Exploring the Rise of Equity-Linked DIP Financing in Chapter 11 Cases: A Look at WeWork and Enviva
The use of equity-linked debtor-in-possession (DIP) financing in Chapter 11 cases has been on the rise in 2024, with notable examples from WeWork and Enviva showcasing the innovative strategies being employed by stakeholders in bankruptcy proceedings.
In the WeWork case, the debtors sought approval for a structured DIP financing arrangement that included $50 million in interim financing and an additional $400 million in financing through an “Exit DIP New Money Facility.” This arrangement sparked objections from WeWork co-founder Adam Neumann, who argued that the facility was not in line with the criteria for DIP financing approval and was a disguised equity investment rather than a loan.
Despite the objections, Judge John Sherwood approved the DIP financing, highlighting the importance of equity-linked DIP financing in restructuring transactions. The case raised questions about the role of equity in bankruptcy proceedings and the potential outcomes of contested hearings.
In the Enviva case, a new twist on equity-linked DIP structuring was introduced, with shareholder participation in a $500 million DIP facility. The inclusion of shareholders in the DIP drew objections from the Official Committee of Unsecured Creditors, citing concerns about violating the absolute priority rule.
Judge Brian Kenney dismissed the objections and approved the DIP financing, emphasizing the business judgment exercised by Enviva in structuring the DIP. The case highlighted the evolving nature of equity-linked DIP financing and the potential implications for creditors and shareholders in bankruptcy proceedings.
Overall, the WeWork and Enviva cases demonstrate the growing popularity and creativity in equity-linked DIP financing, with these tools expected to play a crucial role in shaping the outcomes of Chapter 11 reorganizations. As debtors and lenders continue to explore innovative structures, courts may face challenges in balancing these new approaches with established bankruptcy principles.
