A Multi-Colored Bankruptcy Loan

This case examines a leveraged buyout gone sour, and a how a private equity firm can use the tools of bankruptcy to rescue a portfolio investment. It also focuses on how parties use complex bankruptcy financing (known as debtor-in-possession, or DIP financing) to adjust recoveries in a plan of reorganization in ways that may conflict with the fairness standard required by the U.S. Bankruptcy Code.

In 2021, Multi-Color Corporation (MCC) had all of the characteristics of an attractive leveraged buyout candidate. It had global scale, market leadership, defensive industry exposure, loyal customers, attractive margins, strong free cash flows, and stable and growing revenue. It also had massive cost savings opportunities from a merger and the potential as a platform for future acquisitions.

Facing immense financial distress in 2025, the company explored two primary paths: Either restructure outside of bankruptcy court in a way that modestly reduced its debt or pursue a more permanent restructuring inside of bankruptcy court. Utimately it chose the latter path, partnering with a majority of its secured creditors and its equity sponsor. These parties agreed to invest significant new capital and support a plan of reorganization which would erase most of the company’s debt. However, this plan utilized DIP financing, as well as the actual plan mechanics, to provide a more favorable recovery to its majority creditors. Such premiums are fairly typical in bankruptcy as compensation for the disproportionate risk and effort taken by certain parties. But what level of premium represents a fair payment for the roles played? At what level does it run afoul of the standards of fairness required by the U.S. Bankruptcy Code?

Overall, this case can be used to teach several topics related to debt markets and bankruptcy. During boom times or bubbles, debt markets will offer a borrower a lot of debt. During these periods, companies will market their debt using aggressive pro forma adjustments to earnings. These can be suspect and, in many cases, do not materialize into real cash flows. Moreover, excessive debt on the right side of a company’s balance sheet can have a negative impact on the value of its left side, amplifying financial distress.