When a company files a Chapter 11 case (or even before-when there is time), a big issue is how to fund operations post-filing. The Debtor-in-Possession (DIP) needs to make arrangements with its current lender(s) or a new lender to take on the additional risk (and rewards) of a DIP loan.
With the credit crisis, DIP loans are getting harder to find. A Wall Street Journal article today says:
“Debtor-in-possession, or DIP loans, financing is essential for the lawyers, layoffs and other restructuring necessary for a company’s rebirth. Exit financing is used when a company “exits” reorganization. Banks have been eager to take part in this market because the loans are the first to be paid back and command high interest rates.
“Without the lending lines, companies that would normally survive bankruptcy will have to quickly sell assets. Potential buyers may not be able to borrow either, meaning companies could be forced to liquidate immediately instead of working out their problems. That could cost tens of thousands of jobs across the economy.”
Chapter 11 is a necessary evil in our economy. Just like with bankruptcy in general, if companies can’t restructure and manage their debt, they won’t take the same risk or, worse, they won’t be able to get out of an unforseen problem to, once again, be a successful, profitable employee and contributor.
Let’s hope things settle down soon so, at least, the companies needing to reorganize can do so.