It is no secret to Chapter 11 practitioners that this bankruptcy cycle differs from the last in a number of respects – not the least of which is the comparative scarcity of DIP financing for operating Chapter 11 debtors seeking to execute a “stand-alone” reorganization. Bob Eisenbach of Cooley Godward’s San Francisco office recently flagged and commented on an October 2008 Reuters article addressing this issue and its impact on the economics and feasibility of reorganization. In a nutshell, what DIP financing capacity remains in this market has become much more expensive, making acquisition “bridge financing” more attractive and possibly increasing the trend toward Chapter 11 bankruptcy sales.
The post-petition lending environment is complicated further by the disclosure requirements of the Federal Rules of Bankruptcy Procedure and the Local Bankruptcy Rules of many jurisdictions. Rule 4001(c) of the Federal Rules of Bankruptcy Procedure require a debtor to disclose a summary of the essential terms of any proposed use of cash collateral and/or financing. The Bankruptcy Local Rules of many jurisdictions follow suit. In the Central District of California, for example, the Bankruptcy Local Rules require that “Every motion requesting the approval of a stipulation providing for the use of cash collateral (11 U.S.C. § 363(c)), or postpetition financing (11 U.S.C. § 364(c)), or both, shall be accompanied by court-approved form F 4001-2, ‘Statement Pursuant to Local Bankruptcy Rule 4001-2′ . . . .” The Statement in question requires the identification and disclosure of specific terms pertinent to such financing arrangements.
In the present lending landscape, how much additional disclosure, if any, may be required? The Delaware Bankruptcy Court recently reviewed and granted a “first-day” request, by Barclays Bank – DIP lender for The Tribune Company (parent for the Chicago Tribune and the Los Angeles Times) and its affiliates – seeking authorization for Barclays to submit the details of its DIP fee structure under seal. Papers filed by counsel for the debtors and Barclays acknowledged the general disclosure requirements of Bankruptcy Rule 4001(c), but argued that “[i]t has become essential to Barclays’ ability to provide [DIP financing], in these times . . . that the highly-sophisticated and proprietary methodology for calculating such fees remain strictly confidential.” Explaining further that “Barclays’ methodology is unique and proprietary intellectual property the disclosure of which would put Barclays at a competitive disadvantage,” Barclays and the debtor requested that fee letters ancillary to the DIP lending arrangements be filed under seal with the Court, and disclosed only to the US Trustee’s Office. For a summary of the transaction from the lender’s perspective, check out the post at Mondaq.
Finding that such terms satisfied the “confidential commercial information” requirement of Section 107(b) of the Bankruptcy Code, the Court approved this arrangement.
In addition to higher pricing, it now appears that DIP lenders may have another possible incentive to reenter the DIP lending space. Where courts are disinclined to permit such confidentiality – or where the cash-strapped debtor proves an otherwise attractive acquisition target - will strategic buyers willing to offer “bridge loans” to a debtor in connection with a proposed acquisition have another leg up on increasingly pricey DIP loans?