Is First Brands setting itself up for a fight over an unequal DIP roll-up? And could such a fight upset confirmation?

As reported by 9fin9fin, in spite of pushback and ongoing negotiations, the bankrupt auto parts supplier received interim approval of its $4.4bn DIP facility on 1 October. The facility includes a $3.3bn roll-up, a 3:1 roll-up ratio based on $1.1bn in new money. The interim order approves an initial roll-up of $1.5bn with the remaining $1.8bn to be rolled up upon entry of the final DIP order set for hearing on 29 October.

Notably, the final DIP provides for an exclusive 10% backstop fee to an “anchor” group of lenders represented by Gibson Dunn holding first and second-lien term loans, as well as non pro rata treatment for similarly situated term loan lenders depending on a variety of factors, including size, early membership in the Gibson group, relationships, threats, and other undisclosed terms under the allocation provisions. Since the petition date, nearly all of the first and second-lien term lenders have committed to participate in the DIP but only the “anchor” group will share in the backstop fee.

First Brands and ConvergeOne

The non-pro rata backstop is sure to raise objections, if not by the parties, then sua sponte by Southern District of Texas Bankruptcy Judge Christopher Lopez in order to avoid a repeat of what just happened in another case, ConvergeOne, also before Judge Lopez. In that case, the District Court for the Southern District of Texas recently reversed and remanded the Chapter 11 plan confirmation order based on an exclusive backstop of an equity rights offering. As reported by 9fin, that decision provides a cautionary tale of how a backstop built into a bankruptcy process that allocates economic benefits to holders of some but not all of the claims or interests within the same class can go wrong.

ConvergeOne is the first opinion to clearly delineate a legal standard for approval of an exclusive backstop agreement, albeit as an exit rights offering rather than at the DIP financing stage. Perhaps, significantly, like First Brands, the backstop in ConvergeOne was negotiated prepetition, although as part of a restructuring support agreement incorporated into a prepack.

The ConvergeOne District Court opinion relied heavily on US Supreme Court decision, Bank of America National Trust and Savings Assoc. v. 203 North LaSalle Street Partnership and a decision of the US Court of Appeals for the Eighth Circuit, In re Peabody Energy Corporation to find that the exclusive opportunity to participate in a backstop equity rights offering under a prepackaged plan violates the Bankruptcy Code's equal treatment and absolute priority rules. Critically, in LaSalle prepetition equity holders had invested new money in exchange for their reorganized equity, but were the only parties given the opportunity to make such an investment, like the majority lenders in ConvergeOne and the First Brands’ “anchor” group.

In ConvergeOne, the District Court focused on the requirement that such exclusive opportunities be “market-tested,” something that it doesn’t appear happened in First Brands. A detailed summary of the ruling by 9fin can be found here.

The ConvergeOne decision reflects the Fifth Circuit’s track record of narrowly interpreting Bankruptcy Code provisions, including related to what constitutes “impairment” under section 1124(1) giving rise to the right to vote and seek cram down of a non-consensual plan. If receiving payment in full a few months after confirmation renders a secured creditor impaired as the Fifth Circuit held in W. Real Est. Equities, L.L.C. v. Vill. at Camp Bowie I, L.P., then a lack of pro rata treatment under a DIP roll-up would also seem to give rise to impairment under a plan, another potential argument that the excluded lenders could make at confirmation.

First Brands and American Tire

Another possible basis for objection to the DIP backstop fee would be the excluded lenders’ right to pro rata allocation of payments under their prepetition term loan agreement “sacred right” provisions. A similar dispute over final DIP approval in the American Tire Chapter 11 case in November of 2024 led the parties to strip a proposed roll-up from the DIP facility in that case after the court raised concerns. The DIP financing proposal there contained a non-pro rata roll-up of prepetition term loan claims. At the hearing on final DIP approval, Delaware Bankruptcy Judge Craig Goldblatt stated that he would require that any DIP order preserve the rights of excluded lenders to bring suit against the participating lenders for breach of their rights to pro rata distributions under the prepetition credit agreement. Ultimately, the debtors and DIP lenders decided to remove the proposed roll-up rather than include a reservation of rights.

The recent reversal of Judge Lopez’s confirmation order in ConvergeOne combined with other precedent will surely give the Court pause before before approving a 10% backup fee to an “anchor” group that was not initially offered and will not be shared with the rest of the now participating lender group. The debtors and DIP financing proponents should consider the risks and costs of prosecuting the backstop fee, not only at this early stage but up to and after plan confirmation.

Check out this case study of 9fin's First Brands coverage.

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