YOUR COMPANY IS LOOKING FOR RESTRUCTURING FINANCE
ALTERNATIVES!
FIXING FINANCIAL DISTRESS VIA " DEBTOR IN POSSESSION DIP "
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Debtor In Possession Financing - aka ‘DIP'. Many business people and financial managers are not aware of the term 'DIP' Financing as it relates to restructuring.
DIP financing revolves around companies that are in distress and more often than not, in fact almost always, in a bankruptcy proceeding. Why would any firm want to finance a bankrupt company?
IT'S ALL ABOUT THE ASSETS IN RESTRUCTURING
The answer is that many firms, especially those that are larger and have significant assets have a strong chance of emerging from bankruptcy, obviously as a stronger company (less debt of course) and a more reasonable chance of being successful and profitable again. We say 'less debt 'of course because the originally secured lenders of assets, etc. are in fact going to take a partial, or in some cases whole loss on their original financing.
RESTRUCTURING AND DEBTOR IN POSSESSION FINANCE IS A SPECIALIZED AREA
DIP is clearly a very specialized area. Lenders who are specialized in this area enjoy the highest level of security over the assets they are temporarily financing.
THE RESTRUCTURING GOAL? EMERGE SUCCESSFULLY!
Naturally, the goal of the company, while it is in a temporary bankruptcy filing (U.S. = Chapter 11 bankruptcy court - Canada = CCAA '), is to emerge with new financing. The players and leaders in this specialized area of financing tend to be banks and specialized independent finance firms with significant capital and expertise. It is of course ironic that many of the banks that finance firms and take losses also have specialized DIP divisions that provide capital to the bankrupt firm.
The essence of DIP financing is that the DIP lender is given super-priority security on the assets of the firm. It goes without saying that when a company is in bankruptcy preceding that the interest rates on the financing can in many cases be quite a bit higher than the customer enjoyed in its normal operating business model.
ADVANTAGES OF THE DEBTOR IN POSSESSION LENDER
The advantage of a DIP loan lender is several - many times they are in fact over secured. That is to say, as an example, that a DIP lender may be providing a 5 Million dollar financing for the customer during bankruptcy, while the total assets might be values significantly higher. In many cases, DIP financing are very large, and in that case two or in fact a number of lenders, band together to create temporary working capital financing for the firm as it reorganizes.
In some cases, DIP lenders may intend to take future partial ownership in the post bankrupt firm, as well as of course, their place in line as priority lender over all others.
Many larger institutions actually create large multi-million (billion?) funds that focus solely on making investments in DIP financing and partial future ownership of the firm. In general, the competition for DIP financing is in fact growing - as ironic as it seems to the layperson and non-finance professional, there is money in bankruptcy!
EVERY INDUSTRY HAS DIFFERENT CHARACTERISTICS
Naturally, if a company is in bankruptcy there is still certain, if not a large amount of risk involved in DIP financing and the chances of a final successful emergence and re-financing of a firm. That is where experience comes to play, as seasoned ' dip lenders ' know their industries and work out and re-finance strategies very well.
MAINTAINING A ' BUSINESS AS USUAL ' POSTURE DURING RESTRUCTURING IS KEY
When a firm does successfully arrange DIP financing most finance professionals take that as a sign though that there is a strong chance that the company will re-emerge. Most importantly, as yet undiscussed, is the fact that DIP financing allows the company to continue on to sell, pay suppliers, employees, etc. Stopping a company in its key operating activities is of course highly risky with respect to a successful re-emergence of the firm given previous secured creditors and the new existing lender.
CONCLUSION
If your business requires restructuring / DIP financing or requires extreme changes to current financing seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can assist you.
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Stan Prokop
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