The credit crisis has made it difficult for companies to borrow throughout the economy. It should come as little surprise then that the constriction in the credit markets is hitting Chapter 11 debtors in possession as well. According to an article entitled "Bankruptcy financing gets pricier and more elusive," debtor in possession financing (commonly known as "DIP financing") has recently become more costly for companies in Chapter 11 bankruptcy -- when it's available at all.
- Adding to the challenge is the amount of prepetition secured financing, including second lien debt, that many companies took on over the past few years when financing was easier to get. A company that has already encumbered its assets with secured debt may have little or no unencumbered assets to offer a DIP lender as collateral.
- The article predicts that fewer companies in Chapter 11 will be able to find new lenders to provide DIP financing, giving the DIP's existing lenders the advantage in negotiating DIP financing terms such as interest rate and fees.
- Alternative sources of DIP financing may be able to be found in certain circumstances. In some cases, the buyer in a Section 363 asset sale may provide DIP financing to bridge to the closing of the sale. However, such limited purpose financing is not a substitute for the type of DIP financing generally needed for a successful reorganization.
Cash is king in bankruptcy and DIP financing is often a key source of that cash. Until the credit crisis subsides and DIP financing becomes more available, companies may find it more difficult to reorganize in Chapter 11.