United States: Introducing The Parties To A DIP Financing

Last Updated: July 3 2013
Article by Kristin C. Wigness

Inherent in any debtor-in-possession financing is more complexity than a simple loan from a lender to a borrower. Numerous parties may be involved, each with different roles and interests.

BORROWER/DEBTOR

The borrower under a DIP loan is typically a "debtor-in-possession" under Chapter 11 of the Bankruptcy Code, unless the bankruptcy court has appointed a trustee to oversee the administration of the debtor's assets. 11 U.S.C. § 1101(1). However, even in the case of a trustee appointment, the named borrower under the loan documents technically will remain a debtor entity (even though such entity shall be under the control and direction of the trustee). It should be noted that, notwithstanding 11 U.S.C. § 1501 et al., only a person that resides or has a domicile, a place of business, or property in the United States, or a municipality, may be a debtor under title 11. 11 U.S.C. § 109(a).

Absent compliance with foreign laws and proper filings with foreign agencies governing liens, a DIP lender most likely cannot obtain an effective lien with respect to cash residing outside of the United States (e.g., cash residing within a foreign subsidiary of a domestic debtor). Further, a bankruptcy court's jurisdiction does not extend to foreign territories. Thus, to the extent that the debtor is the parent of foreign subsidiaries, has foreign sister entities, or maintains non-U.S.-based accounts, the DIP credit agreement may include covenants limiting cash disbursements to, and maintained within, foreign entities/foreign jurisdictions.

Guarantors

In accordance with standard market practice, each of the debtor's direct and indirect subsidiaries typically will guaranty the debtor's obligations under the DIP loan (though the lenders may excuse the debtor's foreign subsidiaries from executing such guaranty to the extent that such execution would result in material incremental income tax liability under section 956 of the U.S. Internal Revenue Code of 1986).

Although typical, the guarantor need not necessarily be a subsidiary (direct or indirect) of the debtor, nor does the guarantor need to be a debtor itself. Finally, it should be noted that such guaranties typically are payment guaranties, as opposed to guaranties of collection, or "last out" guaranties, where the lender must exhaust all remedies against the debtor before seeking payment from the guarantor.

ADMINISTRATIVE AGENT AND LENDERS

Administrative Agent

In many instances, particularly where a credit facility involves multiple lenders, said lenders will appoint an administrative agent. The administrative agent (or an affiliate) is typically the arranger of the financing and the lender with the largest individual commitment. The administrative agent oversees the day-to-day administration of the loan, such as collecting payments due from the debtor and disbursing amounts due to the lenders. The administrative agent may have individual consent rights with respect to certain ordinary course exceptions to the terms of the DIP credit agreement sought by the debtor where the burden and cost of obtaining the approval of a majority (or all) of the lenders outweighs the benefits due to a minimal implication of such exception on the lenders' rights.

Lenders

DIP loans may be made by a group of lenders called a "syndicate," with the administrative agent as the lead arranger or underwriter. A DIP loan may have a syndication agent, whose role it is to identify and engage financial institutions willing to lend under the DIP credit agreement, thus further spreading the risk of borrower default among a greater number of lenders. Alternatively, a DIP loan may be "bilateral," wherein one lender (and only one lender) simply makes a loan to the debtor.

In syndicated loans, the existence of multiple lenders creates a degree of complexity that gives rise to the need for express provisions in the credit agreement, not only with respect to the appointment, rights and duties of the administrative agent, but also with respect to the relative rights of the lenders. Such provisions address, among other things, the economic treatment of the lenders (typically several and not joint obligations with pro rata sharing of obligations and economic rights), the treatment of defaulting lenders, and the voting rights under the agreement.

With respect to voting rights, most agreements will provide that required (or requisite) lenders' signatures are necessary to modify the credit agreement, with certain enumerated exceptions, such as changing material economic terms, which typically requires the consent of all lenders. The lenders typically have consent rights with respect to a variety of matters that directly or indirectly affect their interests. Most credit agreements (DIP or otherwise) contain a definition of "required lenders" or "requisite lenders," which commonly means lenders holding more than 50 percent of the loans and commitments.

Expense Reimbursement

Under a typical DIP credit agreement, the debtor generally agrees to pay or reimburse: (1) the administrative agent (and, in certain instances, the lenders) for reasonable out-of-pocket costs and expenses incurred with, among other things, the preparation, negotiation and execution of the DIP credit agreement and any amendment or modification thereto, including the reasonable fees and expenses of outside counsel; and (2) the lenders for all documented out-of-pocket costs and expenses incurred in connection with, among other things, any enforcement of rights or remedies under the DIP loan documents or any "workout" of the DIP loan, including the reasonable fees and expenses of outside counsel. To the extent that the debtor fails to pay or reimburse the administrative agent for such costs and expenses, the lenders typically agree to indemnify the administrative agent for same.

Assignments and Participations

Assignments

Following the closing date of the DIP loan, each lender may assign all or a portion of its rights and obligations under the DIP credit agreement to any "eligible assignee" (as such term is defined in the respective DIP credit agreement) subject to certain restrictions set forth in the respective DIP credit agreement, including, among others, the required consent of the administrative agent to such assignment and, in certain instances, the borrower (so long as no event of default exists at the time of such assignment).

Participations

Each lender may also sell participations in the DIP loan, in some instances without the consent of, and even without notice to, the debtor or the administrative agent. It should be noted that, upon the sale of a participation, the transferring lender legally retains its rights and obligations under the DIP credit agreement and remains in contractual privity with the debtor but transfers only the economic benefits and obligations to the purchaser of the participation.

Conversely, the participant has contractual privity only with the selling lender, not with the borrower. Thus, the selling lender remains the "lender" under the credit agreement, acting as a pass-through for the economic arrangements under the loan.

FINANCIAL ADVISERS

In larger bankruptcy cases, each of the debtor, the administrative agent and the creditors' committee (and often any other committee formed in a case, such as an equity committee) will most likely retain a financial adviser in order to prepare (in the case of the debtor) and review budgets, analyze financial statements and conduct due diligence. Each principal's legal counsel typically retains the financial adviser in order to maintain all communications and work product as privileged. While the Bankruptcy Code provides for reimbursement only of the debtor's and committees' professional fees (including those of the respective financial advisers), the administrative agent must obtain reimbursement through the provisions of the DIP credit agreement. See 11 U.S.C. §§ 327, 330 and 1103.

CREDITORS' COMMITTEE

As soon as practicable after the petition date, the trustee shall appoint a committee of unsecured creditors. See 11 U.S.C. § 1102. While not a party to the DIP credit agreement, the creditors' committee has an opportunity to play a role in shaping the form and substance of the final DIP credit agreement. Between the dates that the bankruptcy court enters the interim order and the final order approving the DIP credit agreement, the creditors' committee may file an objection to the proposed DIP credit agreement and/or otherwise negotiate with the debtor, secured lenders and DIP lenders with respect to the following:

  1. Preserving the right of the creditors' committee to file a motion challenging: (i) the validity, priority, or perfection of the security interests of the prepetition secured lenders; or (ii) any liability of any prepetition party with respect to anything arising from any prepetition credit facility (such motion typically to be filed within 60 days following the date of entry of the Final DIP Order);
  2. Preserving (and preventing the debtor from waiving) claims under section 506(c) of the Bankruptcy Code;
  3. Preventing the prepetition secured lenders and the DIP lender from obtaining a lien on any avoidance actions; and
  4. Preventing cross-collateralization in the context of an "over-reaching" roll-up DIP (i.e., a DIP that results in the prepetition secured lenders having both prepetition and post-petition secured claims on the same loan.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.