Bankruptcy - Commercial Banking

Who is bankruptcy governed by in the US?

Bankruptcy is governed by the US bankruptcy code (Federal Law)

Who is the debtor in a bankruptcy?

the company that is filing for bankruptcy; the debtor files a petition in the Federal Bankruptcy Court seeking protection and relief from all creditors (lenders, unpaid employees, traders, third party contractors, etc)

What is an automatic stay?

An automatic stay is what is put in place once bankruptcy has been declared.

all claims "stayed" as of the petition date and Creditors must cease and desist all collection efforts subject to BK Court approval
o This is the first thing that happens in bankruptcy
o All creditors must stop their collects and wait for the court to see how things are going to go

What is the timeline of a bankruptcy?

1. Prepetition
2. Date BK filed - an automatic stay is put in place
3. Post petition world

Who runs the point for the bank in bankruptcy?

The Special Assets Division (SAD) runs the point for the bank

Why does bankruptcy exist?

- Bk gives to the honest but unfortunate debtor a new opportunity in life and a clear field for future effort without pressure and discouragement from preexisting debt

- The debtor gets a fresh start

What is the summary of a Chapter 7 bankruptcy?

"no way you can survive, company had gone over"

What happens in a Chapter 7 bankruptcy?

1. Company can not recover from where they are at --> Files for Ch 7 bankruptcy

2. Company will dissolve --> no longer a "going concern" for the bank

3. A trustee is appointed by the BK Court to liquidate and sell of assets ASAP

Is time a factor in a Chapter 7 bankruptcy? What about in a Chapter 11 bankruptcy?

Yes, time is a huge factor in a Ch 7 bankruptcy. Every day that goes by makes a difference as the value of the company continues to decrease.

Time is not important in Ch 11 because there is still a possibility the company will recover.

What is a proof of claim?

what all creditors (secured or unsecured) must file in BK 7 stating what claim they have and debt the company owes them; if they don't than the creditor might not get recovered

Which type of bankruptcy is a "proof of claim" filed in?

Chapter 7 bankruptcy, not in chapter 11

If a creditor doesn't file a proof of claim what may happen to them?

They may not be recouped in the Chapter 7 bankruptcy

What happens once all the assets are liquidated in a Ch 7 bankruptcy?

· Once all assets are liquidated all proceeds go to the creditors in order of performance and the remaining unpaid debt is permanently discharged

What is the main difference between a Ch 7 and Ch 11 bankruptcy?

In Ch 7 they hire a BK trustee that night that it is filed. In BK 7 its thought that every day matters as the value of the asset goes down every day. In BK 11 you have a DIP, no trustee and no proof of claim required

What is the summary of a Chapter 11 bankruptcy?

"Reorganization OR Liquidation ("Orderly Sale")"

Can a company emerge from a Chapter 11 bankruptcy?

Yes it can or it can do an orderly sale of its assets

What is a "Debtor in Possession" and when is it placed on a company?

A Debtor in Possession allows Debtor (the company in bankruptcy) to continue to operate the Company; so the company is still in operation and possession of the company

o There is no trustee
o Board of the Company and management stays in place

What does it mean if a company is in bankruptcy but is a "going concern?"

This means that there is hope for the company and the bank is still concerned with its possible recovery

What does it mean if a company is in bankruptcy but is no longer a "going concern?"

This means that the company is not going to recover, possibly has filed for Ch 7 bankruptcy and the bank has lost hope

Does an automatic stay happen in only a Chapter 7 bankruptcy?

No, an automatic stay happens in BOTH the Ch 7 and Ch 11 bankruptcy, but the difference is that in Ch 11 bankruptcy the creditors do not need to file a "proof of claim"

Do you need to file a "proof of claim" in a Ch 11 bankruptcy?

No, only in Ch 7

What is a Chief Restructuring Officer (CRO)?

A CRO is required to be hired in BK 11; this placement of a CRO is usually required by the senior secured creditors (bank) to be put in place to takeover and run the finances of the company
They sort out what is going on in the company and reports directly to the BOARD of the company. They do NOT report into the CEO or the CFO.

