Financing for organized Chp. 11 bankruptcies is drying up. So now what?
Unwilling to Stump Up
Courtesy of Michael Panzner at Financial Armageddon
Some might describe it as paradoxical, Daliesque, or poetic justice when a company whose liabilities far outweigh its assets can’t get the financing it needs to declare Chapter 11 bankruptcy.
Regardless, it says something about the alleged recovery in credit and other markets that some optimistic analysts claim is on the horizon (as well as the overall state of the economy) when lenders who have top priority in such proceedings are unwilling (or unable) to stump up the cash.
In "Liquidation Risk Grows as Finance Dries Up," the Financial Times reports on the latest developments.
US companies face a greater risk of liquidation because sources of finance to let them reorganise under the country’s bankruptcy code are drying up in the global financial crisis.
In the US, companies on the verge of insolvency can restructure themselves under a Chapter 11 bankruptcy protection process, sometimes taking years.
But the credit crunch has severely limited the availability of so-called ‘debtor in possession’ financing that is vital to give them this second chance.
With previous big providers of DIP financing, such as GE Capital, shying away from the market, companies may have to rely on their existing lenders, says Standard & Poor’s, the rating agency.
It said on Friday there had been no substantial increase in DIP volumes in 2008, in spite of a jump in the number of bankruptcies, highlighting the reluctance of banks and investors to finance companies in bankruptcy.
Steven Smith, global head of leveraged finance and restructuring at UBS in New York, said this cycle was likely to see more liquidations than in the last three combined.
He said: “The lack of DIP financing available is an issue for the American economy because of the potential job destruction that could result.”
Lenders, even those with priority claims, face big losses, if a company cannot reorganise and liquidates.
Senior lenders to retail companies would recover less than half of what they would if the company reorganised under Chapter 11, according to S&P.
Debtors also face the highest rates yet for DIP financing. The risk premium a debtor has to pay on the loan has more than doubled since 2001-2002, the height of the last downturn, according to Dealogic…
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