DIP Financing as a Strategy to Ownership
Chaps,
So I have been looking at a few articles / claims around lenders using DIP financing as a tool to gain ownership - however there are a few points I can't get around:
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If DIP loans are where the company's value breaks, i.e. company value is less than even the DIP loan provided, how are DIP lenders not already underwater? If I understand correctly, unlike pre-petition debt that could be trading below par and debt investors could see some upside, the DIP financing is provided for in cash, and DIP lenders would almost certainly be taking losses immediately
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How do lenders get comfortable with the fact that the company is in such terrible shape? I mean, a company not even being worth the cost it takes to get it out of bankruptcy just overall feels... wrong
Happy to hear thoughts and be corrected if wrong. Cheers
Also, do DIP lenders benefit from outsized / disproportionate influence over the outcome or direction of a re-org?
Not an expert on this by any means but hopefully I can add a bit of color.
I agree that it would be really counterintuitive for someone to provide a DIP, even with a roll-up, without at the very least projecting complete recovery of any new money they put in. It happened recently with Sanchez Energy, where the DIP is receiving a majority of post-reorg equity but I don't think that was their plan, according to WSJ they were expecting cash.
If you look at something like the Neiman Marcus bankruptcy, the DIP lenders are taking most of their fees in post-reorg equity instead of cash, even though the DIP isn't projected to be impaired. Also, a lot of the time the DIP is provided by the prepetition secured lenders who might be the class getting equity anyways, so it seems to be a defensive move a lot of the time to prevent another party from priming them and to give them additional leverage in shaping the plan. This looks to be the case in NMG where the DIP lenders also own substantial amounts of the term loan and the bonds and look like they're going to have majority ownership upon emergence.
thank you for the insights. wondering where can you find such info on neiman Marcus or recent bankruptcy filings in general.
Depends on what you have access to. Debtwire/Reorg Research are both geared towards this, they do writeups/some basic models along with more covenant/event articles-I know a lot of schools give you access to them so if you're a student/professional that's one way. WSJ Pro Bankruptcy is another, very expensive, but the articles you can access with a regular WSJ subscription/the headlines give you a lot of material and the gist of what's going on, and petition11 has a free newsletter that is pretty good, mostly recent bankruptcies but doesn't get technical/super in depth. I personally look through the major claims agents (Primeclerk, KCC, EPIQ, etc.) for stuff that looks interesting. I feel that Bloomberg more so than WSJ has a lot of good articles about distressed/bankruptcies, so that's another way. You can also run bond screeners on finra and a lot of brokerages based on yield/price, if you're more interested in distressed than strictly bankruptcy. That's about all I got, sorry for the wall of text.
AccruedInterest is spot on with the above. Only thing I'd add is:
Request to join groups specifically related to this subject on LinkedIn; a lot of times, in these strategy specific/niche groups, guys will post really solid research/articles/insights and the level of discourse is usually pretty decent; not a bad way to add some more exposure to topics you're interested in
Reorg, as mentioned above, is a great resource; while the full thing is super expensive, they do have a top-tier podcast which adds new content on a very consistent basis; worth a listen if you want concise discussion/review of recent activity in the space with the right details and no fluffy/bullshitty nonsense
Hope this is somewhat helpful
And adding to this...if you have DebtWire sub you can email their editorial + legal team and they'll actually get back to you/help. Surprisingly good. My guess is nobody realizes it's a feature and it goes unused.
Not necessarily defensive, pre-petition term loan holders may have purchased the loans at a lower basis before/around Ch. 11 filing vs. being original issuance holders. So, it’s all offensive: but debt at a discount, have outsize influence in the restructuring because you’re the 1L (and fulcrum in this case) and ability to provide the DIP for even more upside via some combo of equity/cash
buy* debt. And in that particular case it’s offensive vs. defensive, but in any case it could be a mixture of either, or one, just depends.
Thanks mate, do you recall which DIP lenders are expecting to get post re-org fees in equity? have been through a bunch of NM articles and haven't seen that - also, not sure what the rationale for that is (sure the lenders think that equity they expect is undervalued at point of bankruptcy exit, but why not just take the high interest)....
it's PIMCO, TPG and DK. They've all lost massive amounts being involved in Neiman, TPG and PIMCO being the biggest losers in the term loan. The biggest losers in the entire complex were Marathon and Anchorage as bondholders who funded a 2L near par (now
Thanks, so do DIP lenders get priority in driving the re-org process / outcome? It seems to be the case from what you’re saying
DIP lenders often enjoy super priority status in the capital structure, which means they can drive a lot of decision making with respect to the reorganization process.
Agreed, if you look at a lot of bankruptcies then the DIP lenders have a ton of influence, especially if they also own prepetition debt. In the DIP Credit Agreement there will basically be a scheduled of "milestones" laid out that the debtor has to follow in terms of when they file their plan, sale order, etc. A DIP lender could also make their loan condition on the borrower pursuing a 363 sale of the company or a certain subsidiary, or contract for really anything they and the debtor agree on which would be another way they drive the outcome. Logically, if they're offering to bring in badly needed new money, they're going to have some degree of influence, especially if there isn't competition to provide the DIP.
