ILLINOIS: An Introduction to Bankruptcy/Restructuring

“Uncertainty is the only certainty there is, and knowing how to live with insecurity is the only security.”

~ John Allen Paulos (renowned mathematics professor)

Regardless of the political environment or quarterly earnings, the only certainty for the modern company is that one can never fully prepare for the unexpected. And the unexpected will happen. Macroeconomic factors like changing consumer trends, interest rates, or, as we are seeing now, tariff policy, can require re-evaluation of one’s business model. Companies can also face issues like poor management, loss of key customers, an overleveraged position, mass tort liability, or fraud. When these situations arise, it may be necessary to pursue restructuring options to resuscitate the business, prevent further harm, or close the book on a doomed venture.

Although traditional bankruptcy filings remain a clear option, a consistent theme in our restructuring practice has been stakeholders’ desire to minimize the costs and uncertainty associated with those types of proceedings. Because of this, we have recently seen and participated in an increase in out-of-court restructurings, as well as steps taken in connection with Chapter 11 cases to streamline and reduce the expense of the process. Below, we discuss various ways these and other current trends in U.S. restructurings can manifest.

Pre-Packaged and Pre-Negotiated Filings

Businesses and their key stakeholders may be able to negotiate the terms of a restructuring in advance of a bankruptcy filing, potentially resulting in a quicker proceeding with lower administrative costs and reduced uncertainty. These arrangements may be memorialized in a restructuring support agreement or plan support agreement, pursuant to which the stakeholders agree to support the company’s restructuring plan (potentially including provision of debtor-in-possession (DIP) financing or consent to use of cash collateral). Better still, a company may be able to lock in the necessary creditor approvals for Chapter 11 plan confirmation before the bankruptcy case is filed, allowing the company to enter bankruptcy on a “pre-packaged” basis with an immediate exit strategy. This is no guarantee of success, however. As we’ve seen with Johnson & Johnson’s Red River Talc filing, a pre-packaged plan can still be rejected, including if it appears that there were pre-filing voting irregularities or if the substantive terms of the plan conflict with what is permitted under the Bankruptcy Code.

Innovative DIP Facilities

Chapter 11 can also be made less disruptive by maintaining, and extending, existing pre-petition securitization facilities to fund the Chapter 11 proceedings, with approval from the bankruptcy court through a process that we pioneered. Structured largely outside the bankruptcy estate (but benefiting from the court process), these “securitization DIP” facilities are increasingly being utilized side-by-side with, and reducing overall reliance on, a typical DIP loan. This allows the debtors to benefit by being able to access liquidity by continuing to sell working capital assets to a bankruptcy-remote special purpose entity (like a trade receivables securitization) as it did pre-bankruptcy. The securitization financiers also benefit by receiving customary financing and contract-based protections under the Bankruptcy Code, including a court order finding that the sale of receivables to the SPE is “free and clear” of any other liens or claims and providing a super-priority claim (typically pari passu with the accompanying DIP facility) for any amounts that may be owed under the relevant securitization documents.

Liability Management Exercises

Commonly referred to as LMEs, these transactions restructure existing debt and raise new debt to address financial stress and/or pending maturities. Borrowers can sometimes execute LMEs without the consent of all lenders, which can be controversial (requiring careful litigation analysis), but also offer an alternative to bankruptcy. LMEs creatively utilize provisions of existing loan documents to achieve these goals and come in a growing variety of structures, including “uptiers,” “drop-downs,” “double-dips” and various alternatives. LMEs were initially often non-pro-rata transactions where a majority of lenders exchange existing secured debt for new higher-priority secured debt, potentially at the expense of non-participating lenders. Recently, many LMEs have been conducted in stages or on a fully pro-rata basis, reducing conflict and litigation risk. However, as we have seen in LMEs involving Mitel, Serta, Revlon, and others, certain LMEs may only postpone an eventual bankruptcy filing. Some courts have also ruled against specific LME strategies (following costly litigation), and lenders have begun implementing contractual blockers to LME transactions at loan inception or during restructurings or other transactions. That said, the LME market is clearly here to stay, with new LME strategies being continuously developed.

Other Non-Bankruptcy Options

Avoiding bankruptcy filings entirely may be desirable for a number of reasons, including cost-reduction and process efficiency, which can motivate parties to agree to out-of-court deals to restructure a business, an area in which we’ve had some great successes representing businesses, lenders, and equity-holders.

Among the factors driving this is the growing prevalence of private credit lenders in the financing market, who may be willing or eager to take ownership of a business, rather than funding a bankruptcy process to cleanse a balance sheet or sell the company or its assets. We’ve thus seen, in addition to typical workouts, a growing number of “hand-over-the-keys” transactions, where lenders consensually take ownership of a business for no or nominal payment. These lenders may also be more willing to use their equity voting proxy rights to displace a company’s board in favor of new management (who may be less beholden to equity-holders).

Another factor that may push parties away from bankruptcy filings is the Supreme Court’s 2024 Purdue Pharma decision, which precluded non-consensual third-party releases that previously had been used to provide additional protections to sponsors, directors and officers, lenders, and others, without the need to subject themselves to their own bankruptcy proceedings.

Other approaches may also generate many of the benefits of a bankruptcy with reduced cost and friction, like whole-business Uniform Commercial Code sales, appointment of a receiver with bankruptcy-like claim allowance and distribution powers (as we accomplished with GPB Capital), and assignments for the benefit of creditors.

Cross-Border

Multi-jurisdictional insolvency issues continue to arise in our practice. Where a company has its main operations outside the U.S., but a domestic presence, it may utilize its home country’s insolvency regime when reorganizing. But to fully reorganize and protect its domestic assets and operations, it may need to seek recognition of the foreign proceedings under Chapter 15 of the Bankruptcy Code. Creditors may also find themselves defending their rights across multiple court systems. We’ve seen an increase in disputes relating to foreign representatives’ actions in Chapter 15 proceedings concerning the extent of protection the U.S. court can permissibly grant them, their actions in litigation against third parties, and their ability to take advantage domestically of powers that exist in the home jurisdiction but not in the U.S. Conversely, we have seen companies with a marginal U.S. presence use the flexible venue options under U.S. law to file Chapter 11 proceedings for a domestic affiliate (including a non-operating entity), which can allow the foreign operating business to reorganize under Chapter 11 rather than its home country’s laws.

We expect to see these and other trends persist, as practitioners continue devising novel solutions to complex business issues in the hopes of salvaging a faltering business or maximizing creditor recoveries.