Restructuring Market

Review and Outlook

February 2014

Highlights

2014 Outlook

Market expectations for default and restructuring activity remains at

low levels (excluding the pending filing of TXU in early 2014)

— The ratio of S&P downgrades to upgrades at the end of 2013 was

0.8x compared to 1.5x in 2012, while the number of speculative

grade issuances in 2013 declined to 67 from 160 in 2012

The next restructuring cycle will likely to occur in another 12 to 24

months given the current liquidity in the debt markets, as well as the

growth in corporate friendly debt instruments, such as covenant-lite

loans and PIK-Toggle notes

Improving US GDP growth levels of ~3% will also help issuers to

navigate over-levered balance sheets

Sectors exposed to government funding, such as education and

healthcare, as well as those facing secular industry headwinds, such

as coal and shipping, will continue to provide opportunities for

distressed investors

The rising interest rate environment, with the 10-year Treasury

reaching 3.0% at the end of 2013, may taper growth of leveraged

finance volume, but not likely to levels required to boost restructuring

activity during 2014

2013 Year-in-Review

Traditional restructurings were relatively soft, but improved from trough

levels in 2012

— Default rate (by % of principal of LSTA index) increased to 2.11% in

2013 from 1.27% in 2012

— Larger bankruptcies were more prevalent, such as City of Detroit and

Cengage Learning

Amendment activity declined significantly due to a combination of

increased presence of covenant-lite loans, improved cash flow generation

by issuers and lower levels of near-term maturities

Leveraged finance markets remain frothy

— Leveraged loan new issuance volume reached record levels of

$605bn with 57% of the volume being covenant-lite in 2013

— High yield new issuance volume decreased 6% YoY from record levels

in 2012 to $324bn in 2013 but remains robust

— PIK-Toggle Note issuance returned, as some investors and private

equity sponsors are utilizing these securities over preferred equity

investment vehicles

LBO volume surged to comprise 13.8% of leveraged loan issuance in

2013 compared to 10.9% in 2012

Highlights

1

Leveraged Loan Default Rate S&P/LSTA index loan default rate increased to 2.11% in 2013 from 1.27% in 2012, primarily due to several bankruptcies by

large, legacy LBO issuers. However, default expectations have declined over the past several months following a decreasing

trend in the ratio of S&P downgrades to upgrades

Ratio of S&P Downgrades to Upgrades(2) Defaults by Principal and % of LSTA

Note:

1. Dotted red line indicates projections from LCD‟s quarterly buy-side survey conducted in September 2013 (excludes EFH)

2. Rolling Three Month average

Source: S&P LCD

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

7.0x

8.0x

9.0x

Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-130.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

0

10

20

30

40

50

60

70

De

c-0

7

De

c-0

8

De

c-0

9

De

c-1

0

De

c-1

1

De

c-1

2

De

c-1

3

De

c-1

4

De

c-1

5

De

fau

lt %

$ in

billio

ns

Default ($ billions) Default % of LSTA Index

Dec. 2013: 2.11%

2.51%(1)

The pullback in the ratio of S&P

downgrades to upgrades over

the past year reflects muted

expectations for future

distressed activity

2

480 535

157

77

236

377

466

605

0%

10%

20%

30%

40%

50%

60%

70%

0

100

200

300

400

500

600

700

2006 2007 2008 2009 2010 2011 2012 2013

$ in

billio

ns

Total Cov-Lite (% Outstanding) Cov-Lite (% New Issuance)

US Leveraged Loan Market Issuance reached record levels in 2013 as impressive fund inflows allowed companies to issue covenant-friendly securities

as part of refinancings, LBOs, acquisitions and dividend-related transactions – strong pipeline indicates continued

robustness

Leveraged Loan Volume by Purpose Institutional Leveraged Loan Issuance

Source: S&P LCD

Secondary Spread-to-Worst Weekly Leveraged Loan Fund Flows

47.5%

13.8%

18.6%

9.3%

10.9%

Refinancing LBO Acquisition Dividend Other

46.9%

10.9%

17.9%

10.8%

13.5%

2013 2012

0

400

800

1,200

1,600

2,000

$ in

mill

ions

2013 Net Flows: $54.1bn

2012 Net Flows: $7.8bn

0 bps

400 bps

800 bps

1,200 bps

1,600 bps

BB-/Ba3 B+/B1 B/B2

B-/B3 CCC+/Caa1

3

144 144

68

164

287

218

345 324

0

100

200

300

400

2006 2007 2008 2009 2010 2011 2012 2013

$ in

billio

ns

Secured Unsecured Subordinated

US High Yield Bond Market 2013 issuance retreated from the record levels experienced in 2012 as covenant-lite leverage loans dominated the

