DIP financing, creditor-on-creditor violence, and other restructuring trends with King & Spalding’s Michael Handler

Litigious Issues in Inter-Creditor Squabbles and Dip Financing

This podcast episode delves into the different litigious issues surrounding inter-creditor squabbles and dip financing. Various topics are discussed, including adequate protection, priming lenders, backstop fees, collusion between majority lenders, and collateral stripping. The conversation highlights the willingness of minority lenders to take financial risks to protect their rights and examines the strategic incentives for borrowers and sponsors in structuring these transactions. The importance of equal treatment and the potential violation of credit agreements and bankruptcy provisions are also explored.

The Impact of Backstop Fees and Financing Mechanisms

The podcast addresses concerns about backstop fees and their potential to impair the rights of disenfranchised lenders. It explains that backstop fees can be viewed as more than just compensation for assuming additional risk, but rather as a means for majority lender groups to exert control over required lenders or bankruptcy classes. The discussion highlights the need for clearer regulations and mechanisms to ensure that backstop fees are properly aligned with the actual risk faced by lenders. The importance of fair pricing and a level playing field for all participating lenders is emphasized.

Priming Financing and the Scrutiny on Non-Consensual Transactions

The podcast explores the challenges and scrutiny surrounding priming financing, especially in cases where it is non-consensual. It discusses the reluctance of debtors to accept non-consensual priming financing, with a focus on the importance of a confirmable plan and the avoidance of protracted fights over adequate protection. The higher scrutiny placed on transactions involving insiders is also highlighted, with a closer examination of the entire fairness standard. The definition of insiders under the bankruptcy code is explained to provide context for understanding the scrutiny applied to these transactions.

The Erosion of Collateral Rights and Potential Increase in Chapter 11 Filings

The podcast concludes with a discussion on the erosion of collateral rights in the credit markets and the potential increase in Chapter 11 filings. It mentions the various mechanisms and loopholes used to erode these rights, such as leakage transactions and priming financing, which can impact the recovery of minority lenders. The need for clearer provisions in loan agreements and bond indentures to protect against these erosion tactics is highlighted. Additionally, the impact of multiple pressure points, such as inflation, supply chain issues, and increasing interest rates, on the likelihood of increased Chapter 11 filings is examined.

Debtwired!

DIP financing, creditor-on-creditor violence, and other restructuring trends with King & Spalding’s Michael Handler

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Quick takeaways

Deep dives

Litigious Issues in Inter-Creditor Squabbles and Dip Financing

The Impact of Backstop Fees and Financing Mechanisms

Priming Financing and the Scrutiny on Non-Consensual Transactions

The Erosion of Collateral Rights and Potential Increase in Chapter 11 Filings

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