Legal language for recoupment term sheet

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A Primer on Restructuring Term Sheets and Important Negotiating Issues

Chapter 11 debtors and sophisticated creditor and/or shareholder constituencies are increasingly using restructuring term sheets and restructuring support agreements (sometimes referred to as “lockup” agreements) to reduce the expense, risk and unpredictability attendant to Chapter 11 cases.

A restructuring support agreement is a contract between the debtor, its creditors and other key constituents that, in very simple terms, provides that if a Chapter 11 plan of reorganization contains certain key terms outlined in the restructuring term sheet, the parties to the restructuring support agreement will vote in favor of it. A restructuring term sheet describing the acceptable terms of a Chapter 11 plan of reorganization is typically attached to the restructuring support agreement. The following alert provides an overview of key components that are often included in an effective restructuring term sheet.

What is a Restructuring Term Sheet?

A restructuring term sheet is a document entered into by and between the debtor, its lenders and other key constituents that sets forth in summary fashion material provisions of the proposed restructuring. Restructuring term sheets are commonly negotiated and executed before a Chapter 11 filing and may be implemented through either a pre-negotiated or pre-packaged Chapter 11 case. However, it is not uncommon for parties to negotiate and execute restructuring term sheets well after the bankruptcy case has commenced.

What is the Purpose of a Restructuring Term Sheet?

Restructuring term sheets serve an important role in Chapter 11 cases by minimizing uncertainty, informing the market that the debtor is pursuing a viable restructuring plan and reducing costs associated with bankruptcy. Indeed, if the debtor is contemplating restructuring through new capital investments or agreeing to convert existing indebtedness into equity, many lenders and investors will often require the debtor to enter into a restructuring term sheet as a condition to their participation.

What are the Key Components of a Restructuring Term Sheet?

Although each distressed situation is fact specific, restructuring term sheets typically focus on five areas:

Financing – The restructuring term sheet will include one or more of the following provisions: (i) terms for debtor-in-possession financing, which is financing put into place at the outset of a Chapter 11 case to provide ongoing working capital during the pendency of the case; (ii) conditions upon which the debtor may use cash collateral during the Chapter 11 case; and (iii) terms for lender(s) to provide exit financing, which is financing provided to a debtor to allow it to emerge from bankruptcy.

Deleveraging / Restructuring Transactions – The restructuring term sheet will summarize and outline the key terms of the contemplated deleveraging / restructuring transaction(s). Common examples include: (i) sale of the debtor’s assets; (ii) conversion of existing indebtedness into equity; (iii) issuance of new debt; and (iv) rights offerings and new capital commitments.

Treatment of Key Claims and Interests – The restructuring term sheet will define the classes of claims and interests that will be used in the proposed Chapter 11 plan of reorganization and treatment of same. If a company has secured, unsecured, trade and subordinated debt and preferred and common equity, typically, each type of claim and interest will be classified and treated separately.
Releases, Exculpations, and Injunctions – The restructuring term sheet will set forth which parties will obtain or benefit from releases, exculpations and injunctions under the Chapter 11 plan of reorganization. Although bankruptcy courts will have the final say on the composition of any releases, exculpations and injunctions granted as part of the Chapter 11 plan of reorganization, parties often attach specific release, exculpation and injunction language as an exhibit to the restructuring term sheet.

Other Key Terms – The restructuring term sheet may include one or more of the following provisions: (i) treatment of “critical venders”; (ii) treatment of executory contracts and unexpired leases; (iii) case milestones; (iv) composition of a new board of directors; (v) corporate governance documents; (vi) treatment of indemnification obligations and D&O insurance; (vii) treatment of existing management agreements; (viii) compromises and settlements; (ix) treatment of fees and expenses incurred by lenders and other key constituents in connection with the restructuring; and (x) conditions on effectiveness of the Chapter 11 plan of reorganization.

Conclusion

The expense, disruption and value deterioration inherent in protracted Chapter 11 restructurings have militated in favor of debtors and key constituents seeking consensual restructurings via agreements and restructuring term sheets. From the debtor’s perspective, entering into a restructuring term sheet helps to reduce the cost, length and negative publicity associated with a bankruptcy filing by assuring the market that it has a viable plan for the restructuring. On the other hand, lenders and other key constituents benefit from obtaining timely access to information, a seat at the table and a say in the restructuring transaction(s), and potential related incentives for participating and supporting the restructuring, such as payment of professional fees and an option to purchase equity in the reorganized debtor at a discounted rate. While participating in restructuring term sheet negotiations can be an important step in maximizing value, the complexities and nuances of the Chapter 11 landscape, the governing caselaw, and the importance of drafting precision require detailed expert review and analysis of any proposed restructuring term sheet.