By Shana A. Elberg, Moshe S. Jacob, and Bram A. Strochlic (Skadden, Arps, Slate, Meagher & Flom LLP)
2024 saw a rise in the use of equity-linked Debtor-in-Possession (DIP) financing in Chapter 11 cases. Examples from WeWork and Enviva illustrate how stakeholders are leveraging this innovative tool to drive broader reorganization strategies and outcomes rather than as a mechanism solely providing interim financing to fund a debtor’s operations during the pendency of its bankruptcy case.
WeWork’s bankruptcy case highlights the significant role equity-linked DIP financing can play in a debtor’s overall restructuring transaction, with 80% of the reorganized equity provided through the DIP arrangement and outside the plan of reorganization. In that case, following the filing of several versions of a reorganization plan, the debtors sought approval of a structured two-part DIP financing arrangement, seeking initial interim approval of $50 million to provide immediate liquidity for business operations during the remainder of the bankruptcy and final approval of an additional $400 million upon the plan’s effective date. In exchange for this $400 million, the lenders would receive 80% of the new equity in reorganized WeWork.
The bankruptcy court ultimately approved the DIP, overruling an objection from WeWork co-founder Adam Neumann asserting the facility was a disguised $400 million investment of equity capital in the reorganized debtors, rather than a loan for use by the debtors. The bankruptcy court’s decision centered on the fact that only the $50 million interim DIP facility was up for approval at the initial hearing—access to the remaining $400 million was contingent on confirmation of the plan.
The Enviva case introduced a new twist on equity-linked DIP structuring: shareholder participation. The debtors in that case sought approval of a $500 million DIP facility, of which $100 million was allocated for prepetition shareholders who had the right to subscribe during a two-week period—participating shareholders could convert their loans into equity in the reorganized company at a then-undetermined discount rate. Enviva’s proposed DIP drew objections, particularly from the Official Committee of Unsecured Creditors, who argued that the arrangement violated the absolute priority rule.
The bankruptcy court dismissed the objections at the final DIP hearing, ruling that equity to be distributed to shareholders on account of their participation in the DIP was granted based on new capital contributions by such shareholders, not their pre-existing equity stakes. The final DIP order in Enviva, which the committee initially appealed before settling as part of a global resolution, raises questions that may be answered differently in a different jurisdiction. For example, while the bankruptcy court determined that the new capital contributions justified the shareholders’ rights, the absence of a market test raises questions about how this approach aligns with the principles established in the LaSalle case.
In sum, the WeWork and Enviva cases demonstrate that equity-linked DIP financing is not just growing in popularity but also in creativity with regard to its implementation. As debtors and lenders continue to test the limits of these innovative structures, we may see courts pushing back on different concepts to ensure adherence to established bankruptcy principles.
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