Friday, October 17, 2008
'DIP' Loans Are Scarce, Complicating Bankruptcies - WSJ
The credit criris took a toll another niche market, Debtor-in-possession. Banks are unwilling to lend out money, which will be used for a banktrupcy financing.... Credit has gotten so tight in recent weeks that companies contemplating a bankruptcy filing can't find the cash needed to get through the process. This multibillion-dollar corner of the lending market -- debtor-in-possession and exit financing -- has been rocked by General Electric Co.'s recent, undisclosed decision to largely halt lending to companies in bankruptcy-court protection or near it, said several bankruptcy lawyers and financial advisers. GE is one of the world's largest such lenders, last year doing $1.75 billion in restructuring loans. Debtor-in-possession, or DIP, financing is essential for the lawyers, layoffs and other restructuring necessary for a company's rebirth. Exit financing is used when a company "exits" reorganization. Banks have been eager to take part in this market because the loans are the first to be paid back and command high interest rates. Without the lending lines, companies that would normally survive bankruptcy will have to quickly sell assets. Potential buyers may not be able to borrow either, meaning companies could be forced to liquidate immediately instead of working out their problems. That could cost tens of thousands of jobs across the economy. GE Capital, meanwhile, has told numerous potential borrowers that it is out of the DIP and exit-lending business until at least next year, said these people. GE Capital spokesman Ned Reynolds said, "We're still open" and the company is living up to its existing commitments. GE executives said last month that demand for DIP financing may jump to as high as $12 billion this year. But market volatility has limited GE's role in DIP financing. "We have to be very selective right now," said Mr. Reynolds. Pricing deals is difficult, he said, as the cost of funding changes from the time a deal is proposed until when it closes. "It is a struggle, a real struggle to find DIP financing," said Jonathan Henes, bankruptcy attorney at Kirkland & Ellis LLP in New York. "In the old days, like early 2007, the banks would do an origination and syndication model, where hedge funds and [loan funds] would gobble up those loans, but they don't have the capital. They are out." Data provider Dealogic estimates lenders provided $24.24 billion on 40 restructuring deals in 2008, a 38% increase from the $17.59 billion on 18 deals in 2007. Major banks do much of the work, with GE typically among the top five or 10 lenders each year. Despite the tight credit markets, DIP lending is up this year because of the overall increase in bankruptcy filings since 2007. Little has been done in the past few weeks. Interest rates for bankruptcy financing have doubled to the London interbank offered rate plus 5% to 7% or higher, compared with Libor plus 2.5% last year, said Mr. Henes and others. "When I think of GE Capital and where their expertise lies, DIP financing is front and center," said Scott Davis, an analyst at Morgan Stanley. "If they are backing away from DIP financing, that would be a big surprise." Several companies are trying to raise DIP financing in case they need to file for bankruptcy reorganization, but have struggled to find any takers, said bankruptcy observers. These people said one such company is Pilgrim's Pride Corp. of Texas, which is the country's largest poultry producer by sales and has about 50,000 employees. Pilgrim's Pride spokesman Gary Rhodes declined to comment on whether the company is seeking DIP lending. Henry Miller, chairman of the investment-banking boutique Miller Buckfire & Co., said the number of lenders willing to do DIP financing "has shrunk in recent months from 30-plus in the heydays of 2006-07 to maybe five or six now." He cited Wells Fargo & Co., Bank of America Corp. and Ableco, a division of Cerberus Capital Management LP, as among the few still interested in DIP financing. "There is very little liquidity out there. It means bankruptcy has gotten harder. So, what does a company do? Good question. You can try to muddle by, but it's really not a good situation," said Barry Ridings, co-chairman of the investment-banking unit at Lazard Ltd.