Tuesday, April 21, 2009

Interesting Article on DIP financing from today's Globe and Mail

Today's edition of Toronto's The Globe and Mail had an interesting article about what's going on in the Debtor in Possession financing market today. Please click on the link below (I've pasted the article, in case the link breaks, but the pasted version lacks a picture and price chart on Abitibi).


Lenders jockey for pole position

Jacquie McNish
Globe and Mail

April 21, 2009 at 5:47 PM EDT

AbitibiBowater Inc. [ABH-T] had every reason to believe it was one of the lucky ones.

Strapped for cash to pay $6-billion (U.S.) of debts in a sputtering newsprint market, the crippled giant still had what it took to win the attentions of one of the world's most prominent lenders. Earlier this month, GE Capital was so convinced of AbitibiBowater's long-term future that it was finalizing a $600-million emergency infusion, known as a debtor-in-possession or DIP loan, to sustain a company headed for bankruptcy proceedings.

If signed, AbitibiBowater would have landed a rare major DIP loan at a time when conventional lenders have all but disappeared from corporate bailouts.

But it wasn't to be. Two weeks ago, with no warning, GE Capital pulled the loan off the table and faded away like ink on a newspaper. The abrupt retreat left AbitibiBowater with little choice but to cede what it described in court documents as “extraordinary” rights to a set of replacement DIP lenders. The generous terms are the latest in a series of power grabs by bankruptcy lenders that have triggered a handful of messy and time-consuming creditor battles.

“He who controls the DIP controls the process these days,” said Aubrey Kauffman, a restructuring specialist with Fasken Martineau DuMoulin LLP.

AbitibiBowater lost virtually all of its negotiating leverage with potential DIP lenders when GE Capital left it stranded.

“That jolted everybody,” said one person close to AbitibiBowater.

After what sources described as five frantic days and nights of talks with potential lenders including Goldman Sachs & Co., AbitibiBowater and its legal team at Stikeman Elliott LLP and Paul Weiss Rifkind Wharton & Garrison LLP were unable to strike a replacement deal with conventional lenders.

Instead, it was forced to tap two of its major investors – Fairfax Financial Holdings Ltd. and Avenue Capital Group – and the Quebec government for a total of about $300-million in DIP loans. If certain conditions are met, the company can borrow as much as $700-million.

A voluminous 252-page credit agreement negotiated by Fairfax's lawyers at Torys LLP and Shearman Sterling LLP and Avenue Capital's New York firm Kramer Levin Naftalis & Frankel LLP essentially vaulted the two investors from a lowly perch as largely unsecured creditors to high-ranking lenders with the right to effectively veto most major decisions, such as asset sales.

Restructuring loans have been a lucrative business for decades for adventurous lenders such as GE Capital and CIT Group. DIP lending pays high interest rates, rich fees and, typically, the loans rank ahead of most other debts.

Defaults are rare on DIP loans, but lenders have largely pulled away from the market because of fears that losses will rise as the global recession deepens. Moody's Investors Service has become so concerned about DIP loans that it recently started to rate them to reflect the risks of possible defaults.

Against this backdrop, most companies don't have much choice but to swallow tough terms demanded by those willing to wager a DIP loan.

These days, most troubled companies can raise DIP loans only from a short list of affiliated companies, existing investors and, in some cases, governments that are willing to protect their existing investments or political interests by lending emergency funds.

“The only people who are willing to come forward are people who already have a vested stake in the company and want to preserve their interests through a DIP loan,” said Robert Chadwick, a Goodmans LLP lawyer who represents a number of AbitibiBowater bondholders.

These loans don't always sit well with other creditors, some of whom are pushing back against what they call overgenerous loans. The result is heightened tension between creditors, and delays for managers who are racing against the clock to right their corporate ships in turbulent waters.

Dutch-based petrochemical giant LyondellBasell Industries found itself in the middle of an international bank shoving match when it negotiated a record $8-billion (U.S.) DIP loan with a syndicate of banks in January to tide it through bankruptcy court proceedings. At least one bank, ABN Amro, was so infuriated that it threatened to walk away from the bailout because it argued that the big DIP loan weakened its claim to company assets set aside as collateral for its $3.4-billion loan.

Other unsecured creditors were so angered that some made moves to claim assets from LyondellBasell affiliates that were operating outside court protection. The mess has kept LyondellBasell and its lawyers busy in a variety of courts seeking orders to stop the creditor raids.

Creditors of the company that owns the Philadelphia Inquirer started complaining when they read the fine print in a $25-million (U.S.) DIP loan and discovered that the lender, a real estate developer, protected the job and pay raise of the company's chief executive officer, Brian Tierney. Shortly after the company won protection under Chapter 11 of the U.S. Bankruptcy Code, Mr. Tierney agreed to give up his raise.

Creditors of Circuit City's Canadian chain, The Source, found themselves in a cross-border tug of war about the terms of a $1.3-billion DIP loan that was arranged for the U.S.-based retailer by a syndicate of its existing banks led by Bank of America. When The Source's Canadian creditors began to read the small print, “the plot thickened,” said Fasken's Mr. Kauffman, who represents one of the subsidiary's suppliers.

What the creditors discovered was that the U.S. parent had agreed to hand the DIP lenders the right to seize most the assets of the healthy Canadian unit. The arrangement earned a rare rebuke from a court-appointed monitor and an Ontario judge set aside a portion of Canadian assets to protect local creditors.

Orestes Pasparakis, an Ogilvy Renault LLP lawyer who represented Bank of America in the Circuit City filing, defended the terms of the U.S. DIP as the necessary price of a loan that was urgently needed to keep a troubled retailer operating. In the end, the U.S. parent was forced to liquidate, but he said the DIP loan, which has been fully repaid, allowed the healthier Canadian unit to keep paying its bills while it restructured. “The Canadian stores would not have had the luxury of exploring its options had it not been for that loan,” he said.

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