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At Home Group Ch. 11 May Not Result in Guidance From Bankruptcy Court on Allowance of Double-DIP Claim Given Potential De Minimis Economic Relevance; Term DIP Financing Participation May Be Far More Important

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Editors’ Note: The latest in Octus’ Expert Views series, an article written by Michael Handler of King & Spalding, is below. The article is for purely illustrative and academic purposes, based on assumptions that may not be true and are not investment advice. The article was based off of a post the author made on his Linkedin page, which can be found (along with other interesting content) HERE.

The “double dip” as a financing structure for purposes of effectuating a liability management exercise (“LME”) transaction was first used by At Home Group Inc. (“At Home Group”) and subsequently implemented in some form in many other LME transactions, including Wheel Pros. As King & Spalding and Octus, formerly Reorg, described in our respective articles, the double-dip financing structure utilizes a non-Loan Party Restricted Subsidiary or non-Loan Party Unrestricted Subsidiary as the Borrower and the existing “Loan Party” group holding all or substantially all of an enterprise’s operating assets as guarantors.1 The loan is then funded by the Non-Loan Party borrower to the Loan Party group as a first lien intercompany loan. If the borrower pays off the loan at maturity, it pays the single claim at face value plus par plus accrued, etc. However, if the borrower and/or the guarantors file for chapter 11, the double-dip lenders have two claims against the Loan Party guarantors in satisfaction of their claim vis-à-vis the guarantee and the intercompany loan. This assumes that both the guaranty claim and the intercompany claim are fully allowed in bankruptcy and not challenged under various theories, including as a constructive fraudulent transfer on the basis that the Loan Party guarantors did not receive reasonably equivalent value in respect of both the guaranty and incurring the intercompany loan and were insolvent or rendered insolvent at the time of the transaction.

If At Home Group files for chapter 11 as The Wall Street Journal (among other publications) has reported may be imminent, it will be the second prominent borrower to have filed for bankruptcy after implementing a double-dip financing structure as part of an LME transaction.2 The first was Wheel Pros, and in its chapter 11 case the second claim in respect of the double dip does not appear to have affected relevant creditor recoveries, was not challenged and was only mentioned as part of the Wheel Pros’s liquidation analysis for purposes of showing compliance with the “best interests test” plan confirmation requirement.3 Given the economic realities of At Home Group – a big-box retailer operating amid poor consumer confidence and uncertain tariffs – the double-dip claim may not meaningfully affect recoveries of the Non-ABL Senior Secured Creditors (as such term is defined below) nor be challenged as a result thereof. Rather, the size, terms and participants of debtor-in-possession (DIP) financing will likely be far more impactful as described below.

Cost/Benefit of Double-DIP Allowance

According to Octus, At Home Group has a approximately $675 million ABL Credit Facility (of which $389.5 million was drawn as of Oct. 31, 2024) and approximately $1.557 billion of debt secured by a first lien on “Term Priority Collateral” (referred to herein as the “Non-ABL Senior Secured Debt”; and any creditor holding a claim in respect of such debt, a “Non-ABL Senior Secured Creditor”).4 Of this $1.557 billion of debt, the $200 million secured notes reportedly have a “double dip claim.”5 If there is minimal value to be distributed net of the prepetition ABL facility, any incremental indebtedness incurred in connection with a DIP ABL facility and any priming DIP financing secured by “Term Priority Collateral” allowance of the second claim in respect of the double-dip financing structure may not be worth much (especially after adjusting recoveries for the incremental professional fee costs in defending against a challenge).

For example, if there is $50 million of distributable value in respect of the Term Priority Collateral after satisfying DIP financing and relevant administrative expense claims (excluding adequate protection claims, which we will assume are held ratably for illustrative purposes), the double-dip notes would get 5.69% recovery ($11.38 million) if their second claim was allowed in full, as compared with a 3.21% recovery ($6.42 million) if only a single claim is allowed. While that is a meaningful difference, it could be further reduced by the incremental professional fee burn attendant with litigating whether the second claim is allowed. If distributable value in respect of Term Priority Collateral is less than $50 million, the dollar value of the second claim will be further reduced, further reducing the benefit of the second claim while the cost of defending allowance of such claim remains the same.

DIP Participation Biggest Factor in Non-ABL Senior Secured Debt Recoveries

Rather than the double-dip allowance, the biggest economic impact for the Non-ABL Senior Secured Creditors may be whether they participate in the DIP financing, which will likely be secured by a priming first lien on the Term Priority Collateral and priming second lien on the ABL Priority Collateral (i.e., junior to the ABL but senior to other Non-ABL Senior Secured Debt). As I discussed in my recently published article “You’ve Got to Fight! For a Contractual DIP Financing Participation Right,” DIP financing can shift a substantial portion of collateral value to DIP lenders, especially when the DIP proposes to roll up prepetition debt.6 Thus, the right to fund (or participate) in DIP financing may be far more important to relative economic recoveries among the Non-ABL Senior Secured Debt than whether the double-dip claim is fully allowed or is instead successfully challenged. This is especially true in a retail bankruptcy, where there could be relatively little value ascribed to the Term Priority Collateral – i.e., fixed assets, intangibles and going-concern value.

