FINANCING COMPANIES IN CHAP 11

How to do it, How to Profit from it

David Poitras

©2009 Jeffer Mangels Butler & Marmaro LLP. All rights reserved
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 The Players

Lende
r Unsecure
d
Creditor

Debtor
3
 Preliminary Considerations

Cash Collateral

or

Debtor in
Possession
(DIP) Financing
4
 Preliminary Considerations: Factors to Consider

• Cash Flow/Needs
– Can the debtor survive on cash and receivables?
• Seasonality
• Timing/Collectability of Receivables
• Collateral Base/Equity Cushion
• Valuation
• Loan Terms
• Availability of Financing
• Loan to Own

5
 Sources of DIP Financing

• Existing Lender(s)
• Commercial Banks
• Private Lenders – Equity Players
– Strategic Buyers – Hedge
Funds
• Contacts through Investment
Bankers, Financial Advisors &
Turnaround Managers

6
 Forms of DIP Financing

• Rollover
• Rollup
• Takeout
• Syndication
• Mezzanine

7
 Negotiating the DIP Loans
(Usually done Pre-petition)

• Lien Priority/Collateral
Package
• Loan Fees
• Interest Rate
• Loan Amount
• Term
• Carve-Outs

8
 Negotiating the DIP Loans
(Usually done Pre-petition)

• Projections
• Prohibited Uses
• Events of Default
• Releases, Waivers and
Admissions
• Cross-collateralization

9
Obtaining Court Approval for DIP Loan

• Emergency Motion to Approve DIP Loan

• Legal and Factual Issues to be Addressed in
Motion:

1. Showing Required
- FRBP 4001
- 11 U.S.C. Section 363 (cash collateral)
- 11 U.S.C. Section 364 (financing)

10
 Obtaining Court Approval for the DIP Loan
Legal and Factual Issues to be Addressed in Motion

2. Cash Flow Projections

- Variance - Priority
- Detail - Payments to Insiders
- Assumptions - Professional Fees
- Critical Vendor - U.S. Trustee Fees

11
 Obtaining Court Approval for the DIP Loan
Legal and Factual Issues to be Addressed in Motion

3. Adequate Protection

• Increases or Decrease in
Collateral Position
• Cross-collateralization
• Value for Unsecured
Creditors
• Prepetition Rollup
• Valuation Issues (liquid
growing concern,
intangibles)
12
Obtaining Court Approval for DIP Loan

• Negotiating with
Unsecured Creditors
and/or Committee
• Setting the Emergency
Hearing on the Motion
• Final Hearing on
Motion

13
 Potentially Objectionable or Controversial Terms
in DIP Loan Agreement

• Cross-collateralization
• Findings of fact or recitals that bind the
bankruptcy estate or all parties in interest
with respect to the validity, perfection or
amount of the DIP lender’s lien or debt

14
 Potentially Objectionable or Controversial Terms
in DIP Loan Agreement

• Findings of fact or recitals that bind the

estate or all parties in interest with respect to
the relative priorities of the DIP lenders lien
and liens held by parties who are not parties
to the DIP loan agreement, or which create a
lien senior or equal to any exiting lien
• Waivers of 11 U.S.C. 11 Section 506(3),
unless the waiver is effective only during the
period in which the debtor is authorized to
borrow funds

15
 Potentially Objectionable or Controversial Terms
in DIP Loan Agreement

• Provisions that operate, as a practical matter,

to divest the debtor of any discretion in the
formulation of a plan or administration of the
estate or to limit access to the court to seek
any relief under other application provision of
law
• Releases of liability for lender’s alleged pre-
petition torts of breaches of contract
• Waivers of avoidance actions under the
Bankruptcy Code

16
 Potentially Objectionable or Controversial Terms
in DIP Loan Agreement

• Automatic relief from the automatic stay

upon default, conversion to Chapter 7, or
appointment of Chapter 11 trustee
• Liens on avoidance actions
• Waivers, effective on default or expiration,
of the debtor’s right to move for a court
order to obtain the use of cash collateral or
other financing

17
 Questions

David M. Poitras
Jeffer Mangels Butler & Marmaro LLP
1900 Avenue of Stars,7th Floor
Los Angeles, CA 90067
(310) 201-3571
DPoitras@JMBM.com

18 ©2009 Jeffer Mangels Butler & Marmaro LLP. All rights reserved.