Bankruptcy Law 101: Exit Financing in Ch. 11 Cases

✨ Summary by AI at Octus

Welcome to the latest installment of U.S. Bankruptcy Law 101, an Octus series focused on discussing fundamental U.S. bankruptcy law topics and issues.

Welcome to the latest installment of U.S. Bankruptcy Law 101, an Octus series focused on discussing fundamental U.S. bankruptcy law topics and issues. This edition examines exit or post-emergence financing in chapter 11 reorganization cases.

Our other articles in the series can be found HERE. Stay tuned for our next edition in a few weeks.

Exit Financing Overview

The success of a reorganized debtor post-bankruptcy often depends on its ability to secure financing – typically called “exit financing” – to support ongoing operations. Exit financing is often critical to a debtor’s ability to fund plan distributions, pay administrative expense claims, assume and cure any defaults under prepetition contracts and maintain sufficient working capital.

The importance of exit financing is reflected in several provisions of the Bankruptcy Code. Section 1123(a)(5) requires a plan of reorganization to provide “adequate means for the plan’s implementation.” A debtor therefore cannot confirm a plan without proving it has the financial wherewithal to fund its terms.

Furthermore, as previously discussed, another confirmation requirement is that a plan must satisfy a feasibility test. Under this test, a debtor must demonstrate that confirmation is not likely to be followed by a liquidation or the need for further reorganization. The availability of committed exit financing can be an essential part of proving up plan feasibility.

Unlike debtor-in-possession financing, which we discussed HERE, a debtor’s exit financing is largely based on the reorganized company’s projected financial health and not its needs during its bankruptcy. The terms of exit financing can be similar to a traditional credit facility outside of bankruptcy, but will typically have conditions tied to the progress of the bankruptcy case and impose higher fees and interest rates.

Practically, exit financing is often an integral component of a debtor’s overall restructuring strategy and can be negotiated as part of a restructuring support agreement or reorganization plan prior to the bankruptcy filing or in conjunction with DIP financing.

For a debtor’s existing lenders, exit financing can protect their pre-petition investment. By rolling over existing debt into an exit facility, lenders can maximize the recovery of their previous claims and prevent sudden write-offs. Providing exit financing also gives lenders a certain level of control over the bankruptcy process and the reorganized company.

Providing exit financing can also be safer than traditional lending because lenders can negotiate a higher priority so that they would be first in line for repayment and the company’s balance sheet has usually been delevered during the bankruptcy.

However, not all exit financing is successful and can weigh down the reorganized company. For example, Rite Aid filed its first bankruptcy in 2023 and emerged in August 2024 with $1.7 billion of exit asset-based-lending, or ABL, financing and takeback notes. Due to inventory and other operational challenges, which were exacerbated by decreased liquidity as a result of heavy debt load, the company filed its second chapter 11 in May 2025 to liquidate and wind down. Rite Aid’s second plan went effective on Jan. 2.

A similar pattern occurred in the Party City bankruptcy, which filed chapter 11 in December 2024, not long after emerging from a 2023 chapter 11 case with more than $650 million of debt. In the second bankruptcy, the company liquidated and wound down operations, narrowly avoiding chapter 7 conversion after it became administratively insolvent. Party City’s second plan went effective in September 2025.

Forms of Exit Financing

Exit financing can take many different forms, including new debt or equity raises, takeback debt or converted, refinanced credit facilities and debt-for-equity swaps.
 

• In a new-money debt or equity raise, existing stakeholders or third-party investors inject fresh cash into the debtor, which we discuss in greater detail below. The debt or equity raise will often be backstopped by discrete creditors entitled to fees for backstopping the offering. Sometimes exclusion of other creditors can lead to litigation over the investment opportunity.

• When exit financing takes the form of takeback or replacement debt, creditors agree to exchange their existing prepetition claims for newly issued notes or modified credit facilities instead of receiving cash. Takeback debt will often have amended maturities, interest rates and covenants.

• Conversion or refinancing existing credit lines into exit financing with new or existing lenders is another option. This typically involves active credit facilities, like asset-based lending or other DIP credit secured by highly liquid assets like accounts receivable and inventory.

