plenary sessionabi-educational-materials.s3.amazonaws.com/valcon/2010/attractdi… · moderator:...

Educ

atio

nal M

ater

ials

2010

D. Bobbitt Noel Jr. (Presiding Officer)Vinson & Elkins, LLP; Houston

Moderator: Peter S. KaufmanGordian Group, LLC; New York

Deirdre A. MartiniWachovia Capital Finance; New York

James A. RocheGSO Capital Partners; New York

Durc A. SaviniMiller Buckfire & Co., LLC; New York

Plenary Session

How to Attract DIP and Emergence Capital

2010 Valcon Text Print.indd 3412010 Valcon Text Print.indd 341 1/21/10 3:04 PM1/21/10 3:04 PM

342

Valcon2010


American Bankruptcy Institute

343

Mo

dera

tor:

Pete

r S

. K

aufm

an,

Gord

ian G

roup,

LLC

, N

ew

York

, N

Y

Pan

eli

sts

:

Deirdre

A.

Mart

ini, W

achovia

Capital F

inance,

New

York

, N

Y

Jam

es R

oche,

GS

O C

apital P

art

ners

, N

ew

York

, N

Y

Adam

Dunayer,

Houlih

an L

okey,

Dalla

s,

TX

Feb

ruary

25,

2010

Ho

w t

o A

ttra

ct

DIP

an

d E

merg

en

ce C

ap

ital


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P

age 2

Earl

y 2

000s

Dom

inate

d b

y b

anks a

nd c

ert

ain

fin

ance c

om

panie

s,

such a

s J

PM

, C

iti, B

ofA

, G

E

and C

IT

[Insert

league t

able

sta

ts h

ere

]

Mostly a

pro

rata

mark

et

(replic

ating t

he n

atu

re o

f th

e p

rim

ary

syndic

ation m

ark

et

at

the t

ime)

Usually

str

uctu

red a

s r

evolv

ers

with t

hin

spre

ads

For

exam

ple

, $2B

Km

art

DIP

at

L+

350 (

vers

us L

+1000 f

or

the r

ecent

$3.2

5B

T/L

port

ion o

f th

e L

yondell

DIP

)

Mid

2000s

Defa

ult r

ate

s s

low

ed.

Hedge f

unds a

nd o

ther

dis

tressed f

unds (

such a

s W

ayzata

, A

pollo

, O

aktr

ee,

Silv

erp

oin

t,

Hig

hla

nd,

Sankaty

and A

belc

o)

ente

red t

he m

ark

et, r

epla

cin

g t

raditio

nal pro

vid

ers

.

The 2

005 A

mendm

ent

to t

he B

ankru

ptc

y C

ode c

om

pre

ssed t

he C

hapte

r 11

tim

efr

am

e,

incre

asin

g t

he u

ncert

ain

ty o

f bankru

ptc

y o

utc

om

es a

nd f

orc

ing r

apid

decis

ions b

y t

rouble

d c

om

panie

s t

o liq

uid

ate

or

reorg

aniz

e.



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P

age 3

Late

2000s

Far

less “

new

money” D

IP a

vaila

bili

ty;

DIP

scarc

ity led t

o a

n incre

ase in t

he n

um

ber

of

Chapte

r 7 c

ases

Virtu

al shutd

ow

n o

f capital m

ark

ets

in Q

4 2

008 d

ried u

p s

yndic

ations o

f D

IPs in e

xcess o

f $100m

m

Insid

ers

, purc

hasers

of

assets

and g

overn

ment

ste

ppin

g in inste

ad

Defe

nsiv

e r

oll-

up D

IP s

tructu

res b

ecam

e a

n incre

asin

g p

art

of

landscape,

a r

esult o

f extr

em

e t

ighte

nin

g o

f th

e c

redit m

ark

ets

Tra

de-o

ff b

etw

een losses o

n p

re-p

etition p

ositio

n a

nd a

ttra

ctiveness o

f th

e D

IP a

nd r

ela

ted

fees

Roll-

ups u

sually

done o

n a

dolla

r-fo

r-dolla

r basis

The r

oll-

up c

reate

s a

thre

e-t

ier

bank d

ebt

str

uctu

re,

com

prised o

f th

e D

IP,

roll-

up a

nd p

re-

petition s

tub

An inflection p

oin

t w

as c

rossed in late

June 2

009 w

hen L

ear

secure

d a

$500m

m

“new

money” D

IP in s

upport

of

its p

re-p

ackaged b

ankru

ptc

y,

a c

om

mitm

ent

that

would

have b

een n

ear-

impossib

le t

o o

bta

in a

t th

e s

tart

of

the y

ear.