marketplace, but nevertheless the high yield markets remain liquid

High Yield Volume by Purpose High Yield Issuance by Tranche Type

Source: S&P LCD, Advantage Data

Secondary Bond Yield-to-Worst Weekly High Yield Fund Flows

0%

20%

40%

60%

80%

100%

2006 2007 2008 2009 2010 2011 2012 2013

Refinancing / Bonds Refinancing / Bank Debt Refinancing / General M&A Recap Other

(6,000)

(4,000)

(2,000)

0

2,000

4,000

Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14

$ in

millio

ns

2013 Net Flows: $0.9bn 2012 Net Flows: $22.8bn

0%

4%

8%

12%

16%

Ba2 B2 Caa2

4

Post-Crisis Leverage Levels and

Valuation Multiple Trends Frothy debt market conditions have caused LBO leverage and valuation multiples to rise to the highest levels since the global

financial crisis

LBO Valuation Multiples(2) LBO Leverage Levels(1)

Notes:

1. Defined as issuers with EBITDA of more than $50mm; excludes media and telecom loans; EBITDA adjusted for prospective cost savings or synergies

2. Defined as total sources/pro forma trailing EBITDA

Source: S&P LCD data

8.7x

7.2x

8.1x

8.4x 8.3x

8.4x

6.0x

7.0x

8.0x

9.0x

2008 2009 2010 2011 2012 2013

4.9x

4.0x

4.7x

5.2x 5.3x 5.4x

3.0x

4.0x

5.0x

6.0x

7.0x

8.0x

2008 2009 2010 2011 2012 2013

5

Middle Market Trends

S&P LCD has observed total leverage in the middle market ascend to an average of 4.9x in 2013, which is the first time it has eclipsed the large corporate market,

which averaged 4.7x for the same period

— Note: LCD’s middle market data is skewed to sponsored deals that are syndicated. LCD’s pool is comprised largely of borrowers that generate $25-$50mm of

EBITDA, and most of them lean toward the higher end of that spectrum. Pro forma EBITDA for sample averages $38mm. LCD typically does not capture much

of the pro rata segment, nor most club-style credits

Even the LBO data shows that more debt is pouring into smaller companies – in another first, middle market LBO leverage equaled that of large LBOs at 5.3x

— Regardless of the limited sample, the data supports a broader view that leveraged lending in the middle market is changing

— Syndicated deals are on the decline, while less visible, club-style credits are becoming more attractive

— Significant amounts of money are pouring into funds and managed accounts from new players

— Senior stretch and unitranche credits are more rampant than before

— Senior stretch is all-first lien to about 4.0x-4.5x (depending upon the size of the issuer)

— Unitranche offers leverage beyond the 4.5x level and can include subordinated or last-out strips within the same loan agreement that can produce

greater yields

Overall middle market senior leverage multiples further help to depict the current situation – senior debt accounted for 4.8x of the 4.9x total leverage and within

middle market LBOs specifically, the senior debt accounted for 5.2x of the 5.3x total leverage

— Note: LCD's senior debt multiples include second-lien term loans, which accounted for approximately 10% of all institutional volume in the middle market for

2013, up from 4% last year and the highest level since 2008

Source: S&P LCD

Companies in the middle market have levered up at unprecedented levels in 2013 as lenders have allowed multiples to climb

despite citing lower leverage often among the benefits of trading in liquidity for investing down market

6

Date Issuer Industry Lead Agent Purpose RC TLA TLB 2nd Lien / Other

5-Dec Atlantic Express Industrials Wells Fargo DIP $37M / NA - - -

5-Dec Longview Pow er Industrials NA DIP - - $150M / L+750 -

14-Nov Global Aviation Holdings Industrials Cerberus Partners DIP - - $51M / L+1000 -

14-Nov Patriot Coal Corp Resources Deutsche Bank / Barclays Exit Financing $125M / NA - $250M / L+725 - 775 -

