• USD 118.6m new liquidity before interest, fees, and costs in DIP facility
• DIP facility includes 5% backstop premium, 2.5% upfront fee, and 2.25% exit fee
• First-lien lenders to hold substantially all reorganized equity post-bankruptcy

Specialty materials maker SP Unifrax Holdings (Alkegen) entered bankruptcy on Sunday (26 July) seeking a USD 630m DIP facility that is designed to fund the company’s Chapter 11 cases and set the terms for its emergence. The size is notable, as only three other DIP financing facilities this year have exceeded USD 500m (those sought by Saks Global, Pretium Packaging, and Multi-Color Corporation).

Although the DIP facility carries a USD 630m headline size, only about USD 118.6m is expected to provide new liquidity, before accrued interest, fees and other financing costs, and only about USD 87.9m after disclosed fees are applied. The facility positions the first-lien lender group to finance Alkegen into and out of bankruptcy and emerge with substantially all of the reorganized equity and the entirety of the exit financing.

The first-lien lender group includes holders of first-lien term loan claims and first-lien notes claims. These creditors, together with holders of second-lien notes claims, comprise the “Ad Hoc Group” that is represented by Davis Polk & Wardwell as legal counsel, Haynes and Boone as local counsel, and PJT Partners as their investment banker. The identities of the lenders have not been disclosed.

Below is a condensed summary of the DIP financing facility’s material terms.

Limited liquidity

As noted above, despite its USD 630m headline size, the DIP facility is expected to provide only about USD 118.6m of net liquidity, before accrued interest, fees and other financing costs. The facility consists of a USD 315m new-money tranche and a USD 315m roll-up tranche, with the latter representing a cashless conversion of prepetition first-lien claims into DIP obligations on a 1:1 basis. The new-money tranche comprises USD 265m funded upon entry of the interim order on 28 July and a further USD 50m delayed-draw tranche upon entry of a final order. Of the USD 315m new-money tranche, USD 196.4m is earmarked to repay outstanding first-lien revolver borrowings and cash collateralize outstanding letters of credit, leaving the balance to fund working capital, ongoing operations and Chapter 11 administrative expenses. Fees further reduce that amount by approximately USD 30.7m so that the facility may only provide USD 87.9m of net liquidity to the estates, equal to 27.9% of the new-money tranche and 14% of the total DIP facility.

Like the new-money DIP funding, the roll-up is implemented in stages, with USD 265m funded or converted upon interim approval and the remaining USD 50m funded or converted upon final approval.

Interest rates and compounding

The new-money DIP instruments bear interest at either Adjusted Term SOFR plus 8.375% or, at the borrower’s election, ABR plus 7.375%. Under both benchmarks, up to 50% of accrued interest is PIK by default each period – the borrowers must affirmatively elect cash at least five business days before the payment date – with the remainder payable in cash. Before conversion into roll-up DIP instruments, the contingent rolled-up claims accrue pari passu with the applicable prepetition first-lien debt. Following the roll-up, the USD 315m of roll-up DIP instruments accrue interest at SOFR plus 8.375%, payable entirely in kind.[1] The facility also provides for a 2% default-rate premium upon written demand.

Fees and economics

Among the fees required by the DIP facility are a 5% backstop premium, a 2.5% upfront fee, a 2.25% exit fee and a 1% PIK extension premium for each maturity extension, as well as undisclosed administrative and collateral agent fees. The 5% backstop premium on the USD 315m new-money tranche represents approximately USD 15.75m, while the upfront and exit fees equate to approximately USD 7.88m and USD 7.1m, respectively, assuming the full new-money tranche is funded. Based on disclosed amounts, the facility carries at least USD 30.7m in transaction-related fees, excluding agent fees and any extension premiums.

Collateral priority and adequate protection

The DIP facility is secured by a comprehensive collateral package that grants the lenders first-priority liens on the debtors’ previously unencumbered assets and priming liens on substantially all prepetition collateral. The prepetition secured parties have or are deemed to have consented, allowing the DIP lenders to rank ahead of the existing first-, second-, and third-lien creditors with respect to the collateral securing the facility, subject only to the carve-out and certain permitted prior liens. Where assets are already subject to permitted senior liens, the DIP lenders receive junior liens that remain senior in all respects to the adequate protection liens granted to prepetition creditors.

In exchange for the priming and continued use of collateral, the prepetition secured parties receive an adequate-protection package that includes: (i) payment of cash interest at the non-default rate on the first-lien revolver through the RCF repayment; (ii) replacement liens for the first-, second-, and third-lien creditors; (iii) section 507(b) superpriority claims; (iv) budget, covenant and reporting rights; (v) cash payment of the prepetition agents’ and trustees’ – and the DIP lenders’ advisors’ – fees and expenses, subject to invoice review; and (vi) maintenance and insurance of the collateral.

