NEW YORK (Reuters) - The bankruptcy of newspaper publisher Tribune Co and potential filing by Nortel Networks Corp NT.TO NT.N reflect the increasing difficulty of accessing loans in bankruptcy, which may cause companies to preemptively file for protection, Morgan Stanley said.
Tribune filed for Chapter 11 bankruptcy protection on Monday, less than a year after the company was taken private in a deal led by real estate mogul Sam Zell.
Instead of securing a debtor-in-possession (DIP) loan, which has traditionally been made to fund a company as it reorganizes in bankruptcy, the company reached an alternative financing deal with Barclays Capital.
This includes a $50 million letter of credit and continued use of a $300 million trade receivables facility it had made with Barclays in July. It has a $225 million balance on the facility.
“Tribune’s filing is telling, and what concerns us is that constraints on DIP financing will only worsen as the cycle wears on,” Morgan Stanley analysts said on Friday in a report.
The dramatic pullback in lending by banks and other lenders amid the global credit crisis has dried up access to DIP loans, in turn increasing the likelihood a company will need to liquidate if it fails.
“The most telling evidence of the challenging DIP financing environment is that companies with significant cash levels are contemplating preemptive bankruptcy (Nortel is an example) as a means to continue to function in a DIP-less bankruptcy backdrop,” Morgan Stanley added.
The Wall Street Journal reported on Wednesday that Nortel has sought legal advice on a bankruptcy protection scenario in the event that its restructuring plan fails.
The popularity in recent years of companies taking out loans that were secured against their assets also complicates securing a DIP loan, as the companies are left with fewer unencumbered assets to pledge against the loan, Morgan Stanley said.
“This is yet another example of the unintended consequences of the proliferation in leveraged loans and securitization over the past few years,” the bank said.
Bankruptcy proceedings may also be more contentious than previously as corporate lenders have shifted away from banks to hedge funds and other investors.
“The holders of paper heading into bankruptcy are very different in this cycle relative to history,” Morgan Stanley said.
“The involvement of hedge funds and Collateralised Loan Obligations (CLOs) shapes our expectation that the bankruptcy process will be contentious relative to the clubby democratic-type negotiations involving commercial banks’ workout groups of the past,” the bank added.
CLOs are structured vehicles that repackage loans into portfolios that are sold on to generate higher returns.
Reporting by Karen Brettell; Editing by Chizu Nomiyama