1. Class 14 Bankruptcy, Spring, 2009 DIP Financing Randal C. Picker Leffmann Professor of Commercial Law The Law School The University of Chicago 773.702.0864/r-picker@uchicago.edu Copyright © 2005-09 Randal C. Picker. All Rights Reserved.

2. 363(a): Cash Collateral n (a) u In this section, ‘‘cash collateral’’ means cash, negotiable instruments, documents of title, securities, deposit accounts, or other cash equivalents whenever acquired in which the estate and an entity other than the estate have an interest and includes the proceeds, products, offspring, rents, or profits of property and the fees, charges, accounts or other payments for the use or occupancy of rooms and other public facilities in hotels, motels, or other lodging properties subject to a security interest as provided in section 552(b) of this title, whether existing before or after the commencement of a case under this title. September 20, 2015Copyright © 2005-09 Randal C. Picker2

3. 363(c)(2): Restrictions on Use of Cash Collateral n (2) u The trustee may not use, sell, or lease cash collateral under paragraph (1) of this subsection unless— w (A) each entity that has an interest in such cash collateral consents; or w (B) the court, after notice and a hearing, authorizes such use, sale, or lease in accordance with the provisions of this section. September 20, 2015Copyright © 2005-09 Randal C. Picker3

4. 363(e) n (e) u Notwithstanding any other provision of this section, at any time, on request of an entity that has an interest in property used, sold, or leased, or proposed to be used, sold, or leased, by the trustee, the court, with or without a hearing, shall prohibit or condition such use, sale, or lease as is necessary to provide adequate protection of such interest. … September 20, 2015Copyright © 2005-09 Randal C. Picker4

5. September 20, 2015Copyright © 2005-09 Randal C. Picker5 364 n Obtaining Credit: Unsecured Debt u (a) If the trustee is authorized to operate the business of the debtor under section 721, 1108, 1203, 1204, or 1304 of this title, unless the court orders otherwise, the trustee may obtain unsecured credit and incur unsecured debt in the ordinary course of business allowable under section 503(b)(1) of this title as an administrative expense.

6. September 20, 2015Copyright © 2005-09 Randal C. Picker6 364 (Cont.) n Obtaining Credit u (b) The court, after notice and a hearing, may authorize the trustee to obtain unsecured credit or to incur unsecured debt other than under subsection (a) of this section, allowable under section 503(b)(1) of this title as an administrative expense.

7. September 20, 2015Copyright © 2005-09 Randal C. Picker7 364 (Cont.) n Obtaining credit (cont.) u (c) If the trustee is unable to obtain unsecured credit allowable under section 503(b)(1) of this title as an administrative expense, the court, after notice and a hearing, may authorize the obtaining of credit or the incurring of debt –

8. September 20, 2015Copyright © 2005-09 Randal C. Picker8 364 (Cont.) w (1) with priority over any or all administrative expenses of the kind specified in section 503(b) or 507(b) of this title; w (2) secured by a lien on property of the estate that is not otherwise subject to a lien; or w (3) secured by a junior lien on property of the estate that is subject to a lien.

9. September 20, 2015Copyright © 2005-09 Randal C. Picker9 364 (Cont.) n Obtaining Credit: Senior Secured u (d)(1) The court, after notice and a hearing, may authorize the obtaining of credit or the incurring of debt secured by a senior or equal lien on property of the estate that is subject to a lien only if - (A) the trustee is unable to obtain such credit otherwise; and (B) there is adequate protection of the interest of the holder of the lien on the property of the estate on which such senior or equal lien is proposed to be granted.

10. September 20, 2015Copyright © 2005-09 Randal C. Picker10 364 (Cont.) w (2) In any hearing under this subsection, the trustee has the burden of proof on the issue of adequate protection.

11. September 20, 2015Copyright © 2005-09 Randal C. Picker11 364 (Cont.) n Obtaining Credit (Cont.) u (e) The reversal or modification on appeal of an authorization under this section to obtain credit or incur debt, or of a grant under this section of a priority or a lien, does not affect the validity of any debt so incurred, or any priority or lien so granted, to an entity that extended such credit in good faith, whether or not such entity knew of the pendency of the appeal, unless such authorization and the incurring of such debt, or the granting of such priority or lien, were stayed pending appeal.

