Plan Securities
Plan Securities are debt, equity, warrants or other securities issued or distributed as part of a Chapter 11 plan to implement the restructuring, fund the plan or provide consideration to creditors and interest holders.
How it works
Section 1123(a)(5)(J) identifies issuance of securities as an available implementation mechanism. Section 1145 can exempt specified offers or sales under a plan from Securities Act Section 5 and certain state or local registration requirements when its conditions are satisfied, subject to underwriter limitations and transaction-specific scope. Not every security issued around a bankruptcy automatically qualifies for Section 1145.
Section 1123 authorizes securities as an implementation tool
A plan can issue securities for cash, property, existing securities, claims, interests or another appropriate purpose.
Plan Securities can substitute for cash
Creditors can receive new notes, equity or warrants when the reorganized capital structure cannot or should not fund the full recovery in cash.
Section 1145 is conditional
The exemption applies to specified plan transactions and contains its own underwriter rules. It is not a blanket exemption for every financing or resale.
Economic value can differ from stated amount
A $100 face amount note can trade below par, and a percentage equity stake can be worth more or less than the plan valuation after emergence.
Worked example: debt-for-equity exchange
A creditor exchanges a $10 million claim for shares valued at $4 million in the plan. Modeled recovery is 40%, but realized recovery depends on post-emergence equity value and liquidity.
Why dilution and capitalization matter
New management equity, warrants, rights offerings and reserved shares can change the percentage ownership ultimately received by creditors.
Common mistakes
Calling every new security a Section 1145 security; valuing debt at face automatically; ignoring underwriter status and resale restrictions; and treating plan valuation as guaranteed market value.
Example
Unsecured noteholders exchange $500 million of allowed claims for new common equity and warrants in the Reorganized Debtor. Counsel determines whether the issuance satisfies Section 1145 or requires another securities-law exemption.
Example
Unsecured noteholders exchange $500 million of allowed claims for new common equity and warrants in the Reorganized Debtor. Counsel determines whether the issuance satisfies Section 1145 or requires another securities-law exemption.
Professional note
Bankruptcy confirmation does not eliminate securities-law analysis. Identify the issuer, recipient, consideration, transaction structure and underwriter status before assuming Section 1145 applies.
Related terms
- Convertible Securities
Convertible securities are commonly bonds, notes or preferred shares that can convert into common stock or another security under specified 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.
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