Signs of life seen in bankruptcy loan market
Mon Feb 23, 2009 10:59pm GMT
By Emily Chasan
NEW YORK, Feb 23 (Reuters) - The market for debtor-in-posession (DIP) financing, which helps companies fund operations during bankruptcy, is starting to improve, a top U.S. bankruptcy attorney said on Monday.
DIP financing is the lifeblood that keeps companies running while they try to reorganize under bankruptcy protection. But the once-buoyant market for such funds had virtually dried up this past year as banks and lenders grew cautious during the global credit crisis.
A few recent deals are starting to revive the market, said James Sprayregen, a bankruptcy attorney at law firm Kirkland & Ellis, speaking at an Institutional Investor Distressed Investing conference in New York.
"It's not wide open, that's for sure. But it's a lot more open than it was in November and December," Sprayregen said of the DIP market.
One sign of encouragement, Sprayregen said, was the $750 million DIP loan lined up for Smurfit Stone Container Corp (SSCCQ.PK: Quote, Profile, Research). The loan was more similar to ones granted in the heyday of DIP lending a few years ago than the "creative," cobbled-together loans from current lenders that have become more common in recent months.
The company received final court approval for the loan Monday. [ID:nWNAB5730]
"You are actually kind of seeing capitalism at work in loosening up the market for DIP loans," said Sprayregen, who guided United Airlines (UAUA.O: Quote, Profile, Research) out of bankruptcy in 2006.
"It is by no means a robust market, but there is a market," he added.
"Creative defensive" DIP loans have become the norm, Sprayregen said, pointing to companies like petrochemicals maker Lyondell Chemical Co [ACCELC.UL] that received untraditional DIPs.
Lyondell is looking to get court approval this week for its $8 billion DIP loan, the largest put together in history. The company obtained the loan by allowing investors to boost the seniority of their prebankruptcy loans with the bankruptcy financing. Each investor was allowed to boost the seniority of each dollar of an old loan with each dollar of new money contributed.
So-called roll-up deals can be attractive to creditors in bankruptcy because DIP loans are typically among the first to be repaid and have the added benefit of protecting their initial investment in the company.
Such "dollar-for-dollar" DIPs may gain in popularity, Sprayregen said. Aleris International Inc [TXPACA.UL], the aluminum rolled products producer, adopted a similar structure for its $1.075 billion loan earlier this month, offering investors the chance to roll up slightly more than a dollar of old money for every dollar of new money that they invested.
However, despite signs of life in the market, it can still take months for companies to try to line up financing to fund a bankruptcy, and many companies may run out of time before they arrange the financing.
Sprayregen, who recently returned to Kirkland & Ellis after a stint at Goldman Sachs Group Inc (GS.N: Quote, Profile, Research), said he often tells his clients "to think about how you can fund your own case." (Reporting by Emily Chasan; editing by Jeffrey Benkoe)
Extent of Bankruptcy Reform Hinges on Details
PHOTOS
People wait in a high school gymnasium near Phoenix to hear President Obama's plans for curtailing foreclosures. (By Bill O'leary -- The Washington Post)
President Obama at Dobson High School in Arizona, where discussed his plans for fixing the foreclosure crisis Wednesday. (By Bill O'leary -- The Washington Post)
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Why Do I Have to Log In Again?
By Renae Merle
Washington Post Staff Writer
Saturday, February 21, 2009; Page D01
When President Obama touted reform of the bankruptcy code while unveiling his foreclosure prevention program earlier this week, it wasn't much of a surprise. He had advocated allowing judges to modify troubled loans several times before, including during the presidential campaign.
Extent of Bankruptcy Reform Hinges on Details
PHOTOS
People wait in a high school gymnasium near Phoenix to hear President Obama's plans for curtailing foreclosures. (By Bill O'leary -- The Washington Post)
President Obama at Dobson High School in Arizona, where discussed his plans for fixing the foreclosure crisis Wednesday. (By Bill O'leary -- The Washington Post)
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"It will curb the number of people who can use [the bankruptcy court] -- and probably not in a sensible way," said Porter. "The people who are still in homes they bought in '04 really fought hard to stay," she said. "We should be giving them help." Many subprime and other loans now burdening homeowners were taken out at least four years ago, she noted.
The proposal would also cap the value of the loans eligible for bankruptcy modification to limits set by mortgage finance firms Fannie Mae and Freddie Mac, which could be difficult in parts of the country that saw the biggest run-up in prices.
(The conforming loan limit is currently $417,000 in most parts of the country and $625,000 in high-price areas, including the Washington region, though the limit in these areas will soon rise to $729,750.)
"At certain points during the bubble, 60 percent of the homes purchased in California were above the conforming loan limit," Sommer said.
Obama's plan mimics a provision included in the House version of the legislation requiring homeowners to contact their lender before filing for bankruptcy. But the White House version also requires the homeowner to certify that they have complied with requests for information from their lender. Industry officials said that would help weed out homeowners that received their mortgage fraudulently.
But the provision could also allow lenders to disrupt the bankruptcy process by contending they did not receive all requested information, Sommer said. That would be frustrating to homeowners who complain that lenders ignore their pleas for help even after submitting and resubmitting information, he said.
"What we don't want is where someone would think they had provided reasonable information, and the lender comes into bankruptcy court and says, 'You can't do this, we wanted to ask you for more information,' " Sommer said. "We don't want to create a potential gotcha situation where they can try to trip people up."
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