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      Insolvency News and Analysis - Week Ending August 15, 2014
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    Posts Tagged ‘DIP Finance’

    DIP Lending in Transition

    Monday, August 9th, 2010

    As the economy lurches forward into an uncertain back half of 2010, the DIP lending market remains in flux.  In a short piece appearing in the Journal of Corporate Renewal last Wednesday, Imran Choudhury and Frank Merola – both of Jeffries & Co., Inc. - offer a concise overview of the factors affecting credit availability and expense over the last two years.

    After a sharp contraction in 2008, Choudry and Merola show how DIP funding has increased – both in terms of deal size and in terms of new money . . .

    and likewise, how spreads have eased during the same period . . . .

    Their walk-away, in light of this data:

    “The overall state of the DIP financing market has changed over the last couple of years as the broader credit markets have changed. Lower yields due to improvements in the overall credit markets have resulted in lower rates in the DIP loan market as well.

    While it is difficult to say precisely what DIP yields will be over the next year or so, it seems very likely that the worst part of the credit cycle is over and DIP yields are not going to reach the same levels as they did in late 2008 and early 2009. Even though yields on DIP loans are not at their peak levels, the loans will still likely be used for . . . strategic reasons—protecting existing debt positions or controlling restructuring processes or acquiring assets through credit bids.”

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    DIPzilla

    Sunday, February 15th, 2009

    An earlier post here noted the changes in DIP lending occuring in this credit market, and highlighted an October 2008 Reuters article as the jumping-off point for the observation:

    In a nutshell, what DIP financing capacity remains in this market has become much more expensive, making acquisition “bridge financing” more attractive and possibly increasing the trend toward Chapter 11 bankruptcy sales.

    A recent Bloomberg article (available here) suggests that the dramatically increased pricing and other incentives for DIP loans are bringing lenders back into the market, and cites the recent DIP package extended to Lyondell Chemical as an example.

    But what may be just as striking about the Lyondell DIP as its pricing . . . is its size.  Lyondell’s $8 billion proposed DIP – approved on an interim basis January 7 and awaiting final approval – dwarfs all prior DIPs. 

    Ever.

    Bloomberg’s article summarizes the DIP as comprised of approximately $2.1 billion from new lenders.  Lyondell’s pre-petition lenders “doubled down” with $3.25 billion of new money in order to shore up the same amount of old debt.  Copies of the Interim Order entered January 8, with exhibits, are available here, here, and here.

    To get a sense of the dimensions of Lyondell’s DIP, note that it nearly doubles the size of the prior record-holder (Delphi Corp.), based on figures compiled by The Deal’s Bankruptcy Insider and reprinted below:

    Largest loans

    Rank

    Debtor

    Date

    Commitment ($mill.)

    1

    Delphi Corp.

    5/9/08

    $4,354.0

    2

    LandSource Communities Development LLC

    6/8/08

    1,185.0

    3

    Circuit City Stores Inc.

    11/10/08

    1,100.0

    4

    Quebecor World Inc.

    1/21/08

    1,000.0

    5

    Delphi Corp.

    8/6/08

    950.0

    6

    Linens Holding Co.

    5/2/08

    700.0

    7

    Mervyn’s Holdings LLC

    7/29/08

    465.0

    8

    Lehman Brothers Holdings Inc.

    9/17/08

    450.0

    Pilgrim’s Pride Corp.

    12/1/08

    450.0

    9

    Vertis Inc.

    7/15/08

    380.0

    10

    Buffets Inc.

    1/22/08

    285.0


    *Includes loans provided by units.
    Of recent note: Bank of America Corp. includes Merrill Lynch & Co.; Barclays plc includes Lehman Brothers Inc.; Cerberus Capital Management LP includes GMAC LLC and Chrysler LLC; PNC Financial Services Group Inc. includes National City Corp.; Wells Fargo & Co. includes Wachovia Corp.

    Source: www.BankruptcyInsider.com; pipeline.thedeal.com

    To get another perspective on the size of Lyondell’s DIP, compare it to the total combined volume of DIP loans made by last year’s top 4 lenders:

    Bankruptcy financing

    Debtor-in-possession loan metrics, Jan. 1-Dec. 31, 2008

    Top lenders by volume*

    Rank

    Lender

    No. of commitments

    Volume ($mill.)

    1

    General Electric Co.

    21

    $1,960.1

    2

    Wells Fargo & Co.

    38

    1,533.7

    3

    Barclays plc

    5

    1,128.8

    4

    Bank of America Corp.

    24

    1,120.9

    5

    General Motors Corp.

    2

    977.3

    6

    Credit Suisse Group

    6

    947.0

    7

    J.P. Morgan Chase & Co.

    10

    862.2

    8

    Citigroup Inc.

    5

    738.9

    9

    Marathon Asset Management LP

    1

    592.5

    10

    Deutsche Bank AG

    2

    563.0

     

    Top lenders by number*

    Rank

    Lender

    Volume ($mill.)

    No. of commitments

    1

    Wells Fargo & Co.

    $1,533.7

    38

    2

    Bank of America Corp.

    1,120.9

    24

    3

    General Electric Co.

    1,960.1

    21

    4

    Cerberus Capital Management LP

    412.4

    15

    5

    ING Groep NV

    30.3

    12

    6

    J.P. Morgan Chase & Co.

    862.2

    10

    PNC Financial Services Group Inc.

    184.6

    10

    7

    UBS AG

    276.2

    7

    CIT Group Inc.

    223.2

    7

    8

    Credit Suisse Group

    947.0

    6

    Highland Capital Management LP

    129.7

    6

     

    Finally, it is worth noting that as difficult and expensive as DIP lending has become, Lyondell’s DIP – approved within the first week of the year – gets 2009′s DIP lending season off to a record start.  Lyondell’s commitment alone comprises approximately 40% of 2008′s entire DIP lending volume:

    Annual trend

    Year

    No. of deals

    Volume ($bill.)

    2004

    150

    $7.7

    2005

    164

    14.0

    2006

    218

    9.5

    2007

    232

    13.6

    2008

    328

    18.1

     

    Bloomberg’s Tiffany Kary quotes several sources who attribute the higher pricing of DIPs to much higher risk: In a word, increased business failure rates and the prospective difficulty of exiting DIP facilities in this cycle are driving prices in this market.

    But if the size of Lyondell’s DIP is any indication, it appears that even in this market, there is still plenty of appetite for risk.

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