Carve-out and investigation budget

The DIP facility includes a typical carve-out, senior to the DIP liens, superpriority claims and adequate protection, covering statutory US Trustee and court fees, allowed debtor and committee professional fees incurred through the first business day after a carve-out trigger notice, and up to USD 4m of post-trigger professional fees. Following an event of default, the DIP agent may issue a carve-out trigger notice, upon which the debtors must establish: (i) a pre-carve-out trigger notice reserve equal to unpaid accrued professional fees and other carve-out obligations incurred before the notice, and (ii) a post-carve-out trigger notice reserve equal to the USD 4m cap on post-trigger professional fees.

The DIP financing order provides a creditors’ committee (if one is appointed) with limited investigation rights. The committee may use DIP proceeds and cash collateral to investigate the validity, priority and extent of the prepetition secured parties’ liens, claims and potential defenses, subject to a USD 25,000 cap. Notably, the committee may not use those funds to prosecute or initiate litigation against prepetition secured parties. More broadly, the DIP financing order prohibits the use of estate funds, DIP proceeds, cash collateral or carve-out amounts to challenge the DIP financing lenders or prepetition secured parties, other than for limited investigation rights available under the USD 25,000 budget.

Budgets and variance testing

Use of DIP proceeds and cash collateral is governed by a rolling 13-week budget that is refreshed every four weeks. Beginning in the fourth week of the case, the debtors must demonstrate on a weekly basis that cumulative disbursements have not exceeded 112.5% of budgeted amounts. The test excludes professional fees, US Trustee fees and adequate protection payments, focusing instead on operating cash use. The debtors are also required to maintain a minimum liquidity balance of USD 32.5m and submit weekly variance reports for any budget item that deviates by more than 12.5% from forecast.

Source: DIP Financing Motion

Exit financing

On the effective date, the DIP facility transitions directly into the reorganized company’s capital structure through two linked mechanisms – a debt conversion and an equity subscription – that leave the first-lien lender group holding both the exit debt and substantially all reorganized equity.

On the debt side, the reorganized debtors will enter into a USD 400m exit facility. USD 315m of that refinances the new-money DIP cashless and dollar-for-dollar: the new money is in effect continued rather than repaid and re-lent, with the DIP lenders moving forward as exit financing lenders. The remaining USD 85m is not a refinancing but incremental exit term loans distributed pro rata to holders of allowed first-lien claims as part of their plan recovery – the same lender group, but a distinct source. Unconverted DIP claims (accrued interest, fees, expenses) will be paid in cash. The 5.0% DIP backstop premium (USD 15.75m) will be satisfied mainly as a reduction of the backstop parties’ new-money funding obligations.

The equity side draws on the DIP’s other half. The roll-up – issued dollar-for-dollar against the new money, and thus also ~USD 315m – refinanced existing first-lien debt into the DIP rather than advancing new cash and is staged across the interim and final orders (USD 265m on the interim, USD 50m on the final) through instruments deemed substituted for prepetition first-lien obligations. Rather than being extinguished at emergence, the roll-up DIP claims become the subscription currency for the equity rights offering: participating first-lien holders contribute their allowed roll-up claims, in lieu of cash, for their pro rata share of 59% of the new equity interests. The offering is in an amount equal to allowed roll-up DIP claims – outstanding principal plus accrued interest and fees – capped at USD 335m, exceeding the ~USD 315m principal amount of the roll-up DIP claims to accommodate accrued interest, fees and other amounts.

First-lien holders receive 100% of the new equity interests at issuance, with the equity rights offering equity carved out of that 100% rather than added to it; net, the group holds substantially all of the reorganized equity, subject to the 1% unsecured funded debt equity interests and dilution from the management incentive plan (up to 10%), the new equity warrants (up to 5%), and the backstop premiums. On satisfaction, the DIP liens terminate and collateral is released automatically, without impairing the exit facility’s perfection.

The result is a closed loop: the same first-lien group finances the Chapter 11 cases, provides the exit financing, and emerges holding both the exit debt and substantially all the equity – an outcome turning on entry of the final DIP order and confirmation of the RSA-backed plan.

Prior to joining Debtwire, Stephanie served as a judicial clerk for a judge with the United States Court of Appeals for the Fifth Circuit. Stephanie is a former practicing restructuring and financial litigation attorney, during which time she primarily represented Chapter 11 trustees, debtors-in-possession, financial institutions (as secured creditors and defendants in adversary proceedings), and unsecured creditors. 

This report should not be relied upon to make investment decisions. Furthermore, this report is not intended and should not be construed as legal advice. ION Analytics does not provide any legal advice, and clients should consult with their own legal counsel for matters requiring legal advice. All information is sourced from either the public domain, ION Analytics data or intelligence, and ION Analytics cannot and does not verify or guarantee the adequacy, accuracy or completeness of any source document. No representation is made that it is current, complete or accurate. The information herein is not intended to be used as a basis for investing and does not constitute an offer to buy or sell any securities or investment strategy. The information herein is for informational purposes only and ION Analytics accepts no liability whatsoever for any direct or consequential loss arising from any use of the information contained herein.

————————————————–

[1] Term SOFR is subject to a 1.00% floor, while the ABR option is subject to a 2.00% floor. ABR is the highest of: Base Rate (undefined), Federal Funds Rate + 0.50%, or one month Adjusted Term SOFR (~3.61875%) + 1.00%, subject to a 2.00% floor.