lev-os 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
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.
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.
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)
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)
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
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).
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