Given that there are multiple issuances of debt secured by a first lien on Term Priority Collateral, the right to participate in such new money DIP financing – and adequate protection issues related thereto – could result in litigation among the different classes of Non-ABL Senior Secured Creditors unless the pari passu intercreditor agreement governing the Non-ABL Senior Secured Debt expressly provides all of the Non-ABL Senior Secured Creditors with the right to participate ratably in any DIP proposed to be secured on Term Priority Collateral on a priming lien basis. On the other hand, if the pari passu intercreditor agreement is silent on this issue or allows one class with the right to propose such a DIP subject to the other creditors’ right to object on the basis of lack of adequate protection, such other Non-ABL Senior Creditors may object on such basis unless they are afforded the opportunity to participate in such DIP ratably based on relative Non-ABL Senior Secured Debt holdings or some other mutually acceptable allocation of DIP financing commitments. Of course, if certain Non-ABL Senior Secured Creditor classes are pushing for a liquidation, offering such Creditors a DIP participation right may not be enough to avoid an adequate protection fight. Further, if there is DIP secured by a priming lien on Term Priority Collateral, this could result in a significant diminution in value administrative expense claim, which could further reduce the value of allowance of the second claim of the double dip notes.

This dynamic underscores the importance of either (i) negotiating a favorable form of pari passu intercreditor agreement as the incumbent Non-ABL Senior Secured Creditor with respect to DIP financing or (ii) if there is not a form of pari passu intercreditor agreement and it is left to the reasonable discretion of the Non-ABL Senior Secured Creditor, the relevant parties must protect themselves against a scenario where the other secured party provides a DIP and there is no right to participate. It also underscores chapter 11 risk related to DIP financing and litigation over adequate protection where there are different pari passu senior secured creditor facilities, and the advantage of having a single credit facility where one group of “Required Lenders” can provide the DIP financing, consent to being primed and therefore avoid an adequate protection fight. The Borrower should also be focused on this issue, as they have an interest in mitigating the risk of litigation between senior secured creditor classes over lack of adequate protection in connection with securing DIP financing.
 

  1. See King & Spalding LLP, “At Home Group and the ‘Double Dip’ Claim Financing Structure” (accessible here) and Octus, “Liability Management: Identifying Permissible Double-Dip Financing Opportunities in Current Debt Agreements” (accessible here).
  2. See WSJ Bankruptcy, “At Home Group, Stung by Trade War, Explores Bankruptcy,” April 10, 2025, by A. Gladstone and J. Xu Klein; Octus, “At Home Enters Forbearance on May 23 After Skipping May 15 Interest Payment Amid Preparation for Bankruptcy Filing”, May 28, 2025.
  3. See Octus, “Wheel Pros Prepack Plan of Reorganization Goes Effective, Transfers Majority Ownership to 1L Lenders in First ʻDouble DIPʼ Bankruptcy,” Dec. 2, 2024; In re: Wheel Pros, LLC, et al. Case No. 24-11939, Disclosure Statement Relating to the Joint Prepackaged Plan of Reorganization of Wheel Pros, LLC and its Debtor Affiliates Pursuant to Chapter 11 of the Bankruptcy Code [Dkt No. 8], Exhibit E (Liquidation Analysis), at 9. The “best interests” test set forth in section 1129(a)(7) of the Bankruptcy Code requires that a bankruptcy court find, as a condition to confirmation, that a chapter 11 provides with respect to each impaired class of claims, that each holder of a claim or interest in such impaired class either (i) has accepted the plan or (i) will receive or retain under the plan property of value on account of such claim that is not less than the amount that the non-accepting claimholder would receive or retain if the debtor liquidated under chapter 7.
  4. See Octus, At Home Group Capital Structure (as of Oct. 31, 2024) (accessible here)
  5. The $200 million new notes were issued by a Cayman Subsidiary designated as a Non-Loan Party Restricted Subsidiary. It is unclear based on public reports if the Cayman Subsidiary holds any operating assets. For illustrative purposes, this article assumes that it does not.
  6. See The Review of Banking & Financial Services, “You’ve Got to Fight! For a Contractual DIP Financing Participation Right,” Vol 41, No. 4 April 2025, by Michael R. Handler (accessible here)