• In a debt-for-equity swap, prepetition lenders exchange their debt claims for equity in the reorganized company. The swap contributes toward deleveraging the debtor’s balance sheet.
   

Debtors are not limited to securing just one type of exit financing and often will utilize a combination or all types depending on their post-emergence financing needs.

For example, in Office Properties Income Trust, the debtors’ exit financing consisted of $805 million in new senior notes, a $35 million equity rights offering, the reinstatement of $177 million of mortgage debt, the restatement and amendment of its $425 million revolving credit facility and a debt-for-equity swap that handed ownership of the company to its lenders, including affiliates of Helix Partners Management and Redwood Capital Management.

New Debt / Equity Financing

Typically when a debtor obtains new-money exit financing, either through issuing new debt or equity in the reorganized company, the new debt or equity is offered to a specific creditor class and allocated on a pro-rata basis. The allocation structure can be a source of controversy if it strays from a straight pro-rata allocation or when additional benefits or compensation are provided to select creditors within the class who serve as backstop parties, discussed below.

Mechanics of a Rights Offering

A rights offering begins by establishing the target capital amount, the distribution ratio and a subscription price. The securities are typically offered at a substantial discount to the projected post-emergence value to incentivize creditors to participate in the offering. For example, the Azul debtors’ plan included an equity rights offering of up to $950 million open to participants at a 30% discount to plan value.

Debtors will often seek to exempt their rights offering from registration requirements by complying with section 1145 of the Bankruptcy Code (which exempts securities being offered pursuant to plan of reorganization) or section 4(a)(2) of the Securities Act (private placement exemption).

The rights offering will establish a designated record date to determine eligibility to participate, including provisions governing transferred claims. Eligible parties will then have a period of time to exercise their subscription rights.

The offering can be bifurcated into allocated and open portions. The allocated portion is reserved for eligible prepetition creditors based on their pro-rata holdings, offering them a right of first refusal to participate in the new debt or equity. The open or unallocated portion consists of any shares or debt left unsubscribed by the general creditor body. Backstop parties may be bound to purchase shares in the unallocated portion

A rights offering can be over- or under-subscribed. For example, in Core Scientific, the $55 million equity rights offering was oversubscribed. The oversubscription amount was allocated pro rata among participants who exercised oversubscription rights based on the number of shares in the reorganized debtor for which they had subscribed. The participants who exercised oversubscription rights also received excess payments under the rights offering procedures.

If a rights offering is undersubscribed, it can jeopardize plan confirmation because the plan may lack the necessary financing for emergence. Backstop arrangements allow debtors to protect against this risk. However, in Endo, a $160 million general unsecured creditor rights offering received only $2 million in subscriptions. This required the first lien creditors that served as backstop parties to fund $158 million, resulting in a shift in equity allocation, and the plan was able to go effective.

Once the subscription period closes, the subscription agents reconcile the funding, the backstop commitments are triggered to cover any shortfall and the new securities are formally issued.

Backstop Agreements

In a backstop agreement scenario, a select group of creditors (referred to as backstop parties) commits to purchase any unsubscribed debt or equity in the rights offering, essentially guaranteeing the debtor receives the full amount of required funding even if general participation is insufficient. Backstop agreements provide financial security to the reorganized debtor, helping assure stakeholders and the bankruptcy court that the chapter 11 plan is feasible.

In consideration for backstopping a rights offering, debtors typically agree to provide the backstop parties fees, often structured as a percentage of the total commitment and payable in cash or new common equity. Backstop parties may also be entitled to breakup fees or expense reimbursement, as well as additional benefits.

For example in Hearthside Food Solutions, the debtors allocated 65% of their $200 million equity rights offering to all first lien secured parties on a pro-rata basis but held back 35% for the backstop parties that also received a 10% backstop fee.

The compensation value for backstop fees usually ranges around 10% of the overall rights offering and is typically paid in the form of equity. Below is a chart showing backstop compensation in recent cases.

