US Chapter 11 bankruptcies continued: how senior lenders should manage risks

Terminology Note

Throughout this article, we use the terms “lien” and “collateral” in the US legal context. However, for Swedish or European creditors, the more commonly used equivalent term is “security.” Given that the discussion focuses on Chapter 11 proceedings, we will retain the US terminology while recognising this distinction.

A Brief Recap of Key Terms: DIP Financing and Priming Liens Explained

DIP Financing

DIP financing, in theory, is funding provided to a debtor after entering Chapter 11. It is intended to enable the debtor to maintain operations and restructure effectively, thereby helping preserve the value of the estate and maximise recoveries for all stakeholders. However, existing senior lenders who may be primed could view its impact differently.

Priming Liens

Priming liens are security interests that take precedence over existing liens by jumping the priority ranking. This means that even lenders with previously first-priority security interests may be subordinated, significantly impacting the value and enforceability of their collateral.

Adequate Protection in Chapter 11

Adequate protection is a key concept in Chapter 11 proceedings, designed to safeguard the interests of existing secured creditors when their collateral position is impacted by the bankruptcy process. US bankruptcy law requires that creditors receive adequate protection if their collateral is diminished due to court-approved actions such as DIP financing with priming liens. Adequate protection typically involves measures such as:

• Replacement liens – Granting new liens on different assets to compensate for the primed security interest.
• Periodic cash payments – Providing financial compensation to cover any loss in collateral value.
• Other relief measures – Ensuring that the creditor’s overall position is not unfairly prejudiced by the restructuring.

While these measures offer some safeguards, their scope and effectiveness depend on how courts interpret the impact on creditors, making it crucial for lenders to anticipate these risks in their intercreditor agreements (ICAs).

How an Intercreditor Agreement Can Help

It is important to note that while Chapter 11 can override certain contractual provisions, intercreditor agreements still play a vital role in shaping creditor protections. These agreements influence court decisions on adequate protection, establish rules for creditor negotiations, and provide a structured framework that helps creditors align their interests even when facing restructuring challenges.

Since any Chapter 11 process may involve DIP financing that is only obtainable by offering priming liens, existing lenders and creditors should consider the following areas to preserve the priority structure of the debt and regulate the priority and collateral of incoming debt financing. Additionally, the ICA plays a broader role in protecting senior secured creditors by limiting potential asset transfers, defining new money facility terms, and ensuring that creditors retain negotiation leverage throughout a restructuring.

1. Collateral Pools and Lien Priorities

An ICA can specify which specific assets serve as collateral for each layer of debt (e.g., first-lien term loan vs. second-lien notes). By clearly defining which assets secure senior secured creditors, the ICA can help protect their priority by ensuring that these assets are not automatically available as collateral for DIP financing unless permitted by specific provisions. Such provisions may stem from either the original ICA agreed upon from day one or the terms imposed by the Chapter 11 process and DIP financing arrangements.

These provisions are critical for several reasons:

• Restrict or Regulate DIP Financing Terms – Setting pre-agreed conditions on when and how DIP financing can be introduced can prevent situations where new money facilities automatically prime existing secured creditors.

• Preserve Collateral Pools – Clearly specifying which assets are designated for existing senior secured creditors may limit the ability of DIP lenders to claim the same collateral, unless adequate protection is provided.
• Avoid Unfavourable Surprises – Anticipating potential new money facilities allows creditors to preemptively agree on how these will be treated, reducing uncertainty and disputes during a restructuring.
• Enhance Negotiation Leverage – Having these provisions in place strengthens the position of existing creditors in negotiations with the debtor and DIP lenders by ensuring that any priming or new liens require a structured process.

Accordingly, a well-drafted ICA should address:

• Permitted Liens – Defining which liens may be granted without violating the ICA.
• Priority of Existing Security – Establishing the ranking of existing security interests to prevent dilution.
• Exemptions for New Debt – Determining when and how new financing can be added without disrupting the established priority structure.

