Structuring Exit Financing Packages

Structuring Exit Financing Packages

Designs emergence financing structures combining exit term loans, ABL revolvers, and other capital instruments to optimize the post-reorganization balance sheet for a Chapter 11 debtor emerging from bankruptcy.

When To Use

• Debtor or plan sponsor needs to secure committed financing to fund a plan of reorganization
• Evaluating whether an exit term loan, ABL facility, rights offering, or combination best fits the reorganized entity's cash flow and collateral profile
• Comparing competing exit financing proposals from lender groups or backstop parties
• Sizing emergence liquidity to cover plan distributions, professional fees, working capital, and adequate reserves
• Assessing whether existing DIP financing can roll into exit facilities vs. requiring full refinancing

Inputs To Gather

• Plan of reorganization (or latest draft) — distribution waterfall, effective date conditions, cash requirements at emergence
• Reorganized business plan — projected revenue, EBITDA, capex, and working capital needs for 3–5 years post-emergence
• Collateral analysis — borrowing base detail (eligible receivables, inventory, equipment, IP), appraisals, and lien structure
• DIP facility terms — outstanding balance, maturity, conversion or rollover provisions, fees
• Commitment letters / term sheets — from prospective exit lenders or backstop parties
• Disclosure statement financial projections — including plan feasibility analysis and liquidation comparison
• Claims and equity structure — recovery estimates by class, new equity allocation, management incentive plan dilution
• Market comparables — recent emergence financings in the same industry or similar size/credit profile

Workflow

1. Size emergence cash needs — Map every cash use at or around the effective date: plan distributions (cash to creditors), cure payments on assumed contracts, professional fee escrow, wind-down reserves, minimum operating cash, and any cash trap or reserve requirements from lenders.

2. Assess collateral and borrowing capacity — Build or review the ABL borrowing base (advance rates on receivables, inventory categories, reserves). Determine first-lien vs. second-lien capacity on hard assets and enterprise value. Identify any collateral gaps that require unsecured or mezzanine tranches.

3. Design the capital structure — Layer the exit facilities:

   • ABL revolver — sized to working capital volatility; typical advance rates of 85% on eligible receivables and 50–70% on inventory [VERIFY against current market terms]
   • Exit term loan (first lien) — sized to total leverage target, often 2.5–4.0x net leverage at emergence depending on industry
   • Second lien / unsecured notes — if incremental capital is needed beyond first-lien capacity
   • Rights offering or equity backstop — to fill any remaining gap and demonstrate plan feasibility
   • Target total leverage, secured leverage, and interest coverage ratios that satisfy both lender covenants and Bankruptcy Court feasibility standards under §1129(a)(11)

4. Evaluate key terms and covenants — Compare proposals across:

   • Pricing (spread, OID, LIBOR/SOFR floor) [VERIFY benchmark rate conventions]
   • Financial maintenance covenants vs. incurrence-only covenants
   • Mandatory prepayment triggers (excess cash flow sweep, asset sale proceeds)
   • Call protection and repricing provisions
   • Governance provisions — permitted investments, restricted payments, EBITDA add-backs
   • Conditions precedent to funding (confirmation order, effective date deliverables)

5. Run scenario and sensitivity analysis — Stress-test the proposed structure against downside cases:

   • Revenue shortfall (e.g., 10–20% miss to plan)
   • Working capital swings reducing ABL availability
   • Capex overruns or delayed synergies
   • Rising base rates on floating-rate debt
   • Assess covenant headroom in each scenario and identify the tightest constraint

6. Prepare financing comparison matrix — If multiple proposals exist, present a side-by-side comparison of sizing, pricing, covenants, flexibility, and execution certainty. Highlight trade-offs (e.g., tighter covenants but lower cost vs. looser covenants at a premium).

7. Draft exit financing summary — Consolidate findings into a report suitable for the debtor's board, plan sponsor, or Bankruptcy Court disclosure.

Output

The deliverable should include:

• Executive summary — Recommended exit capital structure with total facility sizes, blended cost of capital, and key rationale
• Sources and uses table — All emergence funding sources mapped against every cash use at the effective date
• Capital structure summary — Each tranche (ABL, term loan, notes, equity) with size, rate, maturity, collateral, and key covenants
• Financing comparison matrix (if applicable) — Side-by-side of competing proposals
• Sensitivity / scenario table — Leverage, coverage, and liquidity metrics under base, upside, and downside cases
• Covenant compliance forecast — Projected maintenance covenant compliance for at least 8 quarters post-emergence
• Key risks and mitigants — Execution risk, market risk, refinancing risk, and operational risks to the structure
• Open items and conditions precedent — Outstanding diligence, regulatory approvals, or confirmation-order conditions

Quality Checks

• Confirm sources and uses balance to the dollar — no unexplained gaps
• Verify that projected leverage and coverage ratios at emergence and through the projection period satisfy both lender term sheets and §1129(a)(11) feasibility requirements [VERIFY applicable Bankruptcy Code provisions for non-U.S. proceedings]
• Cross-check borrowing base against the most recent collateral appraisals and field exam reports
• Ensure DIP-to-exit conversion or refinancing mechanics are consistent between the DIP credit agreement and the exit commitment letter
• Validate that all plan distribution amounts tie to the disclosure statement and claims analysis
• Flag any SOFR/LIBOR transition issues or benchmark rate mismatches across facilities [VERIFY]
• Confirm that the proposed structure does not trigger unintended tax consequences (e.g., cancellation of debt income, ownership change limitations under IRC §382) — escalate to tax counsel if uncertain
• Review intercreditor terms if multiple secured tranches exist — ensure lien priority, turnover, and enforcement standstill provisions are clear