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P

age 4

Although D

IP d

olla

r volu

me h

as b

een c

limbin

g,

the v

olu

me p

ick-u

p h

as n

ot

kept

pace w

ith d

efa

ult f

requency.



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P

age 5

Negotiating levera

ge h

as c

learly s

wung h

eavily

in f

avor

of

lenders

The a

vera

ge institu

tional spre

ad h

as n

early d

ouble

d f

rom

425bps in 2

004 t

o

appro

xim

ate

ly 8

00bps Y

TD

2009 a

nd,

in m

any c

ases,

LIB

OR

flo

ors

have b

een a

dded.

Prior

to 2

008,

DIP

spre

ads o

ver

LIB

OR

never

exceeded 4

00bps.

DIP

pricin

g a

ppears

even m

ore

exaggera

ted w

hen v

iew

ed o

n a

rela

tive v

alu

e b

asis

. H

Y

indic

es a

re c

urr

ently t

radin

g n

ear

2002 levels

, yet

DIP

pricin

g is n

early 2

x w

hat

is w

as in

2002.


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P

age 6

DIP

s h

ave t

raded n

ear

par

in s

econdary

mark

et, w

hic

h c

ontr

asts

to s

ignific

ant

variabili

ty in t

he p

erf

orm

ance in p

re-

and p

ost-

petition d

ebt.

Barc

lays s

tudie

d t

he p

erf

orm

ance o

f pre

- and p

ost-

petition d

ebt

and f

ound t

hat

perf

orm

ance o

f pre

-petition d

ebt

depended o

n w

heth

er

or

not

pre

-petition d

ebt

was

rolle

d u

p.

Pre

-petition n

on-r

oll

loans p

erf

orm

ed w

ell

when t

here

were

no p

rim

ing r

oll-

up layers

ahead.

Roll-

ups h

ave o

utp

erf

orm

ed.

Most

DIP

s h

ave t

raded c

lose t

o p

ar,

ow

ing t

o t

heir p

ositio

n in t

he c

apital str

uctu

re a

nd t

he

qualit

y o

f th

eir c

olla

tera

l pro

tection.

Entr

y a

nd e

xit f

ees,

tota

ling 3

-5%

in r

ecent

transactions,

com

pare

favora

bly

to

the 5

0bps g

enera

lly o

ffere

d f

or

am

endm

ents

/exte

nsio

ns.

Thus f

ar,

the e

xit m

ark

et

has n

ot

yet

experienced t

he incre

ase in inte

rest

and

liquid

ity s

een in t

he D

IP m

ark

et.

Accord

ingly

, D

IP h

old

ers

may e

ither

be f

orc

ed t

o p

art

icip

ate

in e

xit f

inancin

gs o

r to

convert

outs

tandin

g D

IP b

ala

nces into

equity in m

any c

ases.



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P

age 7

Ente

ring into

a D

IP a

ssure

s y

ou w

ill k

eep c

ontr

ol of

the c

redit a

s s

enio

r le

nders

. It a

ssure

s

you w

ill n

ot

be p

rim

ed o

r be s

ubje

ct

to h

avin

g y

our

cash c

olla

tera

l used.

In c

ontr

ast

to a

DIP

loan,

a c

ash c

olla

tera

l ord

er

pro

vid

es n

o a

ssura

nces t

hat

senio

r cre

ditors

will

receiv

e a

dequate

pro

tection p

aym

ents

, th

at

their lie

ns w

ill e

ncom

pass a

ll assets

and a

borr

ow

ing

base f

orm

ula

will

be incorp

ora

ted.

A r

oll-

up D

IP loan c

an t

ake lenders

out

of

the p

re-p

etition loan,

there

by r

em

ovin

g p

ote

ntial

of

bein

g c

ram

med d

ow

n in a

pla

n a

nd c

onfirm

ing lenders

superior

colla

tera

l positio

n v

ia

court

ord

er.

If a

3rd

part

y D

IP is p

rovid

ed inste

ad,

it is q

uite p

ossib

le t

hat

no c

urr

ent

inte

rest

would

be p

aid

to

pre

-petition s

enio

r le

nders

until th

eir c

ushio

n is r

educed t

o a

level th

e c

ourt

deem

s inadequate

to

cover

the g

row

ing level of

pre

-petition s

enio

r debt.

By incorp

ora

ting a

dequate

covenant

pro

tections into

a D

IP loan,

senio

r le

nders

can

pro

vid

e f

or

term

ination o

f th

e loan if

the d

ebto

r’s p

erf

orm

ance f

alls

short

of

expecta

tions.

