| NEW YORK
NEW YORK There are likely to be a slew of bankruptcies this year, but the process will be more challenging and costly than ever as a drought in bankruptcy loans has changed the rules of the game.
Companies like VeraSun, Tronox and LyondellBasell's Lyondell Chemical Co have said the credit crunch sent them scouring markets for months to locate debtor-in-possession, or DIP, financing that would allow them to keep operating during bankruptcy.
While some lenders expect the market to recover by the middle of next year, restructuring experts say the financing markets have been exceedingly difficult to navigate.
"DIP financings are either not available in any significant size, or if they are available the pricing is scary," said Henry Miller, co-chairman of turnaround advisory firm Miller Buckfire & Co LLC.
DIP financing, which allows bankrupt companies to pay suppliers and employees as they try to become profitable again, had long been a popular form of financing as DIP lenders are typically among the first creditors repaid in a bankruptcy.
However, tight lending markets now mean many companies must rely on existing lenders or other parties with a stake in the bankruptcy's outcome to provide the DIP.
"DIP financing is not easily available. It's expensive. It's scarce -- and that used to be the easiest part of a bankruptcy filing," said David Resnick, co-head of investment banking at Rothschild.
Despite a jump in bankruptcy filings last year, new DIP loans were sharply lower in 2008 than in the two most recent bankruptcy waves, according to data from Thomson Reuters LPC. In 2008, the number of new DIP loans was about 35 percent below the number issued during the economic downturn in 2002, and about 46 percent below the number issued in 2005 ahead of changes to the bankruptcy code, the data showed.
Difficulties aside, lenders say DIP lending is poised for a comeback in the second half of 2009.
"There is an ability to get DIP financing for the right companies, with the right assets, under the right circumstances," said Mark Shapiro, head of the restructuring and finance group at Barclays Capital in New York. Shapiro, whose firm recently provided an untraditional bankruptcy loan for newspaper publisher Tribune Co, said Barclays Capital is looking at several DIP financings now.
General Electric Co's corporate lending group, which has been a long-time player in DIP financing, says it also expects a recovery in DIP loans after staying out of the market for much of 2008.
"The fourth quarter was a very challenging one for the capital markets," said Rob McMahon, managing director for restructuring at GE Commercial Finance, noting it was difficult to obtain approval to make loans at that time.
But for 2009, McMahon says he is "very optimistic" and is also looking at DIP loans now.
"This is definitely a market to be in in 2009," he said.
Lenders may also try new approaches to bankruptcy loans.
"I'm optimistic that we will see investors return to the DIP market in the first half of 2009 for the right return and the right structure," said Mark Cohen, global head of restructuring and workout at Deutsche Bank in New York.
"Over the last couple of years while capital was so abundant the restructuring would take the form of the company going out and raising new money to take out old money. Now, the lenders are having to roll up their sleeves, get in the room, battle it out, come up with answers and take the pain," Cohen added.
Lenders said they may seek private equity partners to get involved in DIP loans, may make loans through untraditional structures, or even break up DIP loans into tranches for various groups of investors.
But companies looking to file for bankruptcy should brace for these new approaches to come with strings, turnaround experts say.
"In the past, DIP lenders had a greater likelihood of being repaid and exiting as the company emerged from Chapter 11. This is simply not the case today," said Randall Eisenberg, senior managing director at restructuring adviser FTI consulting.
"I do believe it will return," Eisenberg continued. "It will be more expensive and have more stringent covenants. Lenders will also take on a more active role in monitoring and influencing the direction that in-court restructurings will take."
Bryan Marsal, co-founder of turnaround firm Alvarez & Marsal, also said he expects DIP financing to be "very expensive" this year.
In mid-2007, DIP financing rates were London interbank offered rate plus about 5 percent, Marsal said. Companies now should expect to pay at least 11 and 12 points over LIBOR, he said.
Troubles in DIP financing may also have an effect on the way companies exit bankruptcy, according to Barry Ridings, vice chairman of U.S. investment banking at Lazard.
"You end up having a filing and a DIP bridge to a sale," Ridings said, noting that lenders may give only enough money to hold companies over until they can be sold.
(Reporting by Emily Chasan and Caroline Humer, additional reporting by Chelsea Emery, editing by Matthew Lewis)