Relevant Documents:
Revised DIP Order, Credit Agreement, Commitment Letter
Agenda
Judge Mary Walrath approved the Hertz financial restructuring debtors’ proposed $1.65 billion
DIP facility on an uncontested basis after the debtors were able to resolve the outstanding objections of the
official committee of unsecured creditors and an
ad hoc group of unsecured noteholders. Substantive changes to the DIP order and credit agreement memorializing those resolutions were filed on the docket this morning shortly after the commencement of the hearing. The filing also includes a revised DIP commitment letter.
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At today’s hearing, Tom Lauria of White & Case, counsel to the debtors, told the court that the debtors need to start placing orders for U.S. rental fleet vehicles in 2021, which will require the use of DIP funds and a new ABS financing “not unlike” the
new Donlen securitization program, just “10 [times] larger.”
Lauria said the debtors anticipate obtaining a commitment for such new ABS financing, contemplated by the DIP motion, “in the next couple of days,” after which the debtors would seek court approval to enter into the relevant transaction-related documentation.
Regarding the debtors’ existing ABS programs, Darren Klein of Davis Polk, counsel to HVF II ABS program VFN agent Deutsche Bank, said that the ABS lenders “don’t know what’s going to happen at the end of this year,” a reference to the year-end expiration of their
interim resolution of claims and master lease litigation issues with the debtors. His comment came during a discussion about a proposed change to the DIP credit agreement language to ensure the superpriority casualty claims granted to ABS lenders in the interim resolution would retain their priority if the settlement is extended beyond the current year-end expiration. The parties “haven’t figured out” whether “a more global resolution” or continuation of the interim resolution will be the path forward, Klein continued.
Brian Lohan of Arnold & Porter, counsel to the DIP lenders, said that his clients are “ok with the request” as long as the casualty claims remain “substantially similar” in nature in any further extension or future agreement. “[W]e’re not looking to foot-fault the debtors or get leverage over the ABS settlement,” Lohan told the court.
Lauria said the DIP provides the debtors sufficient liquidity to “comfortably” operate through the end of 2021, which is “hopefully” “much longer than we will need” to exit chapter 11. Later, Lauria reiterated that the debtors hope to exit “far in advance” of the end of 2021.
Lauria reviewed a number of key points in the DIP, including the first lien prepayment from asset sale proceeds in excess of $50 million provision, the lack of restrictive covenants (other than a $270 million minimum liquidity covenant) and a full reservation of rights for parties including the UCC to challenge prepetition claims and liens of the secured lenders including avoidance actions. On the last point, the revised DIP order contains new language noting that “[f]or the avoidance of doubt and as set forth in paragraph 4(b) [of the order], nothing herein shall constitute a finding of the validity, priority, perfection, enforceability, avoidability, allowance, or the extent of the Prepetition Secured Parties’ prepetition liens and claims.” Lauria also clarified on the record that section 8.12 of the DIP credit agreement “is not intended” to waive the debtors’ right to seek cramdown of a chapter 11 plan against the second lien notes, reiterating a point made in the debtors’ reply in support of the DIP.
Additional substantive changes to the DIP, as described by Lauria on the record and reflected in the revised DIP order filed today, include:
- “[A]ny DIP Adequate Protection Superpriority Claims granted to the Prepetition Secured Parties shall be provided solely to the extent set forth in section 507(b) of the Bankruptcy Code.”
- The debtors, UCC and the ad hoc noteholder group reserve all rights to argue that adequate protection payments authorized in the third interim adequate protection order may be recharacterized as payments of principal “or otherwise, or subject to disgorgement.” The revised DIP order provides that such payments will be paid first from “undisputed corporate cash collateral.”
- All parties reserve their rights on asserting and calculating any diminution in value.
- The waiver of the “equities of the case” exception under section 552 is now explicitly limited to a waiver by the debtors and preserves the rights of all parties other than the debtors to pursue such claims against the DIP lenders, up to a $50 million recovery cap.
- A “marshalling-like sequence of recoveries” has been applied to require the DIP lenders and prepetition secured parties (“solely to the extent of any diminution in value of prepetition collateral”) to seek recoveries first from DIP collateral other than proceeds of avoidance actions. The parties may then only seek recoveries from proceeds of avoidance actions “if necessary” in the following waterfall: first, from actions against parties other than the prepetition secured parties; second, from actions against the prepetition second lien parties; and third, from actions against the prepetition first lien parties.
- “[A]ny avoidance action resulting in the successful avoidance of a lien or other determination that a lien on certain assets does not exist will not cause a diminution in value.”
- The value of equity pledges to be received by lenders from the debtors’ reinvestment of pledged ABS facility equity to new special-purpose entities for ABS refinancing purposes would be limited to the value of the capital stock in the existing SPE “on the date of reinvestment.”
- The UCC, ad hoc noteholder group and U.S. Trustee would receive three business days’ notice of any DIP credit agreement amendments, regardless of materiality of the amendment.
- The section 364(e) good-faith finding regarding the prepetition secured parties’ actions has been limited to “negotiation of the” DIP facility “and the adequate protection granted under [the] DIP order.”
Counsel to the UCC, Alice Byowitz and Thomas Mayer of Kramer Levin, expressed support for the DIP, as modified, and provided additional context on the process behind resolving the UCC’s objection. Byowitz noted that the order contains a sufficient reservation of rights for the UCC to continue its
lien challenge adversary proceeding against the first and second lien collateral agents. Mayer said the UCC is also analyzing “the KERP and other payments to insiders.” According to Mayer, the general importance to “retain control over” potential causes of action and avoid granting liens to the potential and actual targets of the UCC’s investigations and avoidance actions was “the big issue” that kept the parties “up until 2 a.m.” but was ultimately settled through the revised DIP order language.
Mayer also said the UCC has “no criticism” of the debtors’ handling of the “very participatory” DIP marketing and subsequent negotiation process and that “this is in fact a good DIP,” “relatively cheap.” Although there might be “one or two” provisions the UCC does not like, “I don’t stand here with substitute money today,” Mayer continued.
The court also entered an
order to seal information in the DIP fee letter.