The Complete Guide to Restructuring Support Agreements: Everything You Wanted To Know About RSAs

What is a Restructuring Support Agreement?

A Restructuring Support Agreement (RSA) is a legal contract between a debtor company and certain of its creditors in a Chapter 11 bankruptcy restructuring. Through this agreement, the debtor and consenting creditors establish agreed-upon terms for the treatment of creditor claims and an overall plan of reorganization for the company.

The primary purpose of an RSA is to reduce the uncertainty, cost, and length typically associated with Chapter 11 bankruptcy cases. By binding creditors to support a restructuring plan, the debtor gains more certainty that the proposed plan will be approved. This allows for a more efficient and streamlined restructuring process.

Some key features of Restructuring Support Agreements include:

- Treatment of Claims - The RSA spells out how different classes of claims will be treated under the reorganization plan. This gives creditors clarity on potential recoveries.

- Commitment to Vote - Creditors signing the RSA agree to vote in favor of a plan that aligns with the RSA terms. This support makes plan approval more likely.

- Milestones - The RSA usually contains deadlines for key events in the restructuring, helping keep the process on track.

- Fiduciary Outs - These allow parties to withdraw support from the RSA if a better alternative emerges that is required by their fiduciary duty.

By getting broad creditor support through an RSA, the debtor can file bankruptcy and move through Chapter 11 with much less uncertainty, making RSAs an important tool in many major restructurings.

Parties Involved in a Restructuring Support Agreement

Restructuring support agreements involve the former debtor's perspective, and key stakeholders in the company's capital structure:

Debtor - The debtor is the company undergoing the restructuring and bankruptcy process. The debtor negotiates the RSA terms and commits to taking agreed-upon steps in the restructuring process.

Major Secured Creditors - Large creditors with liens against company assets are usually involved in RSAs. This includes term loan lenders, bondholders, and any other creditors with security interests. They agree to the treatment of their secured claims.

Key Unsecured Creditors - Significant unsecured creditors like trade creditors, litigation claimants, and bondholders are often RSA parties. They agree to the treatment of unsecured claims.

Equity Sponsors - Equity sponsors are private equity, venture capital, or other entities that own a stake in the debtor. They negotiate the impact on their equity interests.

Getting broad support from these key groups through an RSA increases the likelihood of a smooth, successful bankruptcy reorganization. The debtor works to get critical mass approval from capital structure stakeholders.

Key Terms of Restructuring Support Agreements

Restructuring support agreements contain several key terms that are critical to the restructuring process:

Treatment of Claims

The RSA will specify the proposed treatment and recovery for creditors who sign on to the agreement. This includes the percentage distribution, timing, and form of consideration they will receive.

Different classes of creditors may receive different treatment. For example, secured lenders may get paid in full while unsecured creditors get a percentage of recovery.

DIP Financing Terms

The agreement will outline the debtor's plan to obtain debtor-in-possession (DIP) financing to fund operations in bankruptcy. It will specify the proposed DIP loan amount, interest rate, maturity date, liens, and other terms. Creditors signing the RSA agree to support the DIP financing terms. This helps ensure the debtor can obtain financing.

Timelines and Deadlines

The RSA lays out a schedule of specific deadlines and target dates for key events in the restructuring process. This often includes the bankruptcy filing date, plan confirmation date, and effective date of the reorganization plan.

Having an agreed-upon timeline helps move the process forward efficiently.

Fiduciary Out Clause

This provision allows the debtor to consider alternative proposals if they would provide greater value to the bankruptcy estate. It gives the debtor flexibility to take better offers that arise.

However, the debtor must first consult with the RSA parties before accepting an alternative proposal.

Difference from Term Sheet

A restructuring support agreement (RSA) differs from a restructuring term sheet in some key ways:

Binding vs. Nonbinding - An RSA is a binding contract between the parties, while a term sheet is typically nonbinding and subject to further diligence and negotiation. The RSA obligates stakeholders to support the restructuring outlined in the agreement.

Stakeholder Signatories - An RSA will have signatories from multiple key creditor and equity constituencies, including secured lenders, bondholders, trade creditors, shareholders, etc. A term sheet may just be between the debtor and one set of stakeholders.

Level of Detail - The RSA contains much more detailed terms, including precise treatment of claims, exact voting and bankruptcy timeline, and remedies if the agreement is breached. A term sheet has high-level terms but leaves specifics to be worked out later.

Court Approval - The debtor typically files the RSA with the bankruptcy court and asks the court to approve it. A term sheet does not need court approval.

