DIP Financing Common Features and Pitfalls John Melko, Gardere Wynne Sewell LLP Bruce Ruzinsky, Jackson Walker LLP David Zdunkewicz, Andrews Kurth LLP Southern District of Texas Bankruptcy Bench Bar Conference

What is a “DIP Loan”? Section 364(c) and (d) provide for different levels of DIP loans: (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—section 503(b)(1) of this title (1) with priority over any or all administrative expenses of the kind specified in section 503(b) or 507(b) of this title;503(b)507(b) (2) secured by a lien on property of the estate that is not otherwise subject to a lien; or (3) secured by a junior lien on property of the estate that is subject to a lien. (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. (2) In any hearing under this subsection, the trustee has the burden of proof on the issue of adequate protection. Few DIP lenders are willing to make a loan on anything other than a “priming” basis, i.e., 364(d). 2

Does the Company Need a DIP Loan? DIP Loans are intended to be used when cash collateral is insufficient and management or the trustee cannot obtain additional credit on any other basis. However … Commonality of DIP Loans DIP loans are becoming a regular feature of Chapter 11 cases:  Current cash flow will not support operations and costs of administration at current levels;  Significant capital expenditures are required for the continuation/reorganization of the debtor;  Prepetition lender is interested in “upgrading” its existing loan. Defensive vs. Strategic or Third Party DIP  Defensive DIP loan made by existing lender to prevent its collateral from being primed and for other purposes as explained below;  Strategic DIP loan made by a lender with a view toward purchasing assets at 363 sale where DIP will be credit bid; or made for other reasons. 3

Common Features of DIP Loans 4 Priming Liens – even existing lender may “prime” its own loan or part of its own loan. Third party lenders will want to prime all existing lenders; Confirmation of prepetition liens for existing lenders; Releases for existing lenders with respect to sins of the past; Releases for new lender for any claims arising from negotiations or anything prior; Releases are normally subject to a “Challenge Period” during which some party can examine/challenge liens or conduct of lender; Collateral package:  Typically, first lien on all existing collateral;  May include liens on causes of action, including Chapter 5 causes of action;

Common Features of DIP Loans (Cont’d) 5  Subject to carve out for UST fees; also subject to agreed basket of administrative expenses of debtor and committee professionals, after default, up to a maximum amount;  Budget review and approval;  Covenants – varies widely. Range from tight covenants if the case is a continuation of an operating company to “covenant lite” for bridge loans to sale;  Rollup of prepetition debt of existing lender. Consider effect on admin expense claims;  Interest rates: vary widely. Some DIP loans are subject to bidding;  Findings of good faith, best interests of estate, reasonableness of loan, etc. all with view toward 364(e) protection: (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.