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Abstract: 

While many loan agreements contain a “sacred right” prohibiting “Required Lenders” from effectuating new money priming financing and/or the exchange of existing loans into such priming debt on a non-pro rata basis (commonly referred to as “Serta” protection), such Serta protection often contains a carve-out for debtor-in-possession financing. This article argues that lenders (both in syndicated and private credit facilities) should fight back against such a carve-out and expressly require as a sacred right a DIP financing participation right as part of “Serta” protection (or otherwise negotiate for a contractual DIP financing participation right) to protect against the value destruction attendant in a chapter 11 case where minority lenders are not offered the right to ratably participate in DIP financing commitments arranged and provided by the majority “Required Lenders.” Such protection is especially important given the lack of protections for minority lenders under relevant bankruptcy law related to DIP financing.

Keywords: : Debtor-In-Possession Financing; Serta Protection; In re JER/Jameson Mezz Borrower II, LLC; Contrarian Funds LLC v. Aretex LLC; American Tire Protection

Affiliations:  1: King & Spalding LLP.