on account of their interest only if every senior class is paid
in full. The accepted hierarchy is that secured creditors come
first, followed by administrative expense claimants, priority
creditors, and unsecured creditors. Equity holders come at
the bottom of the list, after unsecured creditors.
PE Firm will argue that the resources to pay creditors in
the OffshoreCo case were such that payments flowed down
to unsecured creditors, but that nothing was left over for old
equity holders. If the value of OffshoreCo is less than or equal
to the debt, then that argument will be accepted because
there was, in fact, no equity in the company. However, if the
value of OffshoreCo is more (perhaps significantly more)
than the value of the debt, then the old equity holders would
have a strong argument that there is equity in OffshoreCo
and that it is unjust to cancel such equity for no value.
Thus, these cases often boil down to a dispute over the
company’s value. Bankruptcy courts sometimes choose to
appoint a committee of equity holders to advocate on behalf
of the entire class of equity. In other cases, ad hoc equity
committees form to protect such interests. The fact that
such disputes are intense and hard-fought makes sense. In
the OffshoreCo example, PE Firm stands to realize all of the
upside gain associated with OffshoreCo’s post-bankruptcy
success in a recovering industry. From the old equity’s per-
spective, PE Firm is essentially using Chapter 11 to lock in
that upside gain at old equity’s expense.
This upswing dynamic, coupled with sophisticated industry participants who understand the opportunities at hand,
help explain why Chapter 11 seems to be a popular choice
for overleveraged companies in the oil patch. Successfully
using Chapter 11 to lock in the upswing value of such a
company will depend largely on the true value of the company
and whether parties on the losing end of a proposed plan
timely organize to advocate for and protect their interests.
ABOUT THE AUTHOR
Jason Binford is a partner in the financial restructuring and reorganization practice group at Gardere Wynne Sewell LLP. Binford earned a bachelor’s degree from Texas A&M University, a
master’s degree from St. Mary’s University, and
a JD from St. Mary’s School of Law.
Owned & produced by: Presented by:
DECEMBER 5–7, 2017/LAS VEGAS, NV, USA/ POWER-GEN.COM
REGISTER BY OCT. 6 & SAVE! #P O WE RGE N
ON ALL FORMS OF