The recommended reading this time is not an article but a pleading in a bankruptcy case. The official committee of unsecured creditors (the “Committee”) appointed in the Kids Brands case (In re Kid Brands, Inc., Case No. 14-22582 (Bankr. D. N.J.) objected to financing for which the large corporate debtor seeks approval from the Court. Why the objection? Because (a) no new financing is needed (debtor is cash flowing), (b) the proposed financing deprives unsecured creditors of access to possibly valuable assets by giving the lender security interests in them, (c) the proposed financing provides very little new money after it pays off the lender’s old claim while paying the lender exorbitant fees, (d) the debtor is sure to default under the proposed financing given the impossible benchmarks it sets for progress to a sale of the debtor’s assets, and (e) the proposed financing provides nothing and leaves nothing for administration of the case (for the benefit of unsecured creditors) after the lender gets paid.
At best, unsecured creditors get what’s left over after provision is made for full payment of secured claims, and for payment in full of administrative claims and priority unsecured claims. Often a large corporate debtor’s need for cash during the case requires that a “DIP lender” lend the debtor new cash under a “DIP loan.” Making DIP loans is good business, given various protections DIP lenders can get. Also, as in Kids Brands, a debtor’s pre-bankruptcy lender is in the driver’s seat when it comes to becoming a DIP lender. Often, the DIP lender’s leverage is very strong, and who can blame a lender in that position for seeking large termination fees (for payoff of a pre-bankruptcy indebtedness) and large DIP loan fees (for entry into the DIP loan) and for requiring additional collateral to secure the DIP loan – even if the DIP Loan is not substantially more in amount that the indebtedness it pays off?
A creditors committee can certainly blame such a lender, and the Committee did so in Kids Brands. The Committee objection (pdf link below) describes a scenario in which a failure to object could cost unsecured creditors any hope of recovery. Thus unsecured creditors – who individually lack the cash interest or ability to monitor the DIP lending terms as carefully – might get their money’s worth from a vigilant committee.
The editors and editorial board of DailyDAC include preeminent restructuring and insolvency professionals, journalists, and editors. They are devoted to providing reliable and plain English education and deal intelligence about assignments, corporate bankruptcy, receiverships, out-of-court workouts an similar topics.
When Your Customer Files for Bankruptcy
When Your Borrower Files for Bankruptcy (DIP Financing, Cash Collateral, and Adequate Protection)
Dealing With Distress for Fun & Profit – Installment #17 – Overview of DIP Financing and Cash Collateral Motions
Six Common Mistakes in Drafting Collateral Descriptions
Dealing With Distress For Fun & Profit – Installment #5 – A Peek Into Some Basic Chapter 11 Concepts
90 Second Lesson: What is a “UCC Article 9” Sale?
Our weekly newsletter, sent every Tuesday at 9am, includes: