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Negotiating and Drafting Cash Collateral/DIP Financing Orders

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Negotiating and Drafting Cash Collateral/DIP Financing Orders

Every company needs access to cash to fund its operations. Companies in bankruptcy are no different. But how should a company planning to enter bankruptcy approach this issue if all of its cash is tied up by a secured lender? What will a bankruptcy judge say when the company asks her permission to use cash on terms presented by its lender? How should lenders, debtors, and creditors approach negotiations over the terms of a cash collateral order or debtor-in-possession (DIP) financing agreement? For 2022, professionals must also understand the impact that the economic programs enacted under the CARES Act may have on the use of cash by a commercial debtor during its case. This webinar focuses on answering these questions for advanced business reorganization practitioners and advisors from the perspective of all parties to a negotiation, as well as addressing best practices in drafting, negotiating, and presenting cash collateral and DIP financing orders in complex reorganization proceedings.

Part of the webinar series: BANKRUPTCY TRANSACTIONS - 301: ADVICE FOR THE ADVANCED PRACTITIONER 2022

See more at https://www.financialpoise.com/webinars/

Every company needs access to cash to fund its operations. Companies in bankruptcy are no different. But how should a company planning to enter bankruptcy approach this issue if all of its cash is tied up by a secured lender? What will a bankruptcy judge say when the company asks her permission to use cash on terms presented by its lender? How should lenders, debtors, and creditors approach negotiations over the terms of a cash collateral order or debtor-in-possession (DIP) financing agreement? For 2022, professionals must also understand the impact that the economic programs enacted under the CARES Act may have on the use of cash by a commercial debtor during its case. This webinar focuses on answering these questions for advanced business reorganization practitioners and advisors from the perspective of all parties to a negotiation, as well as addressing best practices in drafting, negotiating, and presenting cash collateral and DIP financing orders in complex reorganization proceedings.

Part of the webinar series: BANKRUPTCY TRANSACTIONS - 301: ADVICE FOR THE ADVANCED PRACTITIONER 2022

See more at https://www.financialpoise.com/webinars/

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Negotiating and Drafting Cash Collateral/DIP Financing Orders

  1. 1. 2 Practical and entertaining education for attorneys, accountants, business owners and executives, and investors.
  2. 2. 3 Thank You To Our Sponsors:
  3. 3. Disclaimer The material in this webinar is for informational purposes only. It should not be considered legal, financial or other professional advice. You should consult with an attorney or other appropriate professional to determine what may be best for your individual needs. While Financial Poise™ takes reasonable steps to ensure that information it publishes is accurate, Financial Poise™ makes no guaranty in this regard. 4
  4. 4. Meet the Faculty MODERATOR: Mark Melickian - Sugar Felsenthal Grais & Helsinger LLP PANELISTS: Matthew Christensen - Angstman Johnson Benjamin M. Rhode - Ropes & Gray LLP Robert E. Richards- Denton’s 5
  5. 5. About This Webinar – Negotiating and Drafting Cash Collateral/DIP Financing Orders Every company needs access to cash to fund its operations. Companies in bankruptcy are no different. But how should a company planning to enter bankruptcy approach this issue if all of its cash is tied up by a secured lender? What will a bankruptcy judge say when the company asks her permission to use cash on terms presented by its lender? How should lenders, debtors, and creditors approach negotiations over the terms of a cash collateral order or debtor-in-possession (DIP) financing agreement? For 2021, professionals must also understand the impact that the economic programs enacted under the CARES Act may have on the use of cash by a commercial debtor during its case. This webinar focuses on answering these questions for advanced business reorganization practitioners and advisors from the perspective of all parties to a negotiation, as well as addressing best practices in drafting, negotiating, and presenting cash collateral and DIP financing orders in complex reorganization proceedings. 6
  6. 6. About This Series – Bankruptcy Transactions: Advice for the Advanced Practitioner Corporate transactions are fraught with complicated legal, business, and financial issues. And transactions in the context of a bankruptcy proceeding often adds a further layer of complexity. Whether representing an asset purchaser seeking to acquire assets “free and clear” of liens and encumbrances; trading claims against a bankrupt company; or negotiating and drafting orders governing the use of a bankruptcy company’s cash, businesses and their advisors must have a robust understanding of the issues they face. This series provides tools for business owners and their advisors to navigate through the landscape of bankruptcy transactions, demystify esoteric concepts, and discuss best practices for advanced professionals working on these matters. Each Financial Poise Webinar is delivered in Plain English, understandable to investors, business owners, and executives without much background in these areas, yet is of primary value to attorneys, accountants, and other seasoned professionals. Each episode brings you into engaging, sometimes humorous, conversations designed to entertain as it teaches. Each episode in the series is designed to be viewed independently of the other episodes so that participants will enhance their knowledge of this area whether they attend one, some, or all episodes. 7
  7. 7. Episodes in this Series #1: Representing Asset Purchasers in Bankruptcy Premiere date: 2/8/22 #2: Bankruptcy Claims Trading Premiere date: 3/8/22 #3: Negotiating and Drafting Cash Collateral/DIP Financing Orders Premiere date: 4/5/22 8
  8. 8. Episode #3 Negotiating and Drafting Cash Collateral/DIP Financing Orders 9
  9. 9. Fundamentals: Debtor in Possession • Debtor in possession = debtor remaining in control of entity while serving the role of trustee • Debtor in possession responsibilities: ✓ § 1107(a) – debtor in possession shall have all the rights, powers, and shall perform all the functions and duties of a trustee serving in a case. ✓ § 363(c) – The trustee may not use, sell or lease cash collateral unless o (c)(1) Each entity that has an interest in such cash collateral consents; or o (c)(2) The court, after notice and a hearing, authorizes such use, sale, or lease o Note: A consent agreement that the court has not approved and was not given the opportunity to approve may be unenforceable. See In re J.L.Graphics, Inc., 62 B.R. 750 (Bankr. D. N.H. 1986) 10
  10. 10. Fundamentals: § 363(a) - Cash Collateral • 11 U.S.C.A. § 363(a) defines cash collateral as: ✓ “Cash, negotiable instruments, documents of title, securities, deposit accounts, or other cash equivalents whenever acquired in which the estate AND an entity other than the estate have an interest and includes the proceeds, products, offspring, rents, or profits of property and the fees, charges, accounts or other payments for the use or occupancy of rooms and other public facilities in hotels, motels, or other lodging properties subject to a security interest as provided in section 552(b) of this title, whether existing BEFORE OR AFTER the commencement of a case under this title.” 11
  11. 11. Fundamentals: § 363(a) - Cash Collateral • Examples of typical forms of cash collateral ✓ Rents and profits of income producing property ✓ Proceeds of prepetition contracts ✓ Proceeds of accounts receivable ✓ Proceeds from the disposition of inventory ✓ Etc. 12
  12. 12. Fundamentals: Cash Collateral Categories • Soft Collateral ✓ Collateral consumed in the operation of the debtor’s business • Hard Collateral ✓ Not used up, but may depreciate such as buildings, machinery, etc. 13
  13. 13. Fundamentals: § 363(e) - Adequate Protection • Upon appropriate request, A secured creditor has the right to “adequate protection” of its collateral ✓ Secured Creditor is entitled to have the value of its collateral maintained at all times, and it can obtain relief from the automatic stay and take back its collateral at any time if that interest is not adequately protected 14
  14. 14. Fundamentals: § 363(e) - Adequate Protection • § 361 Examples of Adequate Protection Options ✓ Periodic cash payments equivalent to decrease in value of collateral ✓ Replacement lien ✓ Other relief that provides “indubitable equivalent” ✓ Equity Cushion o Equity cushion is not explicitly listed in § 361 but can come into play for hard collateral such as when the value of real estate is greater than the debt owed 15
  15. 15. Fundamentals: § 364 - Obtaining Credit - Hierarchy of Options • 364(a) Debtor is allowed to incur unsecured debt in the ordinary course of business • 364(b) Debtor may seek court approval for an unsecured loan other than in the ordinary course of the debtor’s business • 364(c)(1) with priority over any or all administrative expenses of the kind specified in section 503(b) or 507(b) of this title • 364(c) Debtor may obtain a post-petition secured loan through liens on unencumbered property or junior liens on encumbered property • 364(d) If credit cannot be obtained on the above terms, debtor may seek approval with liens that prime pre-existing liens ✓ CRITICAL POINT: Priming liens are a last option, and it is debtor’s burden to prove that primed lenders are adequately protected 16
  16. 16. Summary So Far • Debtor in possession is generally authorized to operate business (§ 1108), however, obtaining the funds necessary to continue operations is often challenging given the debtors strained financial relationships • Practicality ✓ Obtaining nonconsensual use of cash collateral approval will likely involve considerable time and money the debtors does not have ✓ Debtor is unlikely to find: o a lender willing to risk extending an unsecured loan under 364(a) or (b), o a lender willing to accept junior liens under 364(c)(3) ✓ Additionally, the debtor likely does not have unencumbered property available for secured loan under 364(c)(2) 17
  17. 17. Summary So Far • More realistic options for obtaining operational funds ✓ Use of cash collateral agreement under § 363(c) ✓ Debtor in possession (DIP) financing under o § 364(c)(1) – Super-super priority o § 364(d) – Priming lien 18
  18. 18. Perspectives and Leverage • Debtor has minimal leverage as prolonged delay or failure to procure operational funds will likely extinguish the opportunity for a successful reorganization • Secured creditors have high leverage because their cooperation is paramount to the debtor’s successful reorganization • BIG PICTURE: Creditors generally benefit more from a quick and successful reorganization than a contentious attempted reorganization that ends in liquidation ✓ This incentivizes existing creditors to facilitate the debtor’s continuing operation, particularly if they can offset some existing risk by improving the priority of their prepetition claims* 19
  19. 19. Term Restrictions • Given the leverage disparity between the debtor and creditors, Amended Bankruptcy Rule 4001 provides procedural mechanisms to protect debtors (notice and hearing requirements), additionally many courts have adopted local rules to supplement these protections and prevent the use of “extraordinary provisions” • The following slides will discuss some common terms that appear on cash collateral agreements and DIP financing agreements 20
  20. 20. Term 1: Sufficient Adequate Protection • In any Cash Collateral Agreement, a secured creditor’s primary objective is to ensure they will receive sufficient adequate protection • Sufficiency is determined by the valuation of collateral • Again, AP can be achieved through additional liens on collateral, periodic cash payments, or other methods 21
  21. 21. Valuation Theory • 11 U.S.C.A. § 506(a) – Valuation of collateral is to be conducted in light of the purpose of the valuation and the proposed disposition or use of the collateral • Valuation factors (In re Martin (8th Circuit)) ✓ Extent of secured creditor’s interest in cash collateral ✓ Extent that secured creditor’s interest will be adversely affected by debtor’s use of Cash Collateral ✓ Methods available for secured creditor’s interest to be adequately protected 22
  22. 22. Proof of Interest • Creditors have the burden of proving validity, priority, and extent of their interest in property • Undervaluation of interest is a substantial concern for secured creditors ✓ To supply a basis for interest secured creditors will offer into evidence: o security agreements o financing statements o mortgages o any other documents relevant to interests 23
  23. 23. Term 2: Budget and Access • A provision requiring the debtor to provide certain reporting to the lender and further allowing the lender to have access to the books, records and premises of the debtor for the purpose of monitoring its collateral • CREDITOR PERSPECTIVE: Wants transparency to ensure proper management • DEBTOR PERSPECTIVE: Wants to maintain autonomy and not have decisions second guessed 24
  24. 24. Term 3: “Dive” Provision • This type of provision will be sought by the lender to: ✓ Validate and ensure the enforceability of the lender’s prepetition liens ✓ Waive any potential future claims against the lender such as 506(c) surcharge claims • CREDITOR PERSPECTIVE: The lender wants to have certainty where it stands and avoid future liability 25
  25. 25. Term 3: “Dive” Provision • OTHER PERSPECTIVES: Blanket waivers or releases of claims and defenses may have unforeseen consequences that affect other creditors down the road potentially violating the DIP’s fiduciaries duties • Some courts have also taken issue with lien validity concessions ✓ “To adjudicate the validity, priority, or extent of a lien requires the commencement of an adversary proceeding.” In re Roblin Indus., Inc., 52 B.R. 241, 244 (Bankr. W.D.N.Y. 1985) 26
  26. 26. Term 4: Default and Acceleration • Withdrawal of consent to use cash collateral or termination of further financing, upon occurrence of a default, dismissal, or conversion to chapter 7 ✓ Some precedence exists allowing a default to initiate the lifting of the automatic stay if appropriate notice was given, but such extraordinary terms are unlikely to hold up today. See In re FCX, Inc., 54 B.R. 833, 843 (Bankr. E.D.N.C. 1985) • CREDITOR PERSPECTIVE: We don’t get fooled again! ✓ Meet the new boss, same as the old boss – The Who 27
  27. 27. Term 5: Survivability • The financing agreement and order shall continue to be binding and survive such events as the confirmation of a plan or reorganization, the dismissal of a case, the conversion of the case, or the filing of any subsequent case under the Bankruptcy Code. 28
  28. 28. Term 6: Cross-Collateralization • prepetition debt collateralized by postpetition collateral (roll up) as part of the price for making postpetition loans to the debtor-in-possession • CREDITOR PERSPECTIVE: Improving positioning in the priority scheme can be a huge difference in total recovery ✓ Argument: The Bankruptcy Court is empowered under 11 U.S.C.A. § 105(a) to issue orders that are necessary to accomplish the ultimate goal of the debtor's reorganization. 29
  29. 29. Term 6: Cross-Collateralization • OTHER PERSPECTIVES: Other creditors do not want to be jumped in priority position ✓ Argument: The Bankruptcy Code does not authorize cross-collateralization in the situation where the existing lender may be undersecured and therefore cross-collateralization violates the scheme of distribution by allowing a creditor to improve its position 30
  30. 30. Term 7: Prohibit Third Party Financing • Lender's lien shall not be subordinated, altered or affected by any subsequent financing 31
  31. 31. Term 8: Payment of Professionals • Address the treatment of professional fees and expenses of the debtor-in-possession and the official unsecured creditors' committee 32
  32. 32. Term 9: Insurance • Covenants from the debtor with regard to maintenance of insurance, the payment of taxes, the terms upon which collateral may be sold, and the collection of accounts receivable 33
  33. 33. Term 10: Exclusive Jurisdiction • Exclusive jurisdiction of the Bankruptcy Court over the parties and subject matter of their agreement 34
  34. 34. About the Faculty 35
  35. 35. About the Faculty Mark Melickian - mmelickian@sfgh.com Mark Melickian leads Sugar Felsenthal Grais & Helsinger LLP’s restructuring practice. Over the past 20 plus years, he has worked primarily on business transactional and litigation matters with a focus on chapter 11 commercial bankruptcy cases and non-bankruptcy distressed situations. His practice includes both debtor- and creditor-side representations and include financial institutions, indenture trustees, trade creditors, asset purchasers, investors, commercial real estate interests, corporate officers, and other parties in interest in chapter 11 cases throughout the country. In addition, a significant focus of his practice is the representation of committees and other estate fiduciaries in bankruptcy cases – over the past two decades, he has counseled dozens of official and unofficial bankruptcy committees, liquidating trustees, litigation trustees, and plan administrators charged with pursuing and liquidating assets for the benefit of estate creditors. Mark has written extensively on bankruptcy and insolvency law and other topics, having contributed materials on these subjects to American Bankruptcy Institute Journal, Bankruptcy Strategist, Wiley Bankruptcy Law Update, Ginsberg & Martin on Bankruptcy, Norton Bankruptcy Law Adviser, the Cornell University Legal Ethics Library, and dozens of professional conferences and seminars. For several years, he wrote a monthly legal affairs column for Student Lawyer, an America Bar Association publication, for which he received the Peter Lisagor Award for Exemplary Journalism from the Chicago chapter of the Society of Professional Journalists. He is a graduate of Colorado State University and Northwestern University School of Law. 36
  36. 36. About the Faculty Matthew Christensen - mtc@angstman.com Matt Christensen joined Angstman Johnson in 2008 as an associate attorney. Now a member of the firm, Matt has a civil litigation practice involving commercial law (finance and secured transactions), bankruptcy, real property, and business matters. He also has a transactional practice involving real estate, finance and business matters, including franchising. Matt frequently represents bankruptcy trustees and other fiduciaries in recovering assets and administering estates. Prior to joining the firm, Matt was a Junior Partner at a Meridian, Idaho, law firm and also established a solo practice. In addition to practicing law, Matt is an adjunct professor at the University of Idaho College of Law where he teaches international trade/business, real estate transactions and law practice management courses. Matt obtained his Bachelor of Arts in International Studies from Brigham Young University in 2002. He earned his J.D. and LL.M in International and Comparative Law degrees from Duke University School of Law in 2005. While at Duke, he was an Articles Editor for the Duke Journal of Gender Law & Policy. 37
  37. 37. About The Faculty Benjamin M. Rhode- Benjamin.Rhode@ropesgray.com Benjamin Rhode is a counsel in Ropes & Gray’s business restructuring group. Benjamin’s practice focuses on all aspects of corporate restructuring, bankruptcy and insolvency proceedings. Benjamin advises public and private companies, boards, financial sponsors and distressed investors in complex domestic and international distressed situations, including out-of-court liability management transactions, in-court chapter 11 proceedings and distressed acquisitions. Benjamin’s experience spans a broad range of industries, including automotive, retail, oil & gas, health care, communications, gaming and media & entertainment. 38
  38. 38. About The Faculty Robert Richards – robert.richards@dentons.com Bob Richards is chair of Dentons' Global and US Restructuring, Insolvency and Bankruptcy practice groups and practices in the areas of bankruptcy and insolvency-related transactions and litigation. His practice includes Chapter 11 representations, distressed asset acquisitions, distressed loan purchases and foreclosure sales, and out of court transactions and transaction structuring. 39
  39. 39. Questions or Comments? If you have any questions about this webinar that you did not get to ask during the live premiere, or if you are watching this webinar On Demand, please do not hesitate to email us at info@financialpoise.com with any questions or comments you may have. Please include the name of the webinar in your email and we will do our best to provide a timely response. IMPORTANT NOTE: The material in this presentation is for general educational purposes only. It has been prepared primarily for attorneys and accountants for use in the pursuit of their continuing legal education and continuing professional education. 40
  40. 40. Commercial Bankruptcy Litigation is a must-have resource for any non-bankruptcy attorney who is involved in a chapter 11 bankruptcy case. It is also a handy “take on the road” treatise for the experienced chapter 11 professional. This 2,000- plus page treatise, updated yearly, and with contributions from some of the country's most respected practitioners from top firms across the U.S., covers topics from general bankruptcy and procedure to appeals. Commercial Bankruptcy Litigation, 2d, 2022 ed. eBook available through Thomson and Reuters and Amazon
  41. 41. Strategic Alternatives For And Against Distressed Businesses, 2022 ed. Strategic Alternatives For And Against Distressed Businesses is one of a kind. It is the only resource that provides comprehensive state-by-state comparisons of assignments for the benefit of creditors and receiverships. This alone makes the book a must-have for every insolvency professional. “If you can only own one book about corporate restructuring and insolvency, there is a compelling case that this should be the one.” eBook available through Thomson and Reuters and Amazon
  42. 42. ABOUT DailyDAC DailyDAC.com is the leading source of information about assignments, article 9, bankruptcy, receiverships, out-of-court workouts and vulture investing, designed for business owners and vulture investors. Visit us at www.dailydac.com. Premium Public Notice Service DailyDAC’s Premium Public Notice Service helps market asset sales on behalf of fiduciaries (e.g., Chapter 11 debtors- in-possession and committees, trustees, receivers, assignees), secured lenders selling collateral under UCC Article 9, and auctioneers to a very large and self-selected group of potential bidders and their advisors. The Service also assists with noticing other events, deadlines, and milestones – including tombstones and other press releases. Our free weekly newsletter, DailyDAC contains our latest bankruptcy article, current Public Notices and all opportunistic deals added to our proprietary database that week. Sign up at: https://www.dailydac.com/dacyak-weekly-newsletter-signup/
  43. 43. About Financial Poise 45 DailyDAC LLC, d/b/a Financial Poise™ provides continuing education to attorneys, accountants, business owners and executives, and investors. It’s websites, webinars, and books provide Plain English, entertaining, explanations about legal, financial, and other subjects of interest to these audiences. Visit us at www.financialpoise.com Our free weekly newsletter, Financial Poise Weekly, updates you on new articles published on our website and Upcoming Webinars you may be interested in. To join our email list, please visit: https://www.financialpoise.com/subscribe/

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