Rights Offering & Backstop Fee Examples
Year	Company	Rights Offering Size	Backstop Fee (Stated)	Source
2021	Washington Prime Group	$260–$325 million	9%	View source
2022	Talen Energy	Up to $1.65 billion	20%	View source
2023	Party City	$75 million	10%	View source
2024	2U Inc.	$46.5 million	3%	View source
2024	Eletson Holdings	Up to $43.5 million	8%	View source
2024	Hearthside	$200 million	10%	View source
2024	Hornblower	$345 million	10%	View source
2024	WOM SA	$500 million (~$95M + $405M)	12.5%	View source
2025	Anthology	$72.7 million	10%	View source
2025	Azul SA	$650 million	14%	View source
2025	Cutera	$30 million	10%	View source
2025	Wolfspeed	~$301.13 million	10% ($30.25M)	View source
2026	Multi-Color Corp.	Not specified	3% (proposed)	View source
2026	Office Properties Income Trust	$35 million	10% ($3.5M)	View source
2026	Trinseo	$450 million	Not specified	View source
2026	United Site Services	$480 million	8%	View source

The debtors’ ability to pay backstop fees generally resides in their authority to use property of the estate and pay administrative expenses. The debtors must obtain court approval for their backstop agreements, either as part of plan confirmation or by bringing a motion that details the structure and economics of the backstop, the identity of the backstop parties and the backstop consideration. The legal standard for approving the backstop agreement is the debtors’ business judgment, though a heightened standard may apply if insiders are involved.

Litigation Over Backstop Arrangements

As discussed above, exit financing is usually part of the debtor’s larger restructuring strategy and backstop parties are typically recruited prior to the bankruptcy filing. In addition to the backstop fees, backstop parties often have access to more information than other similarly situated prepetition creditors and can exert influence over the bankruptcy case.

Backstop agreements, particularly the exclusive consideration provided to backstop parties, has been a source of litigation frequently instigated by excluded creditors, who rely on the Fifth Circuit’s 2024 Serta Simmons decision to argue that excluding them from participating in a rights offering violates the requirement that similarly situated creditors be treated equally.

In Serta, the Fifth Circuit reversed a bankruptcy court’s approval of plan provisions requiring the reorganized debtors to indemnify lenders that participated in a contested uptier exchange against damages incurred in litigation filed by excluded lenders. The Fifth Circuit found that the indemnification provision violated the Bankruptcy Code’s confirmation requirement of equal treatment because the indemnification was worth more to lenders who participated in the uptier.

Following Serta, in September 2025 U.S. District Judge Andrew Hanen reversed Judge Christopher M. Lopez’s approval of the ConvergeOne debtors’ plan equity rights offering backstop arrangement. In that case, an ad hoc group of first lien lenders agreed to backstop a $245 million reorganized equity rights offering in exchange for an $85.75 million discounted direct investment and a 10% backstop fee/put option premium worth $37.7 million. According to Judge Hanen, the backstop allowed majority lenders to recover 31% more than excluded first lien lenders, and was a violation of the equal treatment requirement. The judge reasoned that the “exclusive” backstop opportunity “constituted treatment for a claim and allowed for some class members to receive higher recoveries than others in the same class.”

Conversely, in WOM SA, Judge Karen B. Owens rejected an argument by an ad hoc group of excluded noteholders that the plan’s $500 million rights offering that was backstopped by a majority ad hoc group violated the equal treatment provision. According to Judge Owens, the backstop premium was not provided on account of the backstop parties’ prepetition claims but was in exchange for the backstop commitment.

Backstop fees also draw scrutiny when the risk of undersubscription is low or when the termination fee is equal to the fee payable upon plan confirmation.

For example, in Windstream, Judge Robert D. Drain refused to approve an 8% premium totaling $60 million for a $750 million rights offering, payable regardless of whether the rights offering was successful. Instead, the judge conditioned the $80 million premium on successful confirmation of a plan; otherwise, backstop parties were entitled to a reduced $30 million premium if the plan was not confirmed and the backstop agreement was terminated.