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— Judgment Call —
The prospect of obtaining multibillion-dollar DIP financing is daunting at best, and the cost has skyrocketed. Maturities are down to a year or less. Active DIP lenders in the U.S. have pulled back or exited the market completely, and the investor base has shifted to include private equity and hedge funds and, in some cases, even corporate insiders (e.g., Magna Entertainment Corp.) and the U.S. and Canadian governments (e.g., Chrysler LLC). At least one company resorted to a coercive DIP as a bridge to an insider-friendly 363 sale (Lenox Group Inc.).
The DIPs getting done are often defensive in nature, as many companies
rely on existing lenders for new money and debt-for-equity swaps.
Rollup features for prepetition lenders, where prepetition debt is
converted into (or rolled up into) postpetition financing, with the new
debt getting superpriority status in the company's reorganization, are
increasingly common, although somewhat controversial.
The problems don't stop on this side of the Atlantic. Insolvency in most European jurisdictions usually means liquidation. And European insolvency regimes don't necessarily mesh well with the U.S. system. Several Western European nations have updated their insolvency laws, but they are far from uniform. Germany, for example, has especially strict rules allowing directors to be held criminally liable if they fail to file for insolvency within three weeks of unsustainable indebtedness. Other countries have insolvency regimes that divest existing management of all powers to manage the insolvent company. So where should all these multinational companies on the brink of insolvency seek relief -- in the U.S., where DIP financing is increasingly difficult to obtain, or in Europe, where liquidation and loss of management control is a more likely result? This was one of many questions confronting chemicals giant LyondellBasell Industries when it faced an acute liquidity squeeze in early 2009. The multinational entity used the U.S. model to protect its global operations. Lyondell Chemical Co. and its other U.S. operations, along with one European holding company (Basell Germany Holdings GmbH), filed Chapter 11 petitions in the U.S. Bankruptcy Court for the Southern District of New York. The court then approved the largest DIP financing package on record, totaling more than $8 billion. Apparently, Lyondell found a way to use the Chapter 11 process to help protect its European affiliates from filing for bankruptcy under less sympathetic insolvency regimes. Using its discretion aggressively, the court granted Lyondell's request to enjoin creditors for 60 days from acting against parent company LyondellBasell Industries AF SCA, a holding company organized under the laws of Luxembourg that has its principal place of business in the Netherlands. At issue: more than $1 billion in notes due in 2015 and a claim by a group of companies, including ConocoPhillips and Dow Chemical Co., for $131 million in debts guaranteed by Lyondell's solvent companies. The intention was to protect Lyondell's integrated European operations and thus help maintain the going-concern value of the company. The injunction likely averted actions in the Netherlands, Luxembourg and elsewhere in Europe that would have frustrated the larger goal of reorganization and may now yield better creditor recoveries. Three days before the injunction was scheduled to expire, LBIAF, the principal obligor on the 2015 notes, filed its own Chapter 11 petition with the U.S. Bankruptcy Court in New York, presumably to get the benefit of the automatic stay. Today's distressed globalized companies face a multinational matrix of insolvency proceedings, with complex choices of law issues and no certain outcomes. Perhaps the Lyondell model will prove attractive to other companies facing similar challenges. While the DIP market may be slowly starting to open up again, even if distressed companies are lucky enough to find DIP financing, they may still face obstacles in obtaining exit facilities, which now are virtually nonexistent. DIP lenders in this market will likely need to do the exit, too. Martin Flics is partner and head of the U.S. bankruptcy practice and Seema Patel is an associate in the banking and restructuring practice at Linklaters LLP. |
Finding debtor-in-possession financing used to be one of the easier parts of the United States bankruptcy process, but today DIP financing is in short supply. The severe contraction in credit markets worldwide, along with an anticipated default rate for 2009 reaching 13% to 15% and a potential volume of $80 billion to $90 billion, translates into an increased demand for DIP money and only a few players on the supply side. 
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