4-Nov Velti Plc Industrials US Bank DIP - - $26.25M / L+1200 -

25-Oct Green Field Energy Services Inc Resources Gordon Brothers DIP - $30M / L+1000 - -

18-Oct Bennu Oil & Gas Resources Credit Suisse Exit Financing - - - $350M / L+1000

9-Sep Furniture Brands Intern'l Inc Industrials NexBank DIP $40M / NA - $90M / NA -

5-Aug Rural/Metro Corp Industrials Credit Suisse DIP - - $75M / L+850 -

15-Jul Eastman Kodak Co TMET JP Morgan Chase Exit Financing $200M / NA - $420M / L+625 $275M / L+950

14-Jun Orchard Supply Hardw are Corp Industrials Wells Fargo DIP $140M / NA - $24.405M / NA $12M / NA

12-Jun LightSquared Company TMET Jefferies Finance Exit Financing - - $2000M / L+950 -

11-Jun NE Opco Industrials Salus Capital DIP - - $47.5M / L+525 -

10-Jun Exide Technologies Industrials JP Morgan Chase DIP $225M / NA - $275M / NA -

6-Jun American Airlines Inc(1) Industrials Deutsche Bank DIP $1000M / NA - $1900M / L+375 -

Total 2013 Special Situations Financing Volume $12,870.9

Bankruptcy Trends Bankruptcy filings in 2013 surpassed 2012 levels but remain significantly below 2009-2011 levels. There were 15 filings

with at least $1.0bn of liabilities, and the two largest bankruptcies, City of Detroit and Cengage Learning, had $10.7bn and

$9.7bn in liabilities, respectively

# of Bankruptcy Filings (>$100mm in liabilities)

Notes:

1. $850mm Add-on to the TLB on 7/30/2013

Source: S&P LCD data, The Deal

Recent Special Situations Financings

Top 10 US Bankruptcies in 2013 included:

City of Detroit, Cengage Learning, Dex One

Corp., Anchor BanCorp Wisconsin,

SuperMedia, Rural/Metro Corp., Central

European Distribution Corp., Revel AC, TMT

USA Shipmanagement, Rotech Healthcare

191

400

267

184

62 94

0

100

200

300

400

500

2008 2009 2010 2011 2012 2013

7

42.9%

15.4% 14.5% 14.9% 14.9% 13.2%

6.9%

14.1% 15.2%

7.9%

25.0%

11.5% 10.8% 9.3% 8.2% 6.7% 5.9% 5.8% 4.4% 4.2%

0%

10%

20%

30%

40%

50%

Diversified Aerospace &

Defense

Metals & Mining Technology Media &

Entertainment

Forest Products &

Building Materials

Consumer Products Retail & Restaurants Transportation Financial Institutions

2012 Distress Ratio 2013 Distress Ratio

Distressed Credit Trends Distress Ratio & Default Rate Over Time Commentary

Note: Dotted red line represents total default ratio across all sectors (including those not displayed on chart)

(1) Financial Institutions is a weighted average amongst various subsectors. Chart excludes Automotive, Capital Goods, Chemicals & Packaging, Healthcare, Homebuilders, Oil & Gas,

Telecommunications and Utilities as a result of limited distress in these sectors

Source: S&P Distressed Debt Monitor released January 3, 2014

S&P Distress Ratio Snapshot by Industry(1)

