Plan Funding
Plan Funding is the cash, financing, asset-sale proceeds, retained liquidity, new investment or other resources used to satisfy distributions, administrative obligations and implementation costs required by a Chapter 11 plan.
How it works
Section 1123(a)(5) requires a plan to provide adequate means for implementation and lists mechanisms such as retaining or transferring estate property, selling assets, modifying liens and securities, and issuing new securities. Funding can come from operations, Exit Financing, sponsor or creditor capital, asset sales, cash on hand or combinations of sources.
Section 1123 requires adequate means for implementation
The plan must identify a workable path to carry out its treatment rather than merely state promised recoveries.
Funding can come from multiple sources
Common sources include cash on hand, asset-sale proceeds, rights offerings, new equity, Exit Financing and operating cash flow.
Committed and projected funding are different
A signed financing commitment can offer more execution certainty than a projection that future cash will be available.
Funding connects directly to feasibility
The Feasibility Test asks whether the plan is likely to avoid another liquidation or financial reorganization unless the plan contemplates it.
Worked example: funding gap
A plan needs $200 million at emergence but has only $140 million of committed cash and financing. Unless the remaining $60 million has a credible source, implementation can fail.
Why minimum liquidity matters
Using every available dollar for distributions can leave the Reorganized Debtor undercapitalized immediately after emergence.
Common mistakes
Counting uncommitted financing as certain cash; ignoring fees and administrative claims; treating enterprise value as a funding source; and assuming confirmation itself supplies liquidity.
Example
A plan requires $120 million on the Effective Date: $40 million for administrative and priority claims, $50 million for creditor cash distributions and $30 million of minimum liquidity. Funding comes from $45 million of cash on hand and a $75 million Exit Financing facility.
Example
A plan requires $120 million on the Effective Date: $40 million for administrative and priority claims, $50 million for creditor cash distributions and $30 million of minimum liquidity. Funding comes from $45 million of cash on hand and a $75 million Exit Financing facility.
Professional note
Plan Funding should be reconciled like a closing sources-and-uses statement. A plan can be attractive yet fail operationally if committed funding does not cover required cash uses and minimum post-emergence liquidity.
Related terms
- Plan of Reorganization
A Plan of Reorganization is the Chapter 11 plan that sets the classification and treatment of claims and interests and establishes the transactions, distributions, governance and other steps through which the debtor will reorganize or otherwise resolve the bankruptcy case.
- Effective Date
The Effective Date of a Chapter 11 plan is the date specified under the plan when its conditions precedent have been satisfied or waived and the restructuring transactions become effective according to the plan and confirmation order.
- Exit Financing
Exit Financing is debt or other committed financing arranged for a debtor's emergence from Chapter 11 to fund plan distributions, repay or refinance DIP and other obligations, and provide liquidity for the post-emergence business.
- Feasibility Test
The Feasibility Test is the Chapter 11 confirmation requirement in Section 1129(a)(11) that a confirmed plan not be likely to lead to liquidation or another financial reorganization unless that liquidation or reorganization is itself proposed in the plan.
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