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:
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
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
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.
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