The S&P US Distress Ratio, the measure of the amount of speculative

issues with spreads above 1,000 basis points as a percent of the total

amount of speculative issues, declined to 5.3% in 2013 from 9.7% in 2012

— Actual number of speculative grade issues declined year-over-year from

160 to 67

Sectors experienced a YoY decline in distress ratios across the board,

reflecting muted default expectations as debt capital markets remain frothy

and anticipated fundamental improvement in the US economy over the next

12 months 0%

20%

40%

60%

80%

100%

0%

3%

6%

9%

12%

15%

Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13

Dis

tre

ss R

ati

o

Sp

ecu

lati

ve

-Gra

de

De

fau

lt R

ate

Speculative-Grade Default Rate Distress Ratio

5.3%

8

2013 Restructuring Trends

9

Retail

Bankruptcies

Increased as a result of shrinking

margins, fixed cost structures,

competition with Internet resellers,

general disintermediation of the retail

segment and negative working capital

among the traditional brick-and-

mortar segment

Restructuring

Activity

Overall rise in middle market

restructurings

Significant increase in terms of

number of engagements

— 2013 rivaled 2010 levels

Companies that saw distressed

activity fell into one of three buckets

— Too small to access the high-yield

bond market

— In industries particularly stressed

by technological or regulatory

changes

— In consumer-oriented industries

impacted by the lackluster

economy

Prenegotiated /

Prepackaged Deals

Level of these transactions became

more prevalent

Represented 8 of the top 10

bankruptcies in 2013

Key constituents favored a shorter

bankruptcy process

363 asset sales have also caused

traditional restructurings to become

largely obsolete

— Usually results in a 3-4 month

process

— Will continue to gain traction in

2014 as businesses seek to

avoid messy in-court cases

Out-of-Court

Restructurings

Continued to be an attractive option

in lieu of a bankruptcy filing

Will likely become more common in

2014 as companies seek to avoid

lengthy, drawn-out and costly Chapter

11 processes and negotiate their

debts with greater flexibility

Litigation

Increased in-court litigation leading to

mediation (e.g. Cengage,

LightSquared, School Specialty, etc.)

Litigants have pushed for a court-

appointed examiner to investigate

pre-bankruptcy transactions used as

a basis for settlement – has led to

significant costs and delay in cases

Creditors continue to use fraudulent

transfer and preference litigation to

try to recover money from all parties

that received value from the estate

prior to the bankruptcy

Not uncommon to see fraudulent

conveyance actions brought against

lenders in bankruptcies which follow

LBO transactions

Cross-Border

Insolvencies

Experienced an increase due to an

increasingly global economy, slower-

paced financial recoveries, higher

interest rates overseas, and

increased familiarity with the use of

Chapter 15 in parallel with a Chapter

11 case in the U.S.

Municipal

Restructurings

Detroit likely to be a precedent-setting

case due to the complex pension and

retiree health-care claims involved

Puerto Rico possible to come next…

Healthcare

Restructurings

Rising due to mounting financial

pressures and costs placed upon

hospitals, coupled with widespread

uncertainty with new industry-wide

regulation

Restructuring Activity Outlook Distress indicators convey that restructuring activity is likely to stay muted during 2014 and most of 2015. However, the

combination of significant new leverage finance volume, frothy covenant-lite issuances, rising energy costs and the threat of

an interest rate rise could be the catalyst for an increase in restructuring levels in the medium-term

Distribution of Distressed Issues and Companies

by Rating

0%

10%

20%

30%

40%

BB+ BB BB- B+ B B- CCC+ CCC CCC- CC C

% of Total Distressed Issues % of Total Distressed Companies

Current market conditions expect low default and restructuring activity during 2014

— S&P downgrades to upgrades ratio of 0.8x as of December 2013 is the lowest level since

June 2012

— S&P distress ratio decreased to 5.3% in 2013 from 9.7% in 2012

— Proliferation of covenant-lite loans provides companies the flexibility to temporarily delay

having to address capital structure concerns due to the lack of maintenance covenants

— Continued strong expected capital markets activity

While issuers no longer need to worry about the “maturity wall” in the near-term, new loan

issuances have created a significant amount of outstanding principal in the medium-term,

which may be a catalyst in a rising interest rate environment

— At the end of 2013, there were $45bn, $112bn and $129bn of loans maturing in 2016-2018, respectively

— Maturities of small stressed companies in the “maturity wall” will remain unaddressed in 2014

Due to a limited data set of covenant-lite loan defaults, it is uncertain whether covenant-lite structures create lower ultimate recovery levels for issuers in restructurings.

