Secured lenders possess significant influence in Chapter 11 bankruptcy proceedings due to their priority interest in the debtor’s assets. This influence extends to Key Employee Incentive Plans (KEIPs), as secured lenders often have the power to veto such plans' approval. A secured lender’s consent is generally necessary to implement a KEIP, especially when the plan is intended to incentivize key management during the restructuring process.
The power of secured lenders arises from the security interest they hold, which grants them priority in the repayment hierarchy. As a result, any proposed disbursement of funds through KEIPs that could potentially affect the secured lenders’ recovery positions typically requires their approval. Lenders are primarily concerned with ensuring that the restructuring process maximizes their recovery and, therefore, may be reticent to approve KEIPs unless they are convinced that the incentives align management’s interests with the successful completion of the reorganization.
From a restructuring professional's perspective, designing a KEIP that secures lender approval involves demonstrating clear performance metrics that correlate with company success and lender recovery. This requires a solid argument that the KEIP will notably enhance the company's value beyond its costs. Additionally, openness in negotiations and modifications based on secured lenders’ feedback may be necessary to facilitate a cooperative approach.
The court's role is often supportive if it perceives that the KEIP is structured to maximize the value for all stakeholders. However, the secured lenders' veto is a powerful tool that can shape or stall proposals until their interests are satisfactorily addressed. Thus, sensitivity to creditor priorities and strategic alignment in plan development is essential for obtaining the necessary approvals to implement an effective KEIP.