2. Addressing Asset Transfers

One of the broader risks that ICAs help mitigate is the potential for existing security nets to be circumvented through asset transfers. This often occurs by shifting valuable assets away from entities that provide collateral to secured creditors and into unrestricted subsidiaries or newly created entities. Such transfers can dilute the security available to existing senior creditors and complicate enforcement actions.

Strengthening provisions in the ICA to limit such transfers or impose conditions on them can be a key protective measure for senior secured lenders. However, even where such provisions exist, the Chapter 11 process can override them under certain circumstances. Nevertheless, these contractual safeguards remain crucial because they provide a framework for creditor negotiations, influence the court’s adequate protection analysis, and help maintain alignment among creditors. While they cannot completely prevent priming or asset transfers in bankruptcy, they can significantly shape the terms under which they occur.

To counter this risk, an ICA should:

• Impose Restrictions on Asset Transfers – Prevent the removal of key assets from creditor reach.
• Include Negative Covenants – Prohibit asset transfers to unrestricted subsidiaries or non-obligor entities.

• Define Permitted Transactions – Specify allowable transfers to ensure they do not weaken creditor security.

3. Roll-Up Provisions

A roll-up in the context of Chapter 11 refers to the process by which prepetition debt (i.e., debt incurred before the bankruptcy filing) is converted into post-petition debt with a super-priority status under a DIP financing arrangement. This effectively elevates the priority of the existing debt to match the newly provided DIP financing, which can put non-participating creditors at a disadvantage.

ICAs should consider:

• Regulating Roll-Ups – Preventing existing secured lenders from losing priority unfairly.

• Approval Thresholds – Requiring lender consent before roll-ups are implemented.
• Ensuring Equal Treatment – Mandating that roll-up benefits be shared among senior creditors.

4. Consent Requirements

Another crucial provision that should be included in an ICA is the requirement for creditor consent when introducing new debt. This helps prevent the uncontrolled introduction of DIP financing that may significantly impact the existing priority structure.

• Super-Majority Consent – An ICA can require a super-majority of senior creditors to approve any amendments to the senior financing documents or to consent to new DIP financing (with or without priming liens). This ensures that a minority of creditors cannot unilaterally approve financing terms that might be detrimental to the broader lender group.
• Managing Subordinated Creditors – An ICA can also stipulate that subordinated creditors must not oppose (and may even be required to support) DIP financing that has been approved by the senior creditors. While US courts have varying interpretations of the enforceability of such provisions, they can still serve as a valuable tool in negotiations.
• Impact on DIP Lender Negotiations – If subordinated creditors are bound by ICA provisions that prevent them from opposing senior-approved DIP financing, it strengthens the senior creditors’ negotiating position when dealing with potential DIP lenders. This can also help prevent the dilution of senior lenders’ collateral and priority.

By implementing strict consent requirements, an ICA ensures that senior lenders retain control over the restructuring process and are not caught off guard by unexpected or unfavourable debt arrangements.

5. Dispute Resolution

Since the Chapter 11 process is inherently stressful, it is critical that the ICA includes a designated forum for resolving disputes among creditors. Ensuring that all parties to the ICA have consented to and are bound by the chosen dispute resolution forum can reduce costs and uncertainty compared to litigating disputes in US bankruptcy court.

Conclusion

A well-structured ICA remains the strongest pre-petition measure that a creditor group can take to protect its interests. Given the risks of DIP financing, particularly with priming liens, ICAs should address collateral priority, asset transfers, roll-ups, and creditor consent requirements to safeguard senior lenders’ rights.

For Swedish creditors relying on USD clearing, compliance with US bankruptcy court rulings is essential, reinforcing the need for robust pre-emptive protections through intercreditor agreements.

Disclaimer

The above analysis is provided for informational purposes only and is not intended as legal advice. The matters discussed herein involve complex cross-border legal considerations, and the specific circumstances of each case may vary significantly. Creditors are strongly encouraged to seek advice from competent Swedish and US legal counsel to address their unique situations and ensure compliance with applicable laws.