However, if these structures were to cause lower recoveries, it would be as a result of not being forced to tackle over-levered capital structures, such as executing

amendments or refinancings, until it is too late

— 46% and 57% of the outstanding S&P/LSTA index and new issuance volume, respectively, at the end of 2013 were covenant-lite structures

— In anticipation of tapering and adjustments to the Federal Reserve monetary policy, the yield curve will likely rise throughout 2015, assuming the ~3.0% US GDP

growth materializes, causing a potentially sharp pullback in the current frothy leveraged loan and high yield bond markets

A slow down in the debt capital markets could limit issuers ability to refinance upcoming debt maturities relative to the current conditions, especially the companies on

the lower half of the high yield rated spectrum – helping to increase restructuring activity

— A 1-3% rise in interest rates will likely make debt service coverage unsustainable for many issuers with floating rate debt

Source: S&P LCD; S&P Distressed Debt Monitor released January 3, 2014

10

Debt Issuance Levels Record levels of leveraged loan and high yield volume outstanding vis-à-vis prior frothy credit market time periods could likely

create significant restructuring opportunities for the next distress cycle

US Leveraged Finance Issuance

346

407

343

232

423 389

624 679

224

595

810

929

0

200

400

600

800

1,000

1997 1998 1999 2000 2004 2005 2006 2007 2008 2011 2012 2013

$ in

billio

ns

Leveraged Loan Issuance High Yield Bond Issuance

Source: S&P LCD; JP Morgan

Pre-Early 2000‟s

Tech Bubble

Pre-Global

Financial Crisis

Today

11

Where are the Distressed

Opportunities?

Coal Education Healthcare

Infrastructure /

Municipalities Merchant Power

Retail /

Restaurants Shipping

Further

curtailments in

metallurgical coal

markets as

weakened demand

driven by the low

cost of alternative

energy sources

have made higher

quality

metallurgical coal

production

uneconomical

Continued

compliance with

tighter

environmental

regulations will

impact margins

Challenges with

Title IV (federal

financial aid) funds

to for-profit

companies

Highly saturated

and competitive

industry – further

exacerbated by the

shift to

digital/online

technology

Providers expected

to experience

challenges

navigating the

Affordable Care Act

resulting in

significantly higher

costs

Exposure to

potential further

government

spending cuts

Vintage 2005-

2008 PPP toll road

and ports

transactions

experiencing traffic

volume

significantly below

original aggressive

projections

Large in-process

restructurings in

Puerto Rico and

Detroit, while out-

of-court

negotiations are

anticipated across

numerous US cities

Industry remains

over-levered and a

rising interest rate

environment will

further adversely

pressure sector

going forward

EFH bankruptcy

expected to occur

in early 2014

Competition for

“bargain hunters“

creates challenges

for discount

retailers and quick-

serve restaurants

Continued growth

of online shopping

including Amazon

further pressuring

margins

Low charter rates

and multiple new

builds entering the

market creates an

increasingly

competitive

landscape,

especially for

vessels not

covered by the

Jones Act

Source: Debtwire, The Deal

12

Potential Catalysts Leading to the

Next Restructuring Cycle

Treasuries and corporate borrowing rates at all time lows

Corporates (and governments) are using more leverage than ever

With Asia growth rates slowing, and US/Euro growth rates already low,

where will growth come from?

Cost cutting was rampant in the last down cycle, but how much longer will it

last?

With globalization in full swing, one geographies‟ issues are becoming

everyone‟s issues!

Numerous countries/regions are experiencing political/social

transformations

Record levels of issuance (including low rated borrowers) cannot continue

indefinitely

Slowing global economies

Rising interest rates

Extreme leverage levels

Declining ability to cut costs

Increasingly globalized economy

Increasing likelihood of international disruption

How much longer will capital markets hold up?

13

BANKRUPTCY

CONSIDERATIONS

February 2014

BANKRUPTCY CONSIDERATIONS

1. Cram-Up • New Loan Approach

• Collateral Sale Approach

• Indubitable Equivalent Approach

2. Reinstatement/Unimpairment • Pros and Cons

• Cramdown v. Reinstatement

3. Credit Bidding • In re Fisker Automotive Holdings, Inc.

4. Vote Designation • In re DBSD North America Inc.

15

Cram-Up – “Fair and Equitable”

• Three Approaches under 11 U.S.C. 1129(b)(2)(A):

1. New Loan (Section 1129(b)(2)(A)(i))

2. Collateral Sale (Section 1129(b)(2)(A)(i))

3. Indubitable Equivalent (Section

1129(b)(2)(A)(i))

16

Cram-Up – “New Loan Approach”

Section 1129(b)(2)(A)(i) Holder of secured claim retains the liens securing such claim, to the extent of the allowed amount of such claim, and receives on

account of such claim deferred cash payments totaling at least the allowed amount of such claim, of a value, as of the effective date of the plan, of at least the value of such holder‟s interest in the estate‟s interest in such property

Retains the Liens – The plan can provide for the sale of the property to a third party, over the secured lender‟s objection, so long as the lender retains the lien

Full Payment of Allowed Amount of Secured Claim - Sections 502 and 506 govern allowance of secured claims

—Oversecured creditors entitled to assert post-petition interest (potentially at default rate), fees and expenses as part of allowed claim

—Oversecured Claims limited to the amount of the claim

—Undersecured Claims limited to the value of the collateral.

