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January 23, 2020
Recent Publication Assesses the Reasonableness of Rights Offerings Under Chapter 11 Bankruptcy

In a recent article for the AIRA Journal, Brattle Principal Marti P. Murray addresses metrics that can be used to assess the reasonableness of rights offerings, and examines 15 recent, high-profile completed rights offerings undertaken between 2007 and 2018.

Rights offerings are a well-established and effective technique for a bankrupt company (a debtor) to obtain exit financing under the Chapter 11 reorganization process. Existing stakeholders are oftentimes the best informed about the debtor and can have an incentive to ensure that the debtor successfully emerges from bankruptcy. 

In a rights offering, stakeholders are given the right, but do not have the obligation, to purchase additional stock or other newly-issued securities at a discount to the ascribed value under a plan of reorganization, or what the price would otherwise be. In order to ensure that the sufficient amount of exit financing is raised, certain backstop parties (usually existing creditors) must agree to purchase any unsubscribed portion of the exit financing after stakeholders have invested additional funds. Backstop parties bargain for additional economic benefits in exchange for agreeing to commit financing to the debtor’s emergence. 

The bankruptcy court must approve the terms of a rights offering. A debtor is allowed to proceed with a rights offering once the bankruptcy court has determined that the debtor has sufficiently explored other options to obtain exit financing, that the terms of the rights offering are fair and reasonable, and that all similarly situated creditors are receiving equal treatment.

Ms. Murray concludes that the reasonableness of the terms of a given rights offerings can be assessed by evaluating certain key metrics, and that rights offerings will continue to play a vital role in corporate restructurings as companies seek to obtain exit financing.

The full article, “Assessing the Reasonableness of Rights Offerings: Raising Exit Financing in a Chapter 11 Proceeding,” can be found below.