Legal Analysis: Private Credit-Style ‘Required Lender’ Definition in Exela DIP Quickly Leads to Holdout Dispute

Just weeks after Exela filed for chapter 11 with what it thought was a deal to provide the company with $80 million of critical new-money DIP financing, three lenders holding about 29% of the commitments refused to fund past their share of a $50 million emergency funding tranche. The debtors faced no opposition at their first day hearing and were poised to execute a restructuring term sheet to salvage the $856 million a year business process automation company, but now they warned “interlender” issues could hold up the case.

According to the restructuring term sheet, the company was to equitize about $1.2 billion of its April 2026 notes. At the March 4 first day hearing, the debtors said the terms were supported by an ad hoc group holding 73.7% of “unaffiliated” April 2026 notes (as well as debtor affiliates holding about 31% of the total April 2026 notes). Five members of the seven-member ad hoc group were lenders under the DIP agreement and funded the $50 million emergency tranche needed after the debtors entered chapter 11 with only $100,000 of cash on hand.

Ray Schrock of Latham & Watkins, counsel to the debtors, noted at the first day hearing that under the DIP, the debtors would need to formalize the term sheet and enter into a restructuring support agreement by March 17 or risk breaching a DIP milestone covenant. Schrock told the judge the debtors would work with their lenders to turn the restructuring terms into a binding RSA by the milestone date, but the date came and went without a public update from the company.

The debtors’ scheduled their second day hearing for March 27, pushed the hearing to April 4, and then pushed it again to April 14, all without an update on the RSA.

The reason started to become apparent through a series of highly redacted discovery motions. Holdco Asset Management – then a member of the ad hoc group and one of the five DIP lenders – said in an April 6 filing that it and two other minority DIP lenders held a combined 29% of the DIP. The lender also said that it and the two other minority lenders held the “unambiguous right to withhold consent to the RSA.”

Indeed, the DIP agreement defined “Required Lenders,” whose collective consent is needed for a multitude of decisions – including approval of an RSA – to mean not just the supermajority holders of the DIP, but at least one of the three minority lenders, Holdco Asset Management, CCUR Holdings and OSP LLC, too:
 

Matthew Roose of Ropes and Gray, counsel to the ad hoc group, later noted at an April 23 hearing that reserving such a powerful consent right for minority lenders is an unusual construct.

Most DIP credit facilities have required lender definitions centered primarily on a percentage of lenders. While not underhead of, few DIPs include a numerosity requirement, and Exela appears to be an even rarer case where this numerosity requirement was extended to cover specific minority lenders. Likewise, in the front-end broadly syndicated loan market, numerosity requirements like the one found in Exela’s DIP are relatively rare.

Interestingly, Octus’ private credit analysis team has observed that numerosity requirements are more common in the burgeoning private credit market, particularly where the credit involves a small number of creditors. The purpose of such provisions is to protect minority lenders where a single large holder might exceed typical required lender percentage threshold solely on the basis of its own holdings. Of course, the dynamics of required lender provisions and the leverage at play varies deal by deal.

Although we do not know exactly why Exela’s DIP was drafted with a minority lender consent right, the parties’ subsequent public statements indicate that (at least looking back and in the litigation context) the debtors and their two majority DIP lenders – Gates Capital and Avenue Capital – radically underestimated how well “baked” the restructuring term sheet was.

“The Debtors at all times believed that the entire Ad Hoc Group supported the path laid out under the Restructuring Term Sheet and without objection or reservation by the [minority lenders], represented the same to the Bankruptcy Court and all parties in interest,” a March 28 letter sent by the debtors to minority lender Holdco Asset Management states.

In addition, the DIP featured a relatively small number of lenders (five), with some members of the seven-member ad hoc group not willing to fund at all. As portrayed by minority lender Holdco Asset Management in a March 30 letter to the debtors, the two largest members of the ad hoc group and soon to become majority DIP lenders – Gates Capital and Avenue Capital – were not willing to finance the entirety of the DIP by themselves. Holdco writes:
 

Under such facts, the minority lenders could have exercised their leverage to require the debtors and majority lenders to adopt a “required lenders” construct more common in the private credit market into the DIP context.

Regardless of the parties’ intention when they entered into the restructuring term sheet, any semblance of consensus for the restructuring and further financing for the debtors quickly evaporated.