12. September 20, 2015Copyright © 2005-09 Randal C. Picker12 Saybrook n Core Facts u Bank owed $34 million; $10 million in collateral u Bank lends additional $3mm postpetition u Bank gets security interest in all property, both for $3mm postpetition loan and for $34 million prepetition loan

13. September 20, 2015Copyright © 2005-09 Randal C. Picker13 Saybrook n Key Questions u Does the Code authorize cross- collateralization? u Does 364(e) protect the particular liens granted in this case?

14. September 20, 2015Copyright © 2005-09 Randal C. Picker14 Cross Collateralization: Step 1 “Debtor hereby grants a security interest in all assets to secure all debts, now owed or to be owed, of Debtor to Bank.” PreP DebtPreP Asset Std SI Status

15. September 20, 2015Copyright © 2005-09 Randal C. Picker15 Cross Collateralization: Step 2 PostP Asset “Debtor hereby grants a security interest in postpetition assets to secure all postpetition debts, now owed or to be owed, of Debtor to Bank.” PostP Debt Std SI Status? PreP DebtPreP Asset Std SI Status

16. September 20, 2015Copyright © 2005-09 Randal C. Picker16 Cross Collateralization: Step 3 PostP Asset “Debtor hereby grants a security interest in pre- and postpetition assets to secure all postpetition debts, now owed or to be owed, of Debtor to Bank.” PostP Debt Std SI Status PreP DebtPreP Asset Std SI Status

17. September 20, 2015Copyright © 2005-09 Randal C. Picker17 Cross Collateralization: Step 4 PostP Asset “Debtor hereby grants a security interest in pre- and postpetition assets to secure all pre- and postpetition debts, now owed or to be owed, of Debtor to Bank.” PostP Debt Std SI Status PreP DebtPreP Asset Std SI Status Ordinary SI Status?

18. September 20, 2015Copyright © 2005-09 Randal C. Picker18 General Order M-274 n Extraordinary Provisions u Cross-Collateralization u Roll Ups w Application of postpetition assets to pay prepetition debt u Waiver and concesssions regarding prepetition debt

19. September 20, 2015Copyright © 2005-09 Randal C. Picker19 General Order M-274 u Provisions that interfere with exercise of fiduciary duties u Section 506(c) Waivers u Liens on Avoidance Actions u Carve Outs

20. September 20, 2015Copyright © 2005 Randal C. Picker20 Screen Capture Slide 1. Start fast, then take your time: Lyondell told its banks in mid-December it could be facing a liquidity problem, even before it defaulted on any covenants. The announcement sent groups of advisers to cluster in the offices of Lyondell's lawyers at Cadwalader Wickersham & Taft. In mid-December the negotiations for a DIP loan started and, by Jan. 7, there was a 35-page term sheet the court approved. On Jan. 9 a group of banks had agreed to provide $2 billion. They gave the money to Lyondell that night.

21. September 20, 2015Copyright © 2005 Randal C. Picker21 Screen Capture Slide 2. Get the lenders on your side: Lyondell had a lot of negotiating power even though it was bankrupt, noted Simpson Thacher & Bartlett partner William Sheehan, who advised UBS. Lyondell's 14 lenders, including lead agent UBS, could face a massive hit because they all had $20 billion in credit extended to Lyondell. To get them on board, Lyondell offered a “roll-up,” by which preferred lenders could sign up to give the company new money through the DIP loan. The company could get more funding, and the lenders would benefit by moving up in the queue to get their money back, because DIP loans have to be paid back before other loans.

22. September 20, 2015Copyright © 2005 Randal C. Picker22 Screen Capture Slide 3. Remind people they are all in this together: At one point in a conference call of the lenders, one of the participants asked the operator how many people were on the line. The reply: “550.” To help with the documentation, the Loan Syndication and Trading Association made an unprecedented intervention to make sure that the lenders all understood the protocol for getting their money. Every lender submitted their paperwork on time.

23. September 20, 2015Copyright © 2005 Randal C. Picker23 Screen Capture Slide 4. Plan ahead for refinancing risk: Usually, DIP loans are paid off in full, in cash. But the Lyondell advisers arranged to pay back its previous lenders with a debt security that would be paid off no more than five years after the official date of the reorganization. Lyondell also arranged a very generous “yank a bank” provision that would allow it to replace all the lenders if they declined to extend the maturity.

24. Lyondell Docs n Lyondell Docket u http://chapter11.epiqsystems.com/ http://chapter11.epiqsystems.com/ September 20, 2015Copyright © 2005-09 Randal C. Picker24