Signs of life seen in bankruptcy loan market

NEW YORK Feb 23 (Reuters) - The market for debtor-in-posession (DIP) financing, which helps companies fund operations during bankruptcy, is starting to improve, a top U.S. bankruptcy attorney said on Monday.

DIP financing is the lifeblood that keeps companies running while they try to reorganize under bankruptcy protection. But the once-buoyant market for such funds had virtually dried up this past year as banks and lenders grew cautious during the global credit crisis.

A few recent deals are starting to revive the market, said James Sprayregen, a bankruptcy attorney at law firm Kirkland & Ellis, speaking at an Institutional Investor Distressed Investing conference in New York.

"It's not wide open, that's for sure. But it's a lot more open than it was in November and December," Sprayregen said of the DIP market.

One sign of encouragement, Sprayregen said, was the $750 million DIP loan lined up for Smurfit Stone Container Corp SSCCQ.PK. The loan was more similar to ones granted in the heyday of DIP lending a few years ago than the "creative," cobbled-together loans from current lenders that have become more common in recent months.

The company received final court approval for the loan Monday. [ID:nWNAB5730]

"You are actually kind of seeing capitalism at work in loosening up the market for DIP loans," said Sprayregen, who guided United Airlines UAUA.O out of bankruptcy in 2006.

"It is by no means a robust market, but there is a market," he added.

"Creative defensive" DIP loans have become the norm, Sprayregen said, pointing to companies like petrochemicals maker Lyondell Chemical Co [ACCELC.UL] that received untraditional DIPs.

Lyondell is looking to get court approval this week for its $8 billion DIP loan, the largest put together in history. The company obtained the loan by allowing investors to boost the seniority of their prebankruptcy loans with the bankruptcy financing. Each investor was allowed to boost the seniority of each dollar of an old loan with each dollar of new money contributed.

So-called roll-up deals can be attractive to creditors in bankruptcy because DIP loans are typically among the first to be repaid and have the added benefit of protecting their initial investment in the company.

Such "dollar-for-dollar" DIPs may gain in popularity, Sprayregen said. Aleris International Inc [TXPACA.UL], the aluminum rolled products producer, adopted a similar structure for its $1.075 billion loan earlier this month, offering investors the chance to roll up slightly more than a dollar of old money for every dollar of new money that they invested.

However, despite signs of life in the market, it can still take months for companies to try to line up financing to fund a bankruptcy, and many companies may run out of time before they arrange the financing.

Sprayregen, who recently returned to Kirkland & Ellis after a stint at Goldman Sachs Group Inc (GS.N), said he often tells his clients "to think about how you can fund your own case." (Reporting by Emily Chasan; editing by Jeffrey Benkoe)