About a month after the debtors’ first day hearing, at an April 9 status conference, it was clear that the minority DIP lenders, each of which was represented by its own counsel, did not want to proceed down the restructuring path outlined by the restructuring term sheet and had been refusing RSA proposals. Counsel to Holdco Asset Management said that the minority lenders only agreed to step in to fund part of the debtors’ much needed $50 million emergency DIP tranche to keep the debtors afloat and maintained that the restructuring term sheet they agreed to with the debtors was nonbinding and for indicative purposes only.

Turning the term sheet into an RSA, according to Holdco Asset Management and the other minority lenders, was not a forgone conclusion.

According to Holdco Asset Management, based on its diligence, the restructuring proposed in the term sheet was simply not feasible. As the lender’s counsel explained at the April 9 status conference and two presentations made to the debtors’ chief restructuring officer, one on March 14 and another on March 18, the lender believed the debtors had cash flow issues and not enough commitments for exit financing. The presentations also presented a bevy of other issues concerning the debtors’ business that the minority lender group believed jeopardized the debtors’ go-forward prospects.

The presentations suggested that the minority lenders favored a section 363 sale, rather than the proposed restructuring.

The debtors denied the minority lenders’ allegations about the health of their business, saying in a March 16 letter to Holdco Asset Management that the lender’s March 14 presentation was “fraught with errors and misrepresentations.”

In their March 28 letter, the debtors took aim at the minority lenders’ legal position, insinuating that the lenders may be “defaulting lenders” for refusing to sign an RSA that mirrored the restructuring term sheet:
 

At the same time, the debtors faced a very real liquidity issue. Despite obtaining a further $5 million of stop-gap financing through an upsize of one of their securitization facilities, on April 17 the debtors said that they only had enough funding for a few more days. The 13-week DIP budget projected a cumulative net cash burn of about $47 million (nearly all of the interim DIP funding) by the week of April 18.

By April 17, the debtors had a commitment from majority lenders Avenue Capital and Gates Capital to fund the remaining $30 million left on the DIP. The problem, however, was that the majority lenders made their funding conditional on the three minority DIP lenders agreeing to roll their loans into an exit facility.

The three minority lenders refused to do so, apparently still insisting on a section 363 sale, a nonstarter for the other parties.

A trial was scheduled for April 23, and the debtors were preparing to argue that the court should find the minority lenders were holding out in bad faith. According to the debtors, the minority lenders used their consent right to bust the RSA milestone and avoid their funding obligations and exit financing commitments – actions the debtors said showed bad faith and warranted a finding that the lenders were defaulting lenders under the DIP. Such a finding, the debtors said, would leave the lenders without consent rights (see the above-quote definition of “Required Lenders”) and open up the potential for breach of contract and other claims by the debtors against the lenders.

On the morning of April 23, it appeared that the debtors would need to litigate before Judge Christopher Lopez – who just a day before had called their proposed findings “aggressive” and implied the plain text of the parties’ contracts would guide his decision. A plain text interpretation was a position the minority lenders welcomed in supplemental briefing.

Alexander Welch of Latham & Watkins began the April 23 hearing with a stark tone, saying no deal had been reached and that the minority lenders were “seeking to veto the chapter 11 cases for one purpose and one purpose alone – seeking a better recovery than other similarly situated creditors.”

But Welch was stopped before he could say much more, when it became clear that there was a breakthrough in negotiations.

The DIP lenders agreed to a deal that would provide the minority lenders with up to $500,000 in fee reimbursements and the elevation of $6 million of their DIP loans into what would be a super senior exit facility provided by Gates to refinance a $40 million Blue Torch facility. Also, the minority DIP lenders agreed to cancel $4 million of their DIP loans and roll the remainder of their DIP lending position into a separate exit facility. The debtors agreed to make the exit facility cash pay, as opposed to paid-in-kind, and obtained additional commitments for exit financing that were not contemplated in the original restructuring term sheet.

The minority DIP lender group’s use of their RSA consent right demonstrates just how much more powerful a required lender provision with strict minority lender protections can be in chapter 11 – where time is of the essence and financing sources can be scarce – than outside of bankruptcy in private credit deals. After the consent right was invoked, the Exela debtors desperately needed financing, and the majority DIP lenders were unwilling to step in and fund the minority’s commitments, at least without the minority lenders’ agreeing to roll their loans into an exit facility.

It took a complex settlement to solve the problem, but not before the debtors were forced to both prepare for a litigation with an outcome that was far from certain and rewire their original restructuring plan.