Bankrupt U.S. companies lucky enough to survive a court restructuring are hitting another roadblock created by the economic downturn -- finding the money they need to put it all behind them.
Getting out of bankruptcy has never been easy. Companies often have to lay off employees, close plants and sell assets to reduce operating costs before they can receive the court approval they need to stand alone again.
When credit markets were healthy, companies would often turn to them to boost capital as they exited bankruptcy. But today's weak markets are not an option now. And like the market for the debtor-in-possession financing that is used to pay for bankruptcy, the outlook is not much better, bankers and lawyers say.
Exit financing is a pretty tough game right now to be honest with you, said Brian Trust, a partner at Mayer Brown in New York.
I'm not saying that you are going to see exit finance markets break open. I think they are going to be subject to the same issues, concerns, constrictions and tightness of credit that we have seen in the current DIP market -- although we have seen a crack in the general credit markets.
Many companies are preparing for continued weak credit markets, renegotiating debt and planning debt-for-equity