Thanks for the comments above - yes makes sense commercially that DIP lenders would expect to have more influence over the reorg process / outcome, but does anyone know how this plays out through lender / credit agreement mechanics? Do DIP lenders have a larger proportion of voting rights, or a different class of voting rights altogether, or something else?
On your first point. If the interest received by the DIP lender is very high (maybe higher than what the DIP lender really needs as a fair rate for the risk taken) so you can have a situation where the combined equity value + interest exceeds par. Furthermore, and probably the bigger factor, is that the court-settled distressed value is far below what the lender thinks is a true achievable value after emerging from bankruptcy.
On your second . . a traditional lender will generally avoid a DIP situation that's likely to convert to equity. Its usually hedge funds, "vulture" PE shops or more risk-tolerant lenders who are coming in to that kind of situation. They get comfortable by weighing upside against downside, as opposed to more traditional lenders who are unwilling to accept much downside. Also, high rate.
Lol dude do you even know what you’re talking about?
While this forum encourages opinion sharing and we appreciate no one has all the answers, do recognize your limitations and refrain from forced responses to questions you don’t even understand as this creates more confusion / misunderstanding.
I don’t mean to be rude so don’t take it personally, but a lot of damage can be cause by misdirection, so just let those who do know answer.. thanks
Worked on Chapter 11’s as an attorney and banker so yea I do know what I’m talking about. Not seeing much in my answer that wasn’t plain vanilla. Given the responses I think there must have been some communication issue where I meant one thing but it came out different and it’s being read in a way that I didn’t intend. Looking at my answer now, not clear what that was. Your response doesn’t make that clear either, it’s just a worthless attack with no substance.
Bottom line, DIP generally not a strategy to ownership but also not necessarily underwater if you end up with the equity. I've never heard of a DIP lender looking for equity but I thought the helpful thing to do was run with your hypothetical and say why it's possible.
No one enters a DIP expecting to get equitized... HFs may provide a DIP and unexpectedly the DIP is equitized bc the co turns out to not be worth as much (generally due to exogenous factors)
SB'd. I see, so is my understanding correct then that DIP lenders generally expect to make full cash recovery + interest on the DIP piece, AND also extract some other benefit from providing the DIP such as roll up of prepetition debt and/ or having better control over the process..
Do you know of any examples where DIP lenders benefit from more "control" of the reorg? Am aware they can require milestones / impose timelines etc, but not sure how that would benefit them specifically (vs. other prepetition lenders).
you literally have no idea what you're talking about.
Where've you been? Missed my favorite heckler. You've never once said a single thing of substance on this site. Zero. Only here to attack me. Starting to wonder if you're my ex
@Reserach Associate — Apologies if I am wrong but no one specifically provides DIP to own. If you think this is not the case and DIP to own do happen, please provide an example where reorg entity was controlled by DIP lenders AND DIP lenders were not pre-petition lenders on Revolvers or Term loans. Looking forward to it
DIP is mostly provided by (i) Commercial banks because they dont like subordination on their existing facilities and by (ii) credit funds because of the lucrative fees associated with DIP
this guy is completely and utterly full of shit; editing your comment can't hide that.
"Hoping to convert to equity" was the topic of the thread idiot.
That's not the motivation of any DIP lender I"ve come across, but I thought I'd entertain OP's premise because some of us are here to be helpful. Not something you'd understand.
Thanks for sharing this mate - not sure how you captured his previous response but I’m glad you did.
Nothing lower than a cover up attempt - and it wasn’t even minor, so many edits were made in his original comment!
A DIP can be used as a tool for control. Here are some elements to consider:
1) Milestones: You can write in certain milestones into the DIP that the Company has to meet otherwise it is in default. Typically you will see this regarding when a plan must be filed by and confirmed by and sometimes it will say the plan must be supported by the DIP lenders
2) Conversion into Equity: You saw this with liquidators in retail. They would provide a DIP and it would convert into equity in the event they were selected as the liquidator of the stores. It occasionally happens in other situations where the DIP provider wants to be a major owner of the reorganized company
3) Improving your collateral position: A secured lender may not have a lien on all the Company's assets. A DIP allows them to get a lien on the unencumbered assets which may weaken the position of unsecured creditors who could get pushed further out of the money. Likewise, unsecured creditors may want to provide a DIP to gain a lien on unencumbered assets and become a secured creditor. This can affect discussions of how the equity of the reorg'd company will be split
Thanks mate, good stuff - on 2, which retail deals were these? Would be interesting to read more
Believe Barney's was an example
I could be wrong but DIP lenders arent providing financing with the goal of ownership in mind. Alot of DIP lenders are already lenders on pre-petition Revolver/Term loans and dont prefer new money DIP from a completely new party..
What you are saying does happen but TL lenders dont prefer subordination and will fight back or provide competitive term.
Still learning so apologies if I am wrong and looking for experienced folks for correction.
If you're already a debt holder that was trying to employ a loan to own strategy, then I can see you participating in the DIP to improve economics. As far as someone coming into a new position as DIP for a loan-to-own strategy, that would be completely foreign to me.
I'm fully cross-capital structure and once we did a small DIP to bridge to a sale. (Previously minority equity and sole 1L lender). It came with a special warrant that gave us 95% of the equity if a sale was not reached by a certain date. Hopefully that's simple enough to understand, but let me know if anyone wants me to elaborate on why that's a good thing.
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