the TSL interview
unsecured creditors. In the ‘80s, we used to
represent a lot of secured creditors. One
of the consequences of the pervasiveness
of secured debt is that it’s very hard to get
debtor-in-possession financing when all
of your assets are liened up because you
have no unencumbered assets to persuade
a financial institution to make a debtor-in-possession loan.
In such circumstances, most debtors
have to go back to the existing secured
creditors as the only source of debtor-in-possession financing. Secured creditors
are very anxious to preserve their positions
and debtor-in-possession financing by
the existing secured creditor, syndicate or
whoever it might be. It has turned out to
be a situation where very onerous terms
are imposed upon a debtor and techniques
have developed which make debtor-in-possession financing oppressive, controlling,
by the use of rollups and similar devices.
The fees and the interests are very
substantial and the provisions of some
debtor-in-possession financings actually
control the plan of reorganization process.
The debtor cannot propose a plan without
the consent of the IP lender.
Do you think secured lenders help or
hinder a company trying to exit from
Well, secured lenders are primarily in-
terested in protecting their own interests.
I mean, I’ve heard people say, “We have ob-
ligations to our shareholders.” I can make
arguments either way, but it has changed
the nature of the process and the conse-
quence of that is that you see more and
more sales of the debtor’s assets very early
in the proceedings. And, if it’s collateral se-
curity that is essentially liquid, the secured
creditor is going to be very intolerant of
any delay. So Section 363 of the Bankruptcy
Code has assumed a paramount impor-
tance. In almost every retail case, starting
in 2008 when retailing started to go bad, I
would say 98 percent of them turned into
liquidation sales to satisfy the secured
creditor. So the reorganization paradigm
of rehabilitation and reorganization of the
same entity, coming out the other end as
a deleveraged entity with prospects, is not
really true anymore. Chapter 11 bankrupt-
cy has turned into a sale process and that’s
been a major change.
You commented in the fall at a legislative
symposium in D.C. that you thought the
federal government would make a good
DIP lender. Why would the government
make a better DIP lender than a secured
lender or an asset-based lender?