DIP Financing
I have been reading a lot about DIP financing and I was wondering whether someone could go into specifics about it? When the DIP financing is secured, where does the interest rate on the financing come from and how does it usually compare to the creditor with a claim on the same asset? Also, what are the common terms involved with DIP financing (ie covenants or duration)?
Any insight would be great. Thanks
Since the DIP facility is post-petition it is super senior to all pre-petition claims and therefore has a super senior, broad lien on substantially all debtor assets regardless of prior pre-petition liens.
Loan terms are subject to debtor-creditor negotiation with final approval by the presiding judge, so the rate and terms may not be arm's length, otherwise the company would never emerge, so it's generally structured to aid the debtor while reorganizing under chapter 11.
Other than a super-senior broad lien on all assets, the covenants may not be overly restrictive, because it already has a super senior claim on assets and receives steady cash payments, while all other creditors are subject to a stay, so they don't earn any interest or payments pending the final court approved allocation of reorganization value or liquidation proceeds to respective claimants.
For this super priority status most pre-petition senior secured lenders fight to convert or refinance their pre-petition claims into a post-petition DIP facility in order to preserve their claim status and continue earning interest on their debt.
Only because it's granted such. DIP financing does not obtain this super senior security interest per se.
Who normally kicks in the DIP financing? Would it just include investors who normally buy senior bank debt? PE Funds, Hedge Funds, institutions?
Also, how do they determine how large the DIP facility has to be? Is it structured on a "how-much-do-you-need" basis?
Lastly - how do you price it? Is it normally fixed or floating, and if floating, is it against LIBOR? And how is it priced relative to the senior tranches, i.e. revolver/term loan?
Sorry, I just find the DIP piece kind of interesting, because from all I've heard about it, it sounds like a great piece of financing to own that's relatively safe, even in a distressed situation, and wondering why everyone isn't rushing to extend this credit to every situation out there.
Also, where'd you get to learn about it? Was it simply from work, or some kind of text? I've been reading Distressed Debt Analysis by Moyer, but only 3 chapters in. Distressed is what I'd like to do ultimately, so I'm pretty curious.
Thanks!
When the DIP facility is provided by pre-petition lenders, they'll attempt to refinance all of their pre-petition claims into parts of the post-petition DIP, while also extending additional loans as part of the same DIP to provide liquidity for the debtor while the reorganization is underway.
If the secured pre-petition lender is a conservative or smaller bank not looking to hold paper of a bankrupt debtor, they'll probably sell their positions to a vulture fund, or another bank with a distressed fund, and that fund will take up the responsibility of refinancing the pre petition debt into DIP, while providing additional loans to provide sufficient liquidity for the debtor. The DIP fees are lucrative so yes, this is a good business to be in right now.
However it is unlikely that the original creditors would forefeit their opportunity to refinance and extend new loans under a new DIP, or at the very least they'll sell their positions to a vulture fund and book a loss on those loans. Plus a shrewd secured lender would have already made provisions for loan losees well in advance of the filing so the impact on their tier ratios should be contained.
The debtor side financial advisor would work with the debtor to develop cash flow based models to determine the extent of additional liquidity needed under the DIP, given the unique circumstances under chapter 11.
Obviously the financial advisor would simultaneously explore other options including asset sales, liquidation, etc. while performing its other functions like preparing the going fwd business plan, valuing the reorganized business, determining the new capital structure and the allocation thereof, sorting out claims, and assisting the debtor with reviewing uneconomic contracts/leases that could be potentially nullified with court assistance, and of course the allocation between all claimants.
Priced just like any other loan - revolver and term facilities refinanced into new DIP loans priced at LIBOR plus spread subject to negotiations and of course court approval. Obviously, the counterparties would consider their super secured status on the DIP when negotiating the spread.
GE Finance or whatever it is called nowadays, and some other banks have pulled out of this market because their existing loan portfolios are already suffering and besides due to the constipated nature of the debt markets there is no guarantee that the debtor can refinance the DIP upon emergence and of course nobody wants to be left holding the bag in this market. It's tough getting an exit loan in this market and that's how the DIP lender exits for the most part.
Moyer should suffice to get you going in the right direction.
I'm of the opinion that the Code doesn't allow cross-collateralization. But if you're in Del or SDNY, anything's fair game. http://www.turnaround.org/Publications/Articles.aspx?objectID=3430
See Delphi. http://www.google.com/search?q=delphi+exit+loanhttp://books.google.com/books?id=qiBe3em_b2oC&pg=PR5&lpg=PR5&dq=weil+go…
Most DIP financing is provided by asset-based lenders.
Refinancing is the best option for those are facing financial troubles due to foreclosures, bailouts and increased mortgage bills. Let me site to you an example. Bo Jackson was a standout talent as running back for the Oakland Raiders and as a left fielder and designated hitter for the Kansas City Royals, excelling at both before a hip injury sidelined him for good. Many would give short term loans to see him play again. However, he is trying his hand at something else. Bo is a part owner of the Burr Ridge Bank and Trust, a community bank in Burr Ridge, Illinois. He picked a community bank as a type of bank known for financial stability, and its unlikely Bo Jackson will ever need mortgage loan modification.
pre-petition secured lenders may be given the option to 'roll-up' their claim, whereby they effectively become the DIP lenders.
the upside is that their claim becomes post-petition and gets super-senior priority (usually only subordinate to post-petition admin claims from critical vendors).
thadonmega had most things correct, but I'd disagree that pre-petition lenders always want the roll-up. the downside to the roll-up is that they are obliged to provide more cash under the facility, so they could be throwing good money after bad. Often times, the pre-petition lenders become the stalking horse bidder and would prefer to use the cash to buy the company, so they don't take a roll-up to avoid wasting cash. They figure their maximum recovery - even a positive return on the initial investment - would come from having total control of the company. Suffice to say, this requires a lot of due diligence, and a boutique i-bank is usually retained.
