On September 14, Crowell partners Rick Hyman and Gregory G. Plotko, together with Dawn Haghighi, General Counsel of PVC Murcor, published an article on the Association of Corporate Counsel’s ACC Docket, “Your Counterparty Filed Chapter 11 – Make Sure to Check These 10 Boxes.” The article provides valuable insight for in-house counsel who find themselves
Merchant Cash Advance Redux: Loan vs True Sale – New York Federal Courts Weigh In
In our February 14, 2022 post, we highlighted certain consequences regarding the treatment of a merchant cash advance (“MCA”) transaction as a “loan” rather than a “true sale” of receivables or future receivables and the implications of such treatment to an MCA provider. Among the takeaways was that a court’s characterization of an MCA transaction as a loan opens an MCA provider up to a host of potential claims by cash advance recipients (“customers”) and their successors (e.g., bankruptcy trustees) that are not otherwise available if the transaction is treated as a true sale.
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SDNY Bankruptcy Court Prohibits a Court Appointed Claims Agent from Selling Direct Access to Creditor Claims Register Data to XClaim
In a matter of first impression relating to an important bankruptcy claims administration issue, Judge Sean H. Lane of the United States Bankruptcy Court for the Southern District of New York, recently denied the ability of a court appointed claims agent to sell and profit from providing direct access to publicly available claims register information.
Celsius Networks’ Warnings Highlight Crypto Bankruptcy Risks
Celsius Networks (“Celsius”) became the latest cryptocurrency platform to raise market temperatures by halting all withdrawals, swaps and transfers from and between its customers’ accounts on June 12, 2022. Celsius touted a next wave of “unbanking,” operating a lending platform allowing the holders of digital assets the opportunity to earn a significantly high returns on those assets. Due, in part, to the lack of regulation, Celsius, and other firms like it, retain wide discretion to use of their customers’ assets and, among other things lend those assets to other platforms at higher rates, enter into complex swap and option transactions that bet on price movements, enter into repo or other lending arrangement to increase yield, or invest in other cryptocurrency projects, all without regulatory constraint. Indeed, it was this broad discretion that led, in part, to the downfall of a similarly situated platform, Cred, Inc., and its ultimate bankruptcy discussed here on Crypto Digest.
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Lessons from Recent Cryptocurrency Bankruptcy Case: Cred, Inc.
Given the recent media coverage and growing concerns among investors over the risks associated with a bankruptcy filing of a cryptocurrency exchange, it feels timely to highlight some issues that arose in the Chapter 11 cases of Cred Inc. and certain of its affiliates (collectively, “Cred”) also discussed on Crypto Digest.
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The Continued Growth of Unitranche Financing
Unitranche financing began as a middle-market product, tracing its origins to the days of recovery from the global credit crisis. The credit markets re-opened with an explosion of available capital from traditional lenders, business development companies and other direct lenders. With an increasing supply of capital, leverage shifted to borrowers and private equity, allowing them to better dictate the terms and conditions of their loan facilities. With the greater prevalence of so-called “covenant-lite” loans, also came the exponential growth of the unitranche market. What began as a financing structure most often used for loans of less than $50 million, unitranche loans are now regularly used for financings exceeding $1 billion, and in 2021, up to $3 billion. A unitranche facility combines the benefits of multi-tranche debt regularly found in the syndicated lending markets (i.e., the ability to raise funds from lenders with different risk profiles and return expectations), with those of speed and certainty that are a hallmark of the private lending community. In its simplest form, unitranche facilities are structured using a single-tier, combing the senior and junior components of syndicated loans into one loan. Whereas a syndicated loan may require distinct grants of senior and junior liens on collateral to multiple lending groups, a unitranche uses a single lien to secure the entire facility. The benefits to the borrower are obvious: it is faced with a single term loan: one set of principal and interest payments, a single package of covenants to monitor, and a uniform list of defaults to avoid. Layering on the advantage of a single agent, a unitranche facility greatly streamlines loan administration from the borrower’s perspective.
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Contractual Ambiguity (or Not) Tested in Sears
Late last week, the District Court for the Southern District of New York provided a reminder of the importance of precise drafting. In Transform Holdco LLC v. Sears Holdings Corp. et. al., CV-05782, Doc. 20, the contractual question at issue related to the purchase of substantially all of the assets (and assumption of certain of the liabilities) of Sears and its domestic and foreign subsidiaries by Transform Holdco LLC (“Transform”) in Sears’ bankruptcy case. Typical of a sale under Section 363 of the Bankruptcy Code, Transform’s purchase was largely structured as an asset sale, allowing it to acquire those assets “free and clear” of liens and encumbrances. Also typical, certain assets were excluded from the sale, including cash and cash equivalents of the US and foreign entities, defined in the purchase agreement as “Excluded Assets.” Following execution of the agreement, the parties entered into an amendment which allowed Transform some flexibility regarding its purchase of the assets of Sears’ foreign subsidiaries. Because the transfer of the foreign assets might be problematic, Transform was granted an option to instead acquire the equity of those subsidiaries. The amendment provided that, if Transform “determines (in its sole discretion)… that it is necessary or desirable to acquire all of the equity interests in any Foreign Subsidiary in lieu of the acquisition of assets and assumption of liabilities…, then the [s]ellers shall use reasonable best efforts to transfer such equity interests, which equity interests shall be deemed to be Acquired Foreign Assets.” (emphasis added). The agreements were governed by Delaware law.
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The Use of Litigation Funding in Bankruptcy
The financing of commercial litigation has grown enormously since it first appeared on the scene in the US, about 15 years ago. While still small relative to the overall US financial market, it is estimated that more than $11 billion has been invested in litigation finance in the US last year alone. In essence, lenders (often referred to as “funders”) provide commercial claimants and contingency law firms with the capital needed to prosecute legal claims which the funders believe have a strong likelihood of success. Funders receive a return based upon, and typically conditioned upon, a successful conclusion of the litigation. The use of litigation funding by bankruptcy practitioners is a growing phenomenon and one that we see as an increasingly important element in how bankruptcy-related litigation is managed.
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Backstops Survive Another Challenge
Backstop commitments have become commonplace in large corporate bankruptcy cases – they provide certainty to the debtor that it will have the funds needed to satisfy its obligations to creditors under its plan of reorganization and that it will have liquidity to operate post-bankruptcy as the reorganized entity. Backstop commitments are also a way for certain creditors to generate some additional return in the form of commitment fees and expense reimbursements in exchange for their agreement to backstop all or a material portion of a proposed rights offering or other financing arrangement. Typically, the opportunity to participate as a backstop provider is not offered to all creditors in a class but is rather limited to those having large claims – often members of an ad hoc group that have the leverage to negotiate for such treatment, and most importantly, the financial wherewithal to perform. For that reason, the fees associated with backstop commitments are sometimes controversial, criticized by those not participating as an unnecessary expense paid by a debtor to a preferred group of creditors in exchange for their support and/or violative of Section 1124(a)(4) of the Bankruptcy Code which requires generally that similarly situated creditors receives the same treatment.
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Trends in ESG for Members of the Restructuring Community
Considerations of “environmental, social and governance” (or ESG) criteria with respect to a company’s management and operations continue to take on greater importance in lenders’ and investors’ credit and investment decisions. How a borrower or a target company measures up to these ever-developing ESG standards will impact its cost of capital and value to potential investors and acquirors. While it remains difficult to predict how the perception of a company’s ESG performance (or even its rating) may impact its capital-raising efforts or its likelihood of success or failure, a number of trends seem inevitable.
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