DIP Loans Still Costly, Dominated by Non-Bank Creditors

By Llewellyn Hinkes-Jones

Jan. 4 — Six years since the financial crisis, debtor-in-possession (DIP) lending has yet to revert to pre-crisis levels and interests rates remain high even though DIP lending has historically been considered low-risk.

According to Bloomberg data, interest rates for DIP loans continue to be 3-4 percent more than they were in 2007, with a median of 700 basis points between 2010 and 2015. And while major banks are still heavily involved in DIP lending, non-bank creditors continue to dominate the landscape, with the bond fund manager Pacific Investment Management Company, LLC (PIMCO) alone funding over 65 percent of DIP loans.

Demand Plunges

Demand for DIP loans spiked during the financial crisis alongside the rise in corporate bankruptcies. As a result, interest rates jumped and banks left the field as credit became tight. But little has changed in the DIP lending market as the demand for DIP loans decreased. In 2015 there were only 51 loans totaling $3.9 billion, less than one-third the number of loans that were issued in 2009 and less than one-tenth the total amount of loans.

Besides interest rates, maturity periods remain short, down from two years on average to less than a year, and more loans include fixed interest coupons and covenant-lite agreements with fewer restrictions on the borrower. While the demand for DIP loans overall has subsided, there have been more large-scale loans, including those for Energy Future Intermediate Holding Co. LLC ($7.3 billion), American Airlines ($3.7 billion), and Eastman Kodak ($2.8 billion), alongside more loans to faltering companies in the energy industry like Alpha Natural Resources Inc and New Gulf Resources LLC.

LyondellBasell Saga

DIP lending has been contentious in recent years related to their use in leveraged buyouts of the chemical firm LyondellBasell Industries and the publishing conglomerate Tribune, Co.

In 2009, LyondellBasell filed the largest DIP loan at the time of over $8 billion following their leveraged buyout by Access Industries headed by billionaire Leonard Blavatnik. But original investors in the company cried foul, accusing the board of directors of agreeing to the buyout against the best interests of the company and that $12.5 billion of debt taken on during the takeover was used to pay off shareholders through abuse of the safe harbor provision in the Bankruptcy Act.

A recent federal ruling in November 2015 by the bankruptcy court of the Southern District of New York allowed a clawback case brought by creditors to move forward.

To contact the reporter on this story: Llewellyn Hinkes-Jones in Washington at ljones@bna.com

To contact the editor responsible for this story: Heather Rothman at hrothman@bna.com

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