USA Law and Practice Contributed by: Stelios G Saffos, Dan Seale, Peter Sluka and Alfred Xue, Latham & Watkins LLP
7.9 Dissenting Lenders and Non-Consensual Restructurings Out of court, dissenting lenders’ rights are typically limited to so-called “sacred rights” in the credit agree - ment. The scope of sacred rights is credit agreement- specific and is currently being litigated in several high- profile cases. In bankruptcies, dissenting lenders can vote to reject a bankruptcy plan, and if such dissenting lenders con - stitute at least half of the creditors in that class, or hold more than one-third of the claims in that class, then the bankruptcy plan will need to be approved under the US Bankruptcy Code’s “cram-down” procedures. If dissenting lenders constitute a smaller amount of such class, they still have rights to object under the “best interests of creditors” test, which requires that a creditor receive at least the recovery it would receive in a liquidation. 7.10 Expedited Restructurings Pre-arranged and pre-packaged plans are available in the United States. A true pre-packaged plan, in which votes are solicited and received pre-filing, is the most expedited type of bankruptcy and there are precedents for such bankruptcies lasting a very short time (less than one week). A pre-arranged case can be somewhat faster than a “freefall” bankruptcy, but is not as fast as a pre-packaged case.
examples of proceeds of avoidance actions securing DIP financings). 7.7 Set-Off Rights Section 553 of the US Bankruptcy Code preserves set-off rights with respect to mutual debts. 7.8 Out-of-Court v In-Court Enforcement Out-of-court restructurings are the most common restructurings in private credit. While they take many forms, the most common is when the lenders “take the keys” and the private equity sponsor(s) receive a mutual release. As part of such restructurings, the lenders often exchange some quantum of their debt for the equity of the borrower or the holding company that owns the borrower. It is also commonplace for the lenders to provide new funding to the company to defray the cost of the restructuring and provide go- forward liquidity. Bankruptcies in private credit usually occur when (a) the buyer of a distressed company prefers to pur - chase in bankruptcy because of the court ordering the sale to be “free and clear” of all liens and other encumbrances, (b) there are burdensome leases or other contracts that the lenders or the buyer wishes the company to reject, or (c) there is litigation that the lenders or the buyer wish to leave behind.
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