—Deficiency unsecured claim is not subject to cram-up test for secured claims

Effective Date of Plan – For purposes of valuing collateral and secured claim, use effective date of plan. Plan itself determines effective date

17

Cram-Up – “Collateral Sale”

Approach Section 1129(b)(2)(A)(ii)

The sale of the prepetition collateral (subject to section 363(k)) free and clear of the secured creditor‟s liens, with the lien attaching to the proceeds

Sale – Plan must anticipate a sale, either contained in the plan itself, or post-confirmation. Section 1123 expressly anticipates that a sale of some or all of assets can be a means to implement the plan

Section 363(k) – Secured lender gets to credit bid

Prepetition Collateral – Sale must be of current collateral, and lien must transfer to proceeds of that collateral. Can‟t sell different collateral and transfer lien to those proceeds

Free and Clear of the Secured Creditors’ Liens - Free and clear under a plan is more powerful than a regular sale fee and clear under 363(f)

Lien Attaching to Proceeds - The lien attaches to the proceeds, be they cash, notes or other property received in exchange

18

Cram-Up – “Indubitable Equivalent”

Approach Section 1129(b)(2)(A)(iii)

The realization of the indubitable equivalent of the allowed amount of the secured claim

Indubitable Equivalent – generally must (a) provide the secured creditor with the present value of its claim and (b) insure the safety

of its principal

—Abandonment or transfer of collateral to secured creditor satisfies requirement

—A substitute lien in property of a value that equals or exceeds the value of the secured claim

—Cash payment equal to the allowed amount of the secured claim

—Payment stream with present value of less than secured claim will not suffice

—No hard and fast rules

Allowed Amount of Secured Claim – see above

—Unsecured deficiency claim treated with other general unsecured creditors

19

Reinstatement/Unimpairment

Two Standards for “Unimpairment”

1124(1): Plan does not alter the legal, equitable and contractual rights to which the holder of a claim is entitled on account of such

claim or

1124(2): Notwithstanding any acceleration due to a default, the plan

—“cures” the default, except with respect to defaults under section 365(b)(2) of the Bankruptcy Code that need not be cured (i.e.,

bankruptcy related defaults and the satisfaction of any penalties relating to nonmonetary defaults);

— reinstates the maturity of such claim as it existed prior to the default;

—compensates the holder for damages incurred as a result of any reasonable reliance by such holder on the contractual provision

that provided for acceleration;

— if such claim arises from any failure to perform a non-monetary obligation, compensates the holder of such claim for any actual

pecuniary loss incurred by such holder as a result of such failure; and

—does not otherwise alter the legal, equitable, or contractual rights to which such claim or interest entitles the holder

20

Advantages

No cramdown or cram-up fight

Take away ability of creditors to vote against plan –

reduce administrative burden of soliciting class

Potentially avoid make wholes / prepayment premiums

being asserted as part of claim

Preservation of below-market terms

Disadvantages

Reinstatement may be impracticable and/or impossible

No third party releases in plan

Need to reinstate entire contract (can‟t pick and choose

terms)

Technical provisions (change of control, financial

reporting) may immediately trigger post-bankruptcy

defaults, which go to feasibility

2005 Amendments to Code provide that certain

nonmonetary defaults -- except for those relating to

nonresidential real property leases -- must be cured.

