Working with Bankruptcy Cases:
Small and midsize companies in Chapter 11 Bankruptcy typically will have trouble finding new financing with which to restructure their debt. To restructure debt is simply to get new financing and try through your attorney to discount or pay down the existing debt. Generally, there are two kinds of debt in these cases. The first type of debt is secured debt, where the creditor has filed a UCC-1 lien against the debtor company, which is done through the Federal Uniform Commercial Code Act.
Essentially this is done by an actual physical filing at the Secretary of States office in the specific state where the lien is filed and gives the lien holder rights in court with respect to getting their money first in the event of a default on the loan. When a lien is filed on any type of collateral it is said to be encumbered and therefore cannot be used as collateral for a new loan.
However, in these cases that we work on the encumbered collateral can be used in the following manner: lets say a piece of equipment has a liquidation value of $10,000 and has a lien against it for $7,500 and lets say our lender can only give them a 50% loan to value which would be $5,000. The deal can still work if the existing lender were to agree to take a discount and accept the $5,000 payment and basically write off the other $2,500.
This type of negotiation happens every day because the existing bank has probably already written the loan down substantially because of the Chapter 11 filing and probably has the loan in their special workout department and would be happy just to get out of the loan without problems and additional costs. As a general rule secured debt is still discountable to up to 50% of the loan amount depending on the local economy and the condition of the collateral.
The second type of debt is unsecured debt, which is money owed by the debtor company against which no lien has been filed. Unsecured debt could be money the debtor owes to vendors etc. and is often settled at 5 and 10% on the dollar. In other cases the debtor will agree to pay it all but over a 5 or 7-year period in installments.
Monies owed State or Federal government for taxes are generally paid out over a 6-year period under the terms of a plan of reorganization. Sometimes they are settled using the governments’ offer in compromise program wherein the government agrees to accept some portion of the total amount and writes off the rest.
If a company has filed a Chapter 11 it puts all creditors (whether secured or unsecured) on notice and stops all collection actions until such time as a plan of reorganization is filed and approved by the Bankruptcy Court. Any new financing, which is generally needed in order to have new money with which to pay off or settle with the secured and unsecured creditors, must be approved by the Court. This is typically not a problem, as the Court welcomes new financing in order to allow the case to proceed.
Commercial Bankruptcy cases can drag on for years and it is never too early in the case for the debtor and their counsel to take a look at the option we provide for new financing. It does not mean that they will take it but you can never have too many options when in a Chapter 11 case. Some of the other options a Chapter 11 debtor might have would be to sell the company, merge with another company, find a partner, get equity or sell off some of the assets.
Financing provided through our lenders can either be DIP (debtor in possession) or Exit financing. The loan is the same in each case the only difference being that in DIP financing the borrower remains in the Chapter 11 and in Exit financing the new financing brings them out of the 11.
Monies owed to creditors, either secured or unsecured, is called, either post petition debt of pre-petition debt, depending on when it was incurred.
If the attorney you have called says the cases has been dismissed you would ask for the name and phone number of the principal anyway because they still may need and want new financing. If the case has been converted to a Chapter 7 (this is where the company would be liquidated in order to pay the creditors) we still may be able to help because the principal may wish to buy back some of the equipment or other assets through the auction process and if so we might be able to provide financing to help him do this.
Generally this happens when the previous owner wants to restart the company and can be done provided that it is done under the auspicious of the Court and there is no fraudulent conveyance (fraudulent conveyance would be where the debtor tries to move assets to a newly formed company and in the process does not pay the creditors when in fact there is money to do so)
While Chapter 11 cases generally involve higher interest rates (as water seeks its own level so the costs of financing is commensurate with the risk of the loan and there is no worse credit condition than a Chapter 11), often the monthly payment under our loans are lower than what the borrower was previously paying. This happens because sometimes we can provide an interest only loan where the borrower does not have to amortize (principal reduction) the loan and therefore a loan priced at 15% interest only can have lower monthly payments that an 8% loan amortized over a 10-year period.
Remember there is rarely a situation where a company in Chapter 11 would not benefit from a proposal for new financing. It is never to early to get this option in front of them. If the attorney says they haven’t decided what to do yet the response from us should be that a financing proposal for a specific amount of money might help them in their process of deciding. Additionally, the attorney representing the company, in Chapter 11, has a fiduciary responsibility to make all sources of new money known to his client. To do otherwise would be to deny his client access to a possible means to exit the 11.