Photo of Frederick (Rick) Hyman

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.
Continue Reading Backstops Survive Another Challenge