Such a

DIP

als

o p

rovid

es a

pre

-negotiate

d p

rocess f

or

obta

inin

g r

elie

f fr

om

the a

uto

matic s

tay.

DIP

loans g

ive s

enio

r le

nders

opport

unity t

o s

et

a b

ar

date

to c

halle

nge p

re-p

etition lie

ns

and s

ecurity

inte

rests

securing t

he p

re-p

etition f

acili

ty b

ein

g p

aid

out

by t

he D

IP loan.

In a

conte

ste

d c

ash c

olla

tera

l ord

er,

the b

ar

date

may n

ot

be a

s s

hort

or

none m

ay b

e s

et

at

all.

Without

a b

ar

date

, in

tere

ste

d p

art

ies w

ill b

e b

ound o

nly

by t

he s

tatu

te o

f lim

itations c

onta

ined in

the B

ankru

ptc

y C

ode.


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P

age 8

Exis

ting lenders

, privy t

o h

isto

rical in

form

ation a

nd insig

ht, h

ave a

n a

dvanta

ge o

ver

com

petitive D

IPs p

redic

ate

d o

n d

ue d

iligence.

Judges h

ave,

at

tim

es,

reje

cte

d c

om

peting D

IPs (

inclu

din

g t

hose p

osited b

y e

xis

ting junio

r

lenders

) on t

he b

asis

of

due d

iligence c

onditio

ns.

Inte

r-cre

ditor

restr

ictions a

lso inhib

it t

he a

bili

ty o

f ju

nio

r cre

ditors

fro

m o

bta

inin

g c

ourt

appro

val to

pro

vid

e a

DIP

.

While

pote

ntial th

ird p

art

y D

IP p

rovid

ers

have b

een a

ttra

cte

d b

y c

urr

ent

DIP

pricin

g,

they h

ave in

most

cases u

ltim

ate

ly s

erv

ed o

nly

as s

talk

ing h

ors

es t

o t

he incum

bent

senio

r le

nders

whic

h h

ave

relu

cta

ntly b

een c

onvin

ced t

o p

rovid

e d

efe

nsiv

e D

IPs t

o a

void

bein

g p

rim

ed.

DIP

s a

re t

raditio

nally

offere

d o

n a

pro

rata

basis

; how

ever,

larg

e h

old

ers

have r

ecently

attem

pte

d t

o c

aptu

re a

dis

pro

port

ionate

share

of

the e

conom

ics in r

etu

rn f

or

drivin

g

transactions.

Because t

he p

roposed s

tructu

res o

ften c

onflic

t w

ith t

he p

re-p

etition c

redit a

gre

em

ent, t

he f

inal

result is n

orm

ally

clo

se

to,

if n

ot

entire

ly,

pro

rata

.

The e

xception t

o t

his

genera

l ru

le is w

hen t

he d

ebto

r is

com

ple

tely

dra

ined o

f its liq

uid

ity

resourc

es a

nd r

equires a

n im

media

te D

IP t

o a

void

a f

reefa

ll.

As c

ert

ain

CLO

s n

ear

the e

nd o

f th

eir r

ein

vestm

ent

periods,

issuer

concentr

ation lim

its a

nd

ratings r

estr

ictions m

ay s

erv

e a

s a

n o

bsta

cle

of

such f

unds t

o t

ake a

pro

rata

share

of

DIP

financin

gs.

Exceptions:

Sm

urf

it-S

tone C

onta

iner

Corp

.



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P

age 9

Roll-

up o

f pre

petition d

ebt

has b

ecom

e m

ore

wid

espre

ad;

allo

ws p

repetition

secure

d lenders

to c

onvert

exis

ting d

ebt

to p

ostp

etition d

ebt

Postp

etition d

ebt

will

often c

onta

in a

loan t

o p

ay o

ff p

repetition loans a

t th

e

dis

burs

em

ent

date

Advanta

ges:

Altern

ative t

o d

irect

cro

ss-c

olla

tera

lization -

as long a

s p

repetition loans a

re

adequate

ly s

ecure

d -

and m

ore

lik

ely

to b

e a

ccepte

d b

y t

he c

ourt

“N

ew

money

” is n

ot

necessary

Colla

tera

l rights

are

not

subje

ct

to t

he a

uto

matic s

tay

Ensure

s im

media

te p

aym

ent

of

the p

repetition c

laim

Avoid

ance o

f a “

cra

mdow

n” a

t effective d

ate

Abili

ty t

o s

ecure

lie

ns o

n a

void

ance c

laim

s

Challe

nges:

Must

pro

ve t

hat

it is in t

he b

est

inte

rest

of

the d

ebto

r, e

sta

te a

nd c

reditors

May r

equire n

egotiation w

ith o

ther

cre

ditor

gro

ups

Exam

ple

s

Mila

cro

n,

Lyondell

(part

ial)


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P

age 1

0

Sin

ce 2

007,

an incre

asin

g %

of

overa

ll D

IP v

olu

me h

as b

een p

rovid

ed b

y r

oll-

ups.

