Restructuring

Contributed by Elisa Lemmer
The resolution recently reached by the debtors, their exit lenders and underwriters, and the Office of the United States Trustee and approved by the bankruptcy court in In re General Growth Properties, Inc., Case No. 09-11977 (ALG) [Docket No. 6143] (Bankr. S.D.N.Y. Oct. 8, 2010) should signal to parties providing debtors with financing commitments that the amount and nature of fees they earn on these transactions may become public information.

Because of the way exit-related fees often are structured, publicly disclosing the amount or nature of fees that a debtor may ultimately pay to its lender in a DIP or exit financing transaction, or to its underwriter in connection with an equity offering, could impede a debtor from obtaining the best pricing in its financing transaction.  Lenders and underwriters also typically request that their fee structure remain confidential for a number of reasons, including, maximizing their own returns on their commitments.  Consequently, in requesting approval from the bankruptcy court to enter into DIP or exit financing commitments, debtors commonly request that the fee letters and other agreements containing fee-related terms be filed under seal (i.e., kept from public access).
These requests require courts to walk a fine line between protecting commercially sensitive information, such as the nature and amount of fees the debtor may pay to obtain committed financing, and providing constituencies in the chapter 11 case with sufficient information to be able to evaluate the economics of the proposed financing transaction.
This was precisely the case in In re General Growth Properties, Inc. There, the debtors filed a motion seeking authorization to, among other things, enter into commitment letters with their prospective exit financing lenders and post-emergence underwriters for a public equity offering.  At the request of their lenders and underwriters, and to maximize their ability to obtain optimal pricing for the exit commitments, the debtors sought to seal the fee-related agreements associated with each exit-related transaction.  These agreements contained terms regarding, among other things, commitment fees, ticking fees, and other amounts the debtors might have to pay.  Although the debtors made the agreements at issue available to the main constituencies in their chapter 11 cases (including, for example, the United States Trustee, the unsecured creditors’ committee, and the equity committee), the United States Trustee, nonetheless, opposed the debtors’ request to seal the fee terms arguing in her opposition that the terms should be made available to the general public.
Ultimately, the parties reached a resolution that was announced on the record and approved by the bankruptcy court.  The settlement required the debtors to disclose the maximum amount of fees that they could be required to pay in connection with a traditional term and revolver exit facility, as well as the underwriting spread that could be earned by the underwriters in a post-emergence public offering.
In an oral ruling, Bankruptcy Judge Allan L. Gropper remarked that the resolution struck the appropriate balance between preserving the public interest in full disclosure of the fees at issue while, at the same time, maximizing the debtors’ ability to obtain the most optimal financing available to them in the market.  Judge Gropper reasoned that the public’s main interest was knowing the magnitude of fees the debtors might ultimately pay in connection with their exit transactions.  He recognized, however, that revealing the specific terms of the fee-related agreements (including how the potential fees were to be allocated among the lenders and underwriters and other similar provisions) could be detrimental to the debtors, the lenders and the underwriters – the likely consequence of such disclosure being less optimal pricing for the debtors on their exit transactions.  Consequently, Judge Gropper allowed the debtors to file those provisions under seal.
Lenders, underwriters and debtors should take note of the compromise position adopted by the court in General Growth in structuring their exit financing fees and transactions – and in determining whether to ask that fee information be kept confidential and filed under seal.  Ultimately, a request that strikes a balance between protecting the public’s interest and protecting the estates is more likely to prevail over one that seeks carte blanche authority to seal all fee-related agreements.
Disclosure: Weil represents the debtors in the General Growth Properties, Inc. case.