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
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342
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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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CO
NF
IDE
NT
IAL —
DO
NO
T D
IST
RIB
UT
E O
R R
EP
RO
DU
CE
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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345
CO
NF
IDE
NT
IAL —
DO
NO
T D
IST
RIB
UT
E O
R R
EP
RO
DU
CE
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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CO
NF
IDE
NT
IAL —
DO
NO
T D
IST
RIB
UT
E O
R R
EP
RO
DU
CE
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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347
CO
NF
IDE
NT
IAL —
DO
NO
T D
IST
RIB
UT
E O
R R
EP
RO
DU
CE
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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CO
NF
IDE
NT
IAL —
DO
NO
T D
IST
RIB
UT
E O
R R
EP
RO
DU
CE
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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349
CO
NF
IDE
NT
IAL —
DO
NO
T D
IST
RIB
UT
E O
R R
EP
RO
DU
CE
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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CO
NF
IDE
NT
IAL —
DO
NO
T D
IST
RIB
UT
E O
R R
EP
RO
DU
CE
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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351
CO
NF
IDE
NT
IAL —
DO
NO
T D
IST
RIB
UT
E O
R R
EP
RO
DU
CE
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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CO
NF
IDE
NT
IAL —
DO
NO
T D
IST
RIB
UT
E O
R R
EP
RO
DU
CE
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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353
CO
NF
IDE
NT
IAL —
DO
NO
T D
IST
RIB
UT
E O
R R
EP
RO
DU
CE
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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CO
NF
IDE
NT
IAL —
DO
NO
T D
IST
RIB
UT
E O
R R
EP
RO
DU
CE
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.
2010 Valcon Text Print.indd 3542010 Valcon Text Print.indd 354 1/21/10 3:04 PM1/21/10 3:04 PM
American Bankruptcy Institute
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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