Prior

to t

he c

urr

ent

cycle

, ro

ll-ups h

ad n

ever

exceeded 1

0%

of

tota

l D

IP v

olu

me in t

he

past.

% o

f O

vera

ll D

IP V

olu

me c

on

sis

tin

g o

f n

ew

cash

co

mm

itm

en

ts v

ers

us r

oll

-up

po

rtio

n



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P

age 1

1

Str

ong e

conom

ics o

f D

IPs w

ill a

ttra

ct

investo

rs a

nd m

ake t

hem

more

com

petitive.

For

exam

ple

, new

DIP

-focused f

unds f

rom

Tanenbaum

and A

laddin

Capital

Because m

ost

DIP

investo

rs w

ill n

eed t

o e

sta

blis

h a

positio

n in t

he p

re-p

etition

debt, t

hey w

ill n

eed t

o b

e c

are

ful to

do s

o in a

way t

hat

avoid

s s

ignific

ant

losses

on t

he p

re-p

etition d

ebt.

For

non r

oll-

up s

tructu

res,

prim

ary

benefit

is t

he y

ield

on t

he n

ew

prim

ing D

IP

loan. The c

arr

y o

n D

IP loans is a

ppro

x.

600-7

00bps a

bove t

he r

est

of

the m

ark

et

(befo

re

fees).

When a

roll-

up is involv

ed,

the p

re-p

etition loan n

orm

ally

tra

des o

ff a

fter

the

filin

g d

ate

.


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P

age 1

2

More

pre

-packaged a

nd p

re-a

rranged b

ankru

ptc

ies,

as c

om

panie

s c

ope w

ith

reorg

aniz

ation t

ime c

onstr

ain

ts,

seek t

o lim

it c

osts

associa

ted w

ith length

y f

iling

pro

cesses a

nd m

itig

ate

the u

npre

dic

tabili

ty o

f actions b

y its

diffe

rent

capital

constitu

ents

Incre

ase in 3

63 s

ale

s,

as t

ime-p

ressed d

ebto

rs f

avor

a c

ontr

olle

d a

uction o

f assets

More

defe

nsiv

e D

IPs,

inclu

din

g r

oll-

ups,

as a

s lenders

pre

serv

e p

riority

Tig

hte

r covenant

restr

ictions a

nd m

ilesto

nes,

inclu

din

g “

trip

-wires” a

llow

ing f

or

sale

of

the d

ebto

r if p

erf

orm

ance h

urd

les a

re m

issed

Continued d

eart

h o

f exit f

inancin

g,

as t

he t

ain

t/overh

ang f

rom

the b

ankru

ptc

y is

deem

ed less f

avora

ble

than o

ther

prim

ary

or

secondary

opport

unitie

s

Gre

ate

r fr

equency o

f clu

b d

eals

on a

full-

flex b

asis

Com

ple

x c

apital str

uctu

res a

nd a

n incre

ase in c

onflic

ts b

etw

een c

reditor

cla

sses.



355

CO

NF

IDE

NT

IAL —

DO

NO

T D

IST

RIB

UT

E O

R R

EP

RO

DU

CE

P

age 1

3

Ale

ris

Cert

ain

part

ies n

ot

part

icip

ating in D

IP a

ttacked t

he p

roposed r

oll-

up p

rovis

ions,

indic

ating t

hey w

ere

unju

stifiably

prim

ed w

ithout

adequate

pro

tection,

and c

onte

ndin

g

that

the D

IP w

as o

ver-

siz

ed.

Lyondell

Contr

overs

y r

evolv

ed a

round t

he e

xclu

sio

n o

f cert

ain

lenders

fro

m p

rovid

ing n

ew

m

oney a

nd t

he r

ela

tive r

ights

betw

een n

ew

money a

nd r

oll-

up D

IP investo

rs.

Chem

tura

Dis

pla

ys d

ifficulty in p

rovid

ing a

com

peting,

prim

ing D

IP


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