Many of these (e.g., financial reporting requirements)

may be historical facts that simply cannot be cured

Reinstatement/Unimpairment Pros and Cons

21

Cramdown v. Reinstatement

Cramdown more effective for dealing with undersecured creditors

—Undersecured creditor won‟t get post-petition interest, fees, or prepayment premiums

—Won‟t reinstate undersecured claims because original contract terms would cause undersecured creditor to receive

more than it would be entitled to under the Code (i.e. – “payment in full” under reinstatement and a bifurcated claim

and less than payment in full if impaired)

Cramdown more effective when interest rates have substantially declined since original loan, because a debtor can use

“New Loan” to stretch out the secured creditors‟ loan at a present market rate

Cramdown necessary when need to stretch out term of original loan

If rates have substantially increased and if the debtor does not need to extend the terms of the loan, reinstatement may

make sense if lender is oversecured

—Reinstatement more effective tool for dealing with oversecured claims when secured creditor has enforceable claims

for default rate interest or prepayment premiums under section 506(b). Under cramdown, an oversecured creditor

could assert these claims. Reinstatement may allow debtor to limit the secured creditor to its prepetition rights so long

as default was triggered by Bankruptcy Code

22

Credit Bidding

Section 363(b) provides that “after notice and a hearing, [the debtor] may use, sell, or lease, other than

in the ordinary course of business, property of the estate”

Section 363(k) specifically provides for the ability of secured lenders to credit bid:

—“At a sale under [section 363(b)] of property that is subject to a lien that secures an allowed claim,

unless the court for cause orders otherwise the holder of such claim may bid at such sale, and, if the

holder of such claim purchases such property, such holder may offset such claim against the purchase

price of such property”

23

Credit Bidding (cont.)

Limits to Credit Bidding

In re Fisker Automotive Holdings, Inc., Case No. 13-13087 (Bankr. D. Del. Jan. 17, 2014)

—The debtors sought to conduct a private expedited sale of its assets through a credit bid to party that bought a senior

secured position. The committee objected arguing that the debtors should conduct an auction

—The issue was whether the creditor could credit bid the face value of its claim and, if so, whether the court may cap the

creditor‟s right to credit bid

—The bankruptcy court noted that although pursuant to section 363(k), a secured creditor is generally allowed to credit

bid (it is “beyond peradventure that a secured creditor is entitled to credit bid its allowed claim”), the Bankruptcy Code

provides that a court may disallow credit bidding “for cause”

—Ruling: The bankruptcy court capped the creditor‟s right to credit bid its $168 million claim at only $25 million (the

amount it paid to purchase the claim) because:

—the credit bid would chill the bidding process;

—an expedited private sale via credit bid would result in an unfair and hurried process, and is inconsistent to

principles of fairness; and

—the amount of the secured claim was uncertain

Ruling under appeal

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Vote Designation

Section 1126(e):

—"the court may designate any entity whose acceptance or rejection of such plan was not

in good faith, or was not solicited or procured in good faith or in accordance with the

provisions of this title”

This allows a bankruptcy court to disqualify or discount a creditor‟s vote for plan

confirmation purposes if the court determines that the vote was not made in good faith

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Vote Designation (cont.)

DISH Network Corp. v. DBSD North America Inc. (In re DBSD North America Inc.)

The Second Circuit upheld the bankruptcy court‟s designation of a creditor‟s votes to reject a chapter 11 plan because the creditor purchased a blocking position after the plan had been filed, in order “to use status as a creditor to provide advantages over proposing a plan as an outsider, or making a traditional bid for the company or its assets” it voted with “ulterior motives” and not in good faith. 634 F.3d 79, 104 (2d Cir. 2011) (quoting In re DBSD, 421 B.R. 133, 139-40 (Bankr. S.D.N.Y. 2009) (J. Gerber))

—The bankruptcy court reasoned that:“[w]hen an entity becomes a creditor late in the game paying . . . [100

cents] on the dollar, as here, the inference is compelling that it has done so not to maximize the return on its

claim, acquired only a few weeks earlier, but to advance an “ulterior motive” condemned in the case law”

—Note - the Second Circuit limited its ruling: “[the] ruling . . . should deter only attempts to „obtain a blocking

position‟ and thereby „control the bankruptcy process for [a] potentially strategic asset‟ . . . our opinion

imposes no categorical prohibition on purchasing claims with acquisitive or other strategic intentions”

—See also In re Derby Development Corp., 2012 WL 2501064 (Bankr. D. Conn. June 27, 2012); In re

Lichtin/Wade LLC, No. 12-00845-8-RDD, 2012 WL 6576416 (Bankr. E.D.N.C. Dec. 17, 2012)

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