In summary, the binding nature, more signatories, and level of detail differentiate an RSA from a nonbinding restructuring term sheet. The RSA locks in stakeholder support for the restructuring plan outlined.

Breach of Restructuring Support Agreement

A restructuring support agreement is a legally binding contract between the parties.

An RSA breach occurs when one of the parties fails to comply with a material term or obligation under the agreement. Common RSA breaches include:

- Failure by the debtor to meet bankruptcy milestones or deadlines outlined in the RSA

- Failure by creditors to vote for or otherwise support the proposed plan of reorganization

- Publicly opposing or taking actions inconsistent with the RSA

- Soliciting or supporting an alternative transaction or restructuring proposal

Consequences of Breaches

If one side breaches an RSA, the non-breaching party usually has the option to terminate the agreement. Specific consequences upon termination may include:

- Creditors not being bound to vote for the plan of reorganization

- Debtor no longer has support for proposed bankruptcy exit financing

- Parties losing settlement offers, releases, and other benefits contained in the RSA

- Debtor losing the ability to assume the RSA in bankruptcy

The most common remedy for a breach of an RSA is monetary damages. The non-breaching parties have the right to sue the breaching party for any damages caused by the breach. For example, if a key creditor backs out of supporting the restructuring plan in violation of the RSA terms, the debtor may have increased costs and delays. The debtor could potentially sue that creditor for monetary damages resulting from the breach.

Another option is for the debtor company to reject the RSA as an executory contract. This means the debtor essentially cancels the contract. The debtor would need approval from the bankruptcy court to reject the executory RSA contract. This route is less common but is a possibility if the debtor believes it no longer wishes to be bound by the agreement.

Overall, legal action for monetary damages is the most frequent outcome when one party breaches an RSA. Since the RSA is meant to provide certainty to the restructuring process, breaches are treated seriously. Experienced bankruptcy counsel is key to ensuring RSAs are structured properly and enforceable.

Fiduciary Out Clauses

RSAs also typically contain "fiduciary out" clauses. These allow the debtor to terminate the RSA if they receive a superior restructuring proposal that is in the best interests of the bankruptcy estate. However, the debtor usually must first consult with other RSA parties before exiting.

Fiduciary outs give the debtor flexibility to consider better offers, while still providing creditors with protection. Activating a fiduciary out usually terminates the entire RSA.

Securities Law Considerations

Public companies entering into restructuring support agreements (RSAs) need to be aware of securities law obligations relating to the disclosure of material information. Under U.S. securities laws, public companies are required to disclose certain information that could impact investment decisions.

The execution of an RSA is likely considered material information that needs to be promptly disclosed to investors. Public companies will want to publish the RSA through a Form 8-K filing with the Securities and Exchange Commission (SEC) soon after entering into the agreement.

In addition to filing the RSA itself, the 8-K will also include a press release summarizing the key terms of the agreement. The goal is to provide investors with the important details relating to the restructuring plans outlined in the RSA.

Besides the initial filing, public companies will also want to include updates on the RSA in subsequent SEC filings as material developments occur. This includes if the company breaches the terms of the RSA, if key deadlines are extended, or if the agreement is ultimately terminated.

Ongoing disclosure allows investors to stay informed on the restructuring process tied to the RSA. Adhering to securities law requirements helps public companies maintain transparency around RSAs and meet obligations to shareholders.

Examples of Restructuring Support Agreements

Restructuring Support Agreements have been used in many major bankruptcy cases over the past decade. Here are some notable examples:

Guitar Center

In November 2020, Guitar Center filed for Chapter 11 bankruptcy. Prior to filing, Guitar Center entered into a Restructuring Support Agreement with its secured noteholders and ABL lenders. This prepetition RSA locked in support from creditors holding over $1 billion of debt.

Key terms included:

- Noteholders would convert debt to equity, becoming majority owners

- ABL lenders would take pay downs and maintain lending commitments

- Unsecured noteholders got 7% of equity and new unsecured notes

- Trade vendors would be paid in full

With this RSA in place, Guitar Center quickly moved through the Chapter 11 process. A reorganization plan based on the RSA terms was confirmed just 3 months after filing.

Hertz

Hertz filed for bankruptcy in May 2020, amidst plummeting rental car demand from COVID-19. Hertz originally got a prepetition RSA, but amended it after filing to resolve creditor objections.

Key terms of the amended RSA:

- DIP lenders took equity in the reorganized company

- Unsecured creditors got a mix of cash, equity, and new notes

- Existing shareholders were wiped out

The amended RSA brought all major creditor groups on board. Hertz exited Chapter 11 just 3 months after amending the RSA, with a smooth confirmation.

Purdue Pharma

Purdue's 2019 bankruptcy was highly complex with thousands of opioid lawsuits pending. Purdue negotiated an RSA with 24 state attorneys general to settle cases.

Key terms included:

- $4.5 billion payment from Sackler family members

- DOJ civil and criminal claims resolved

- New company formed for benefit of claimants

With the RSA, Purdue progressed toward a contested confirmation hearing. This showcases the use of RSAs even in difficult megacases.

Alternatives to Restructuring Support Agreements

While Restructuring Support Agreements (RSAs) are a common tool used in Chapter 11 bankruptcy cases, they are not the only option available. Companies looking to negotiate a consensual plan of reorganization with major creditor groups have a few alternatives to traditional RSAs:

Plan Support Agreements

Plan Support Agreements (PSAs) are fairly similar to RSAs. They are contracts between the debtor and certain creditors to vote in favor of and otherwise support a proposed plan of reorganization. Like RSAs, PSAs often contain provisions requiring creditors to vote against competing plans.

However, PSAs tend to be more high-level and less detailed than RSAs. While RSAs will often contain specifics on the proposed treatment of claims and other terms, PSAs may only commit the parties to support the general framework of a plan. PSAs will typically be executed later in the process after substantial negotiations over a proposed plan.

Lock-Up Agreements

Lock-up Agreements represent a more limited agreement between the debtor and creditors. A lock-up simply commits creditors to vote in favor of a plan of reorganization meeting certain specifications. Lock-ups do not contain many of the other cooperative provisions included in RSAs and PSAs.

Lock-up Agreements are useful for securing the necessary votes to confirm a plan when support for a full RSA is not feasible. However, lock-ups provide less certainty and flexibility for the debtor compared to a broader RSA or PSA.

RSAs remain the most thorough and binding form of negotiated plan support in Chapter 11 cases. However, in certain situations, PSAs and lock-ups may provide alternatives to accomplish a debtor's restructuring goals. The facts of each case will determine which option is best.

Impact on Bankruptcy Process

Entering into a Restructuring Support Agreement prior to filing for bankruptcy can have a significant positive impact on the bankruptcy process. The RSA sets the stage for a much smoother and less contentious process compared to a typical Chapter 11 bankruptcy case.

With the terms of the deal already hashed out and agreed to by the major parties, the company can file its bankruptcy case and proposed plan of reorganization right away. This avoids lengthy negotiations and fights with creditors that often drag out the bankruptcy process. Having creditors already sign on eliminates a major source of delay and litigation.

The built-in creditor support also speeds up plan confirmation. Since the agreement already has majority backing from key creditors, approval of the pre-packaged plan moves quickly. Without an RSA, the debtor would have to spend significant time convincing creditors to vote for their proposed plan.

Overall, a pre-negotiated RSA results in tremendous cost and time savings versus a normal Chapter 11 process. The company can get in and out of bankruptcy faster, reducing legal fees and administrative costs. Less litigation also saves money compared to a contentious case.

The RSA provides the debtor valuable breathing room to restructure with the full cooperation of major creditors. This expedited process allows the company to minimize disruption and uncertainty to operations. RSAs give the debtor the advantage of a smooth, efficient bankruptcy proceeding, designed to successfully reorganize the company.

Pros and Cons of Restructuring Support Agreements

Restructuring Support Agreements (RSAs) can provide significant benefits for companies going through bankruptcy but also have some potential downsides to consider.

Pros

- Reduces Uncertainty: A major advantage of an RSA is that it provides more certainty and commitment from creditors earlier in the bankruptcy process. This reduces uncertainty and ambiguity surrounding how claims will be treated.

- Streamlines the Process: With major creditors locked into an agreement, the bankruptcy and reorganization process can often proceed more quickly and smoothly. There is less litigation and fewer objections when the key parties have already reached a deal.

- Lowers Costs: By reducing litigation and speeding up the process, RSAs can significantly lower the costs of Chapter 11 for the debtor. Professional fees add up quickly in bankruptcy, so avoiding delays and legal battles saves money.

- Improves Liquidity: An RSA provides confidence to DIP financers and can improve access to financing, which is critical for the debtor during bankruptcy. Creditors also are more likely to allow the use of cash collateral.

- Higher Recoveries: While creditors give concessions in an RSA, the improved speed and lower cost of bankruptcy often result in higher creditor recoveries compared to a contentious Chapter 11 case.

Cons

- Limits Options: Once an RSA is signed, the debtor loses flexibility in pursuing different plans or transactions. The fiduciary out clause provides only limited relief if warranted.

- Burdensome Negotiation: Reaching an agreement with major stakeholders on an RSA can involve lengthy, difficult negotiations between the debtor and creditor advisors.

- Risk of Breach: If the debtor breaches the RSA down the road, creditors may have remedies that jeopardize the restructuring. Creditors also risk losing negotiated concessions if they breach.

- Complex Documentation: RSAs are complex legal documents that require significant time and expertise from debtor and creditor counsel to properly document the agreement.

So while not without downsides, the overall benefits of reducing uncertainty and costs in Chapter 11 make RSAs a valuable tool for many debtors. Experienced bankruptcy counsel is key to ensuring the pros outweigh the cons.

What happens if some creditors do not sign onto the restructuring support agreement?

Creditors who do not sign on to the restructuring support agreement are considered non-signatories. These creditors can end up being disadvantaged compared to signatory creditors in a few key ways:

- Treatment of claims - The restructuring support agreement will lay out the treatment and recovery amounts for claims held by signatory creditors. Non-signatories may receive less favorable treatment of their claims under the eventual reorganization plan.

- Influence and control - By signing the RSA, creditors have a seat at the table in negotiating its terms and the subsequent reorganization plan. Non-signatories lose this influence and control over the process.

- Timing of payments - The RSA may provide for accelerated or immediate payment to signatory creditors on their claims while non-signatories have to wait.

- Releases and exculpations - The reorganization plan will likely provide releases and exculpations from liability for the debtor and potentially signatory creditors. Non-signatories may not receive these protections.

While disadvantaged in these areas, non-signatory creditors are not without options. They can:

- Object to the RSA - File objections with the bankruptcy court arguing against approval of the RSA. Grounds may include unfair discrimination, flaws in the negotiation process, etc.

- Object to confirmation of the reorganization plan - Argue whether the plan unfairly favors signatory creditors or discriminates against non-signatories.

- Seek appointment to the unsecured creditors' committee - The UCC represents the interests of unsecured creditors as a whole.

However, convincing the court to overrule an RSA and plan with widespread signatory support can be challenging for non-signatories. Having a seat at the negotiating table by signing the RSA is often the best way for creditors to protect their interests.

Duration of Restructuring Support Agreements

Restructuring Support Agreements (RSAs) are typically in effect for 6-12 months after being executed. The agreement will often specify an expiration or termination date.

If a restructuring plan is not confirmed by the bankruptcy court before the RSA expires, the agreement will terminate. This means the parties to the RSA are released from their obligations and commitments made in the agreement.

Once an RSA expires without a plan being confirmed, creditors may change their position or stance on concessions they previously made. For example, a secured lender who agreed to convert debt to equity may decide to stop supporting debt conversion if the RSA expires.

In some cases, RSAs have been extended if a plan is close to being confirmed but needs more time past the original expiration date. Extensions require the agreement of all parties to the RSA.

The limited duration of RSAs puts pressure on the debtor to meet the required milestones and deadlines outlined in the agreement. If key deadlines, such as filing the bankruptcy case or submitting the disclosure statement, are missed, creditors can withdraw their support even before the RSA expires.

Experienced bankruptcy counsel is important when negotiating RSAs to ensure the duration and expiration terms are structured properly. The limited time period also reinforces why efficient coordination by the debtor and creditors is necessary for successfully implementing an RSA.

Approval Process

Most restructuring support agreements are filed with the bankruptcy court shortly after the bankruptcy petition is filed. This allows the creditors that are party to the plan support agreement to take advantage of the Bankruptcy Code's protections for creditors supporting a reorganization plan.

The bankruptcy court will need to approve the restructuring support agreement. Approval is required for the debtor to be able to assume the RSA as an executory contract. The court will examine whether the RSA meets the business judgement standard. Essentially, the court looks at whether the agreement is beneficial and necessary for the reorganization and in the best interests of the bankruptcy estate.

Parties that did not sign on to the RSA can object to court approval. For example, minority creditors may argue that the RSA unfairly impacts their claims or is not an arms-length transaction. However, courts generally defer to the debtor's business judgement and approve RSAs, provided there is a sound business justification.

There are limits on a bankruptcy court's power to approve an RSA. The court cannot approve terms that violate the Bankruptcy Code. The court cannot prevent parties from terminating an RSA according to its terms. Overall, however, bankruptcy court approval lends important legitimacy to the RSA and the overall restructuring process.

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