Exit Financing in Chapter 11 Bankruptcy: Debt, Equity and Combination Structures

Description

Exit financing is one of the keys to success for any plan of reorganization, providing liquidity for required distributions, refinancing existing indebtedness, and providing funds necessary to support the post-emergence business plan. Exit financing has become increasingly complex and can involve the issuance of debt or equity, or both.

The purest form of exit financing is secured or unsecured debt entered into with one or more lending institutions. The terms and conditions are not much different than those of a traditional credit facility outside of bankruptcy. However, there are some unique considerations, such as the importance of material adverse change clauses.

Debtors can now avail themselves of the high yield markets to support their plans, but high yield financing will require an escrow arrangement approved by the court. To appease lender concerns, the order must confirm that the issuer will be the reorganized company (vs. the pre-confirmation debtor); that the proceeds of the financing are not part of the bankruptcy estate; and the escrow entity will not be consolidated with the debtor until the effective date of the plan.

A debtor can also raise financing through the issuance of equity in the reorganized debtor. Where a current shareholder of the debtor wants to make a new investment in exchange for equity in the reorganized debtor, the arrangement must meet rigid requirements for a new value plan. A rights offering may offer a viable alternative, giving existing creditors the ability to protect their original investment while avoiding the issues arising under a new value plan.

Listen as our authoritative panel discusses these and other nuances of debt and equity exit financing strategies. The panel will discuss the pros and cons of various types of debt and equity financing, and the critical procedural considerations associated with each.