And from the Company's perspective, this doesn't provide much liquidity since cash received = facility size - rolled up claims.
These days, we're seeing a lot of hedge funds and PE shops more than happy to provide DIP financing, if they feel the assets are worth anything. Additionally, issuing a DIP requires submitting a budget to the court (ie - how you're going to use it) and periodic updates, usually forecasting the next 3 mos, at least. So the debtor-side FA's work is crucial. Then the creditors' FA rips apart the model to stress test it.
Rescue Financing (Originally Posted: 10/22/2012)
Hi fellow monkeys,
I was hoping to get some clarification on something. When a bulge bracket bank arranges rescue financing (DIP loans) for a distressed company, what group(s) are involved in the process? Is it the private placement group? The DCM group? Lev Fin? Thanks for the help in advance!
Pretty much as many groups as possible. You will have industry coverage, Lev Fin, Restructuring, DCM, structured finance, legal, corporate defense, and probably a few others. Two main reasons for the plethora of groups: 1) they are generally pretty complicated deals and anything could happen. 2) if the deal goes south no MD or group head is going to want to take the brunt of the blame, thus they try to get as many groups as possible in on it to cover their backs.
Thanks for clarifying.
Rescue Financing / Control Investments (Originally Posted: 03/31/2015)
I am senior at a Non-target UG who signed a FT offer with a top-tier BB (GS/JPM) to be in a desk analyst role focused on distressed credit situations (after spending the past summer there).
I have good reason to believe this sets me up well for distressed debt hedge funds.
However, I recently attended the Wharton RX and Distressed Debt Investing Conference, and became interested in control investments / rescue financing - a little more on the distressed debt private equity side.
Being in this desk analyst type role, which technically falls under sales & trading, at GS/JPM, do I have any shot at control investing / rescue financing gigs? For my specific role I'll be given ~20 names in 2 industries and asked which parts of the capital structure we should long and which we should buy CDS on for our book.
What advice would you give me in order to get into any control investing / distressed debt private equity firm? Can I expect any headhunters to reach out to me provided I am at a top shop? Thanks in advance
...
Your S&T desk will probably do you fairly well for the execution side of things at one of the distressed hedge funds (York or Anchorage types) but likely not an investment role. The best way to get into these roles would be to work at PJT RSSG / Lazard RX, or HL RX, with M&A / Sponsors / LevFin groups at other banks being a distant second option. These funds typically hire headhunters who then find bankers to fill investment roles; I don't believe the headhunters who are retained by these distressed debt hedge funds typically reach out to non-bankers during the process for which they do the majority of their hiring (Jan / Feb recruiting in Y1 for a July Y2 start). I'm not an expert on recruitment for this specific space so could be off the mark on this one, so correct me if I'm wrong.
Regarding control investments in distressed companies, loan-to-own, turnaround, etc., I have a bit more experience with recruiting for this space and can safely say you would need to be in banking, as in M&A / coverage to be considered. There is a very short list of big funds with experience in distressed or turnaround and all of them are going to have very long lists of candidates from top banks, (banking) groups and schools who want to work there. I am thinking of a Centerbridge-type firm here, for context.
I may be misunderstanding your desk, PM me if you are confused about any of the above.
dip financing question (Originally Posted: 04/14/2011)
is dip financing ever considered as part of debt when looking at leverage ratios?
Yes
thanks for the fast reply, kenny. would there be any case where you wouldn't consider it as part of total debt?
I can't think of one, it's still debt after all, it's just supersenior.
Do Financial Sponsors Group ever work on DIP Financings? (Originally Posted: 08/15/2016)
I currently work in a FSG group at a MM bank and wanted to know if other FSG groups have ever worked on DIP financing's or if this is just left to the lev fin team generally? I'm asking because I want to make the jump to a restructuring group and feel that getting to work on a few DIPs would really help my cause. Thanks for the input!
someone more knowledgeable will correct me but for there to be DIP financing there needs to be a Chap 11. I can't see how an FSG could be involved in that.
Its handled by RX / LevFin traditionally at my BB.
That's what I thought. The context would be for all sponsor-backed energy companies coming out of chapter 11. I guess once the equity is killed ( and the original sponsor in the process) there's no need for the FSG team to get involved?
Repellendus iste ipsum voluptas dolores voluptates. Eius non omnis occaecati numquam facere quo. Atque eligendi odio tempora ut voluptas. Amet et rerum deserunt neque voluptate consequatur vero. Blanditiis sed nemo asperiores est maxime vel. Et repellat enim eum in ut magnam perferendis non. Sed accusantium eum ut dolor sed laborum eaque sed.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...
Blanditiis voluptas et eaque quo amet qui dolore. Eligendi cumque illo alias rerum dignissimos tenetur. Et fugit aut soluta. Repellendus sed nisi minus earum similique. Ab consectetur quia quia at non.
Veritatis saepe sit voluptatem temporibus. Debitis animi sit officiis ut incidunt quae ex.
Commodi voluptas nihil quia error. Nostrum dignissimos et et velit.
Voluptatem consequatur vel quasi. Corporis suscipit quo ut et. Omnis quas temporibus veniam fugit quidem praesentium dicta.