Can the CFO or a CEO tell the CRO what to do?

No!

What will the CRO create for the company in a Ch 11 bankruptcy?

They will create a 13-week cash flow vetted by the FA to determine the timelines in which the company will run out of cash - the company is still operating in this situation

Who is the bank's representative in a Ch 11 bankruptcy?

The financial advisor

What is a financial advisor?

who the Senior Secured Creditors hires (commercial banks) engage in a financial advisor (FA) firm = experts at restructuring companies
· CROs are inside the company working to restructure the company; the FA advocates for the bank and is the bank's expert

What is a DIP loan?

a DIP loan can happen in a Ch 11 bankruptcy and is a "super priority" loan that can help the company recover.

- this is "post petition" debt

Who must approve a DIP loan?

The BK Court

Where does the DIP loan rank in priority of the other debt?

It ranks "super priority" and automatically jumps to the top to be repaid first

What happens if you default on the DIP loan?

o Default under the DIP loan results in conversation from Ch 11 to Ch 7 liquidation if default not cured. Default allows DIP lender to call on the DIP loan

What type of structure is a DIP loan?

These loans are term loan structured and you typically don't have amortization because it gets repaid at the sale of the company with its assets.

What is a DNO policy?

Directors and Owners insurance; its if your directors and offiercers do something bad (fraud) you can file a claim against them and the insurance will pay a certain amount

o The insurance protects the company from being sued based off the actions of the directors and owners

What is the Unsecured Creditor's Committee (UCC)?

a committee that is comprised of the 7 largest unsecured creditors (not banks, banks are secured); the UCC drafts and approves the reorganization plan (game plan to emerge from Ch 11 BK; the UCC is motivated to enable the company to emerge from Ch 11 BK with a fresh start

What is the UCC's main job?

To draft and approve the reorganization plan for the company to reemerge from Ch 11

Can the UCC make decisions regarding secured creditors collateral or entitlements?

No! The committee is made of the 7 largest unsecured creditors and does not have a say in anything related to the secured creditors.

What is the Fulcrum class of creditors?

first "impaired" class (first class of creditors that will lose money - usually unsecured but can be senior or junior secured)

o This is the first group of people that will lose money

What is the order of repayment in a BK?

1. DIP Lenders
2. Administrative costs (post-petition eages, taxes, professional fees like CRO and FA, legal fees)
3. Senior Secured
4. Junior/Subordinated Secured
5. Senior Unsecured (Capital markets)
6. General unsecured
7. Subordinated unsecured
8. Preferred equity
9. Common equity

What is a 363 Sale in BK?

the company is not coming out of BK and it is an orderly sale (like Ch 11) and what you are working towards is an AUCTION; you are trying to get top dollar for the assets

· This is an auction so you want the top dollar

What are the two types of buyers a 363 Sale?

1. Strategic - a company that would buy the assets if they think it can merge into their business (ex: like Lionsgate buying more things for their library); strategics typically pay MORE

2. Financial - a company that is looking for a deal and to flip the asset and is the distressed asset specialist; they like to buy on the cheap, put new management in and get it on its feet and then sell it to a strategic; financial typically pay LESS

What happens to the assets under a 363 Sale?

· Under the bankruptcy code there is a "363 sale" of assets; whoever take these assets takes the assets "free and clear" from any liens on them or preexisting debt

o The 363 clauses essentially cleans the assets for you

What is the fair market value of the company used for?

When the FA makes the fair market value of the company, this value is also a mark for the bankruptcy process to get a sense for what the assets are worth

What is a stalking horse bidder (SH)?

someone that commits to buying the assets before the 363 sale takes place
o Talking horses get a kill fee and they will get this fee is someone else buys it

o The kill fee comes from the proceeds of the sale and will be lumped into the administrative costs
o Ex: If the SH says they are buying it for $100mm and a bidder comes in and buys it for $105mm, the SH will not get the assets because someone outbid them but they will get a kill fee

What is a kill fee?

A kill fee is what is given to the stalking horse bidder if someone else buys the company and they do not get it