Increased Capital, Competition Bolsters DIP Financing Market


A flood of new capital and lenders are rolling into the market for debtor-in-possession financing this year as investors seek reliable and safe returns, despite an easing in the pace of Chapter 11 filings, according to bankruptcy attorneys and investment bankers.

Judy Elkin, a partner with the law firm of Haynes and Boone in New York, said that the DIP financing market has come back with more capital and lenders, since completely shutting down in late 2008.

"When GE Capital pulled out of the market in the fall of 2008, it was a real eye-opener," she said. "They were such a significant player in the DIP market. What happened after that, to the extent that you could get a DIP loan, it was expensive. They were just short-term defensive DIPs for maybe 30 to 60 days.

"Now, money is not as tight, and GE is back in the market," Elkin said. "Private equity funds and hedge funds that survived the bad economy piled up money with nothing to invest in. Many are looking at DIP financing."

Elkin said she expects DIP loan terms to improve and pricing to come down as the economy improves and competition increases among DIP lenders.

"Prices are already starting to come down with interest rates being so low," she said. However, she said warnings from the Federal Reserve that interest rates might increase by the end of the year could impact the DIP market.

Elkin said that a major problem that could affect the DIP market over the next few years is the wall of commercial real estate debt that will mature in the next three years. About $1.4 trillion in commercial real estate debt will mature before 2014. About half of the debt is underwater, or worth less than the amount owed on the mortgages.

"Everybody has exhausted the concept of amend-and-extend," Elkin said. "You can only do that for so long. If values start to go up, it will be easier for lenders to say yes to a real restructuring. And ifvalues increase and rates stabilize, even when a default occurs in 2012 or 2013, the market will be better equipped to deal with it."

Excerpted from Distressed Debt Report, Volume 7, Issue 9. To view the full article, click here (subscription required).

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