Cloud 9fin The In-Court Report with Cat Corey — The latest on backstop fees in rights offerings and DIP financings
8 snips
Dec 9, 2025 Vince Buccola, a law professor at the University of Chicago specializing in financial distress, and Lara Sheikh, a bankruptcy legal analyst at 9fin, dive into the fascinating world of backstop fees in rights offerings and DIP financings. They dissect the implications of the ConvergeOne decision and reveal how backstop parties recover significantly more compared to non-participants. They also explore empirical research on backstop commitments, addressing valuation challenges and the surprising minimal risk faced by most backstops. It's an insightful session filled with vital trends and legal nuances!
AI Snips
Chapters
Transcript
Episode notes
Backstops Are Economically Put Options
- Backstop commitments function economically like selling a put option to the debtor, so their value depends on strike price, expected security value, duration, and volatility.
- Buccola's study found backstops often transfer outsized value to insiders relative to risk taken, suggesting economic mispricing.
Backstops Deliver Large Fees With Low Losses
- In a 49-case sample (19 with post-confirmation marks), backstop parties rarely faced losses; only one case showed equity worth less than the strike.
- Median backstop compensation equaled 15.5% of capital raised and often delivered materially higher per-dollar recoveries to insiders.
ConvergeOne: Equal Treatment Required For Backstops
- ConvergeOne's district court reversed confirmation because exclusive backstop rights to majority lenders violated Section 1123(a)(4)'s equal-treatment requirement.
- The court emphasized lack of market testing and that excluded lenders received substantially worse recoveries.