The Commission crafted the related principles to allow roll-up provisions in those circumstances if certain conditionsare met, but to disallow provisions that provide little or novalue to the estate.


50

▪ Cross-Collateralization: The Commissioners discussed itsuses and the split in the case law regarding itspermissibility.

▪ Some of the Commissioners viewed this provision assubject to greater abuse because of the ability ofprepetition lenders to improve their prepetition positionthrough the use of cross-collateralization in DIP facilities.

▪ The Commission ultimately supported the ability of adebtor in possession to use cross-collateralization, but (i)only in the adequate protection context, and (ii) only to theextent such cross-collateralization is used if there is actualdiminution in the value of a secured creditors’ interest inthe debtor’s property.


51

▪ Liens on Avoidance Actions: The Commission determinedthat the debtor in possession should not be permitted touse chapter 5 avoidance actions or the proceeds thereof tosecure DIP financing under Section 364.

▪ In the adequate protection context, Section 507(b) grantsprepetition lenders a superpriority claim in situations whenthey have sought adequate protection, and adequateprotection has failed.

▪ Prepetition Inter-creditor/Subordination Agreements: TheCommissioners evaluated the impact of provisions in aninter-creditor/subordination agreement that precludes aprepetition junior lender from offering financing withoutthe senior lender’s consent.


52

▪ This kind of waiver can have a significant negative impacton the debtor, who is often not a party to the agreement.

– Among other things, this waiver often removes an interested andviable source of financing, which may affect both the availabilityand terms of any DIP financing.

▪ The Commission reached a consensus that would allow asubordinated junior secured lender subject to this kind ofwaiver and prohibition to provide DIP financing to thedebtor on two conditions:

– The proposed facility does not prime the existing senior liens

– The prepetition senior secured lender has the right to step in andprovide financing on the same terms and subject to the sameconditions.


53

▪ This kind of waiver can have a significant negative impacton the debtor, who is often not a party to the agreement.

– Among other things, this waiver often removes n interested andviable source of financing, which may affect both the availabilityand terms of any DIP financing.

▪ The Commission reached a consensus that would allow asubordinated junior secured lender subject to this kind ofwaiver and prohibition to provide DIP financing to thedebtor on two conditions:

– The proposed facility does not prime the existing senior liens

– The prepetition senior secured lender has the right to step in andprovide financing on the same terms and subject to the sameconditions.


54

▪ In that event, the Commission supported an amendmentto the Bankruptcy Code rendering unenforceable anycontractual damages provisions that would otherwiseallow senior secured creditors to recover damages forbreach of contract.

▪ The Commission also agreed that the senior securedlenders should be required to take such action within areasonable time as directed by the court in the interim DIPorder.


55

▪ This proposal may result in generally lower costs and betterterms for DIP financing, as debtors benefit from the increasedpool of potential lenders.

▪ However, troubled companies’ pre-petition financing maybecome more expensive, as lenders price in the increaseduncertainty.

▪ Concerns also exist about how the recommendation would workin practice, as senior lenders willing to meet (or beat) juniorlender economic terms may struggle with whether it is possiblefor them to either step into the junior lenders’ papers andaccompanying noneconomic terms, or agree on new finaldocumentation in a workable timeframe.


56

▪ Timing of Approval of Certain DIP Financing Provisions:

▪ The Commissioners discussed the potential impact ofterms that dictate or attempt to influence the course ofthe chapter 11 case, or that implement waivers of, orotherwise affect, rights under the Bankruptcy Code. Suchterms include:

– Milestones and benchmarks

– Concessions regarding the validity/enforceability of prepetition liens

– Deadlines by which the debtor must conduct an auction, close asale, or file a disclosure statement and plan

– Waivers of, or stipulations concerning, the Section 506(c) surchargeand the Section 552(b) equities of the case exception.


57

▪ The Commission discussed ways to provide more effectivenotice of these kinds of provisions to the unsecuredcreditors’ committee and other parties and highlighted theneed to provide these parties with sufficient time to reviewand vet such provisions.

▪ The Commission determined that such extraordinaryprovisions should be highlighted and clearly explained inthe motion seeking approval of the financing.

▪ The Commission also agreed that (i) such provisions shouldnot be subject to approval in an interim order, and (ii)milestones and benchmarks should not be permitted totake effect until at least 60 days after the petition date.


58

▪ The Commission’s suggestion is intended to createbreathing room for the debtor and other stakeholders atthe beginning of a Chapter 11 case.

▪ The common practice of splitting approval of DIP financinginto interim orders and final orders has, to some degree,limited the opportunity for debtors and other stakeholdersto consider and challenge certain conditions often found inthe documentation and enabling orders for DIP financing.

▪ However, these extraordinary financing provisions areoften integral to DIP financing packages, and limiting thebankruptcy court’s discretion to approve these provisionsin interim orders, may cut some debtors off from post-petition financing during the period when it is most criticalto their survival.

Faculty

59

Steven B. Smith

(212) 885-5162

[email protected]

Special thanks to Evan Zucker, Esq. of Blank Rome for assisting in the preparation of the materials.

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