Interim Financing Definition

A striking incentive is roll-up financing. 364 of insolvency law empowers a borrower to obtain financing after competition. 364 (c) of insolvency law allows a creditor, among other things, to grant the creditors a debt with precedence over all other prior ity receivables, which is designated as over-priority.

Through this agency, borrowers have used more creatively to obtain post-competition funding, such as roll-up financing. Whilst in general court is hesitant to authorise financing that reinforces the positions of certain pre-competitive ceding companies at the cost of other ceding companies,9 court has in recent years been more consistent in approving roll-ups.

It appears that in tense loan situations, the court has authorised roll-up financing to make sure that borrowers receive post-competition financing and prevent bankruptcy. Tribunals are prepared to authorise roll-ups if the pre-competitive lender's readiness to prolong financing after competition is on more favourable conditions than those of other suggested providers of finance, the resulting damage or possible bias against other providers of finance is offset by the benefits to the assets, and the financing conditions are in the best interests of the borrower, its estates and its borrowers.

For example, borrowers and DIP financiers have turned to roll-up financing as their preferential loan system. The question of whether businesses will remain dependent on roll-up financing (or whether creditors will remain dependent on it) as loan spreads brighten will remain to be seen. There are three current cases showing the increasing acceptability of roll-up financing.

The $8 billion DIP funding from Lyondell was then the biggest DIP funding in story (surpassed only by GM a few month later). Lyondell's pre-competitive principal position comprised a $12.2 billion Senior Secured Facilities exposure, a $8.3 billion Interim Facilities exposure, a $1.03 billion Senior Secured Portfolio-Based Facilities exposure, and $1.3 billion Hedged and Uncovered Bonds with varying maturities.

Lyondell had great difficulties in obtaining the DIP financing necessary for the continuation of postal competition due to the almost freezing debt market at the date of notification. On its first consultation date, Lyondell suggested DIP financing of $8 billion, comprising $1,515 billion in revolving loans backed by claims and inventories, $3 billion.

$25 billion in new money-secured forward credits and a revised rollup of $3. 25 billion of available indebtedness in the older secured lending facility. 25 billion in new money-secured forward credits. Lyondell's amended roll-up proposal was a $ for-dollar roll-up in which Lyondell converted one buck of its pre-competitive indebtedness into post-competitive indebtedness for every buck raised by owners of priority collateralized loan facilities (the "Senior Secured Lenders"). 1.5 billion of the pre-competition indebtedness was raised in the form of a reserve of one buck for each buck raised by the owners of the priority collateralized loan facilities (the "Senior Secured Lenders").

In addition, this bundled liability did not have to be fully settled in full in cash on the due date of the DIP or upon withdrawal from Section 11; rather, the borrowers reserved the right to extend the settlement of the bundled liability for five years, except as required by the cramp-down provisions of Section 1129(b) of the Insolvency Code.

After all, the roll-up would be subordinated to the asset-backed and new-money term loan. On the first date of the consultation, a number of bondholders raised objections on the basis that all Senior Secured Lenders should have the possibility to take part in the roll-up, not just the group that had undertaken to produce new funds.

Following further negotiation, the DIP creditors and borrowers reached an agreement on the opening of 41st DIP. Bring 5% of DIP funding to commercial ization on a pro-rata base so that other Senior Secured Leenders can take part in the financing and roll-up. The Senior Secured Leenders already pledged to support the $3.25 billion in new funds that were not fully tied to the markets approved 13.

Following this trade-off, the Tribunal authorised interim DIP financing. Lyondell thereafter raised further complaints against the roll-up, claiming that the amended roll-up was not correctly structure and infringed the Bankruptcy Code's prioritisation regime because it was alleged to have secured part of the DIP lenders' prepayments with post-competition guarantees.

However, after a three-day consultation, the Konkursgericht authorised the DIP financing on a definitive footing, which included the amended roll-up financing. LandSource and the first pledgees offered DIP financing totaling $1.2 billion, comprising $135 million in net new funds in a priority backed revolving line financing facility, a new sub-finance of up to $35 million, a new swing line financing of up to $10 million, and a subordinated debt raising up to $1 billion in pre-competitive liabilities for the first pledge.

Essentially, this subordinated financing provided for the planned re-financing or pooling of all pre-competitive financing into the DIP post-competition as part of a financing provided by the same creditors for some USD 135 million of new financing. VeraSun had a total of approximately $1.5 billion of fully committed, fully diluted capital covered bonds outstanding at the time of VeraSun's liquidation, which included a $81.7 million syndicated facility, $210 million in senior notes, $450 million in predominantly uncollateralized bonds, a $266 million syndicated line of credit, a $464 million syndicated line of credit and a $90 million construction advance.

VeraSun's pre-competitive creditors each financed certain business units within VeraSun's three divisions and these debts were not secured against collateral. VeraSun could not obtain any financing from third parties after competition before the start of the cases under Section 11. Gradually, VeraSun was confronted with significant cash flow issues after submitting the documents before it secured DIP financing from various creditors against competition.

Postal competitive financing comprised USD 93 million in new credit lines and an increase of USD 103 million in pre-competitive financing liabilities. In particular, the DIP facilities, financed by VeraSun Energy's pre-competitive bond holders, provided for a rolling up of the pre-competitive prioritised bonds of no more than 110% of the amount of new money paid to borrowers, totalling $103 million of pre-competitive prioritised bonds or approximately 60% of the remaining prioritised bonds guaranteed.

Collapsed debtors replied that, after approving DIP funding, they had allowed any interested debtor protected from competition to join the group and so the collapsed debtors were not an exclusively group of debtors but a group of volunteer new debtors. It also reaffirmed that VeraSun could not find any other financing sources on better conditions than those of the seniors and that the seniors would not borrow without the roll-up.

They thus reasoned that VeraSun had done justice to its load by demonstrating the need for the roll-up. VeraSun's insolvency tribunal cleared the suggested financing of the initial rollup and found that VeraSun fulfilled its burdens of proving the need for the rollup. Accordingly, on December 4, 2008, the Proceedings Tribunal cleared a $196.6 million dollar domestic IP financing, which included a $103 million rollup.

Delaware and New York's Southern District Insolvency Tribunals appear to have agreed to roll-up financing as a key instrument to secure competitive postal financing in a tense postal environment, provided that there is adequate evidence that the roll-ups are necessary and justifiable under the given conditions. In addition, lenders must make sure that the roll-up is not a transverse collateral.

Therefore, it seems likely that these instruments will continue to be available as lending market conditions continue to brighten in the years ahead. Bondholders should consider whether the provision of roll-up financing will benefit them in the event of a particular insolvency, while borrowers should consider this financing as a possible incentive to secure the necessary post-competitive financing.