Plan support agreements are often an essential component of a successful complex Chapter 11 reorganization and provide a framework for a debtor’s financial restructuring. These agreements have increasingly been used to induce core groups of major lenders and bondholders to support a debtor’s restructuring in return for enhanced recoveries. In re Peabody Energy, 933 F.3d 918 (8th Cir. 2019). Recently, the U.S. Court of Appeals for the Eighth Circuit in the Peabody Chapter 11 cases affirmed confirmation of a plan of reorganization built around a plan support agreement that afforded certain noteholders party to the agreement the exclusive right to purchase a disproportionate amount of the equity in reorganized Peabody sold pursuant to the plan. A group of non-signatory bondholders (the ad hoc group) had objected and argued that the right to participate in the in the new equity raise was not offered on the same terms to all bondholders, thereby rendering the plan unconfirmable under the U.S. Bankruptcy Code.

The Eighth Circuit ruled that the right to purchase equity at a substantial discount was not value distributed on account of prepetition claims but rather was “consideration for new valuable commitments” provided by PSA bondholders at a time of uncertainty in the coal markets. The Peabody decision represents a growing judicial trend toward enhancing bondholder recoveries under plan support agreements, which serve as the necessary “grease” to garner critical support and momentum for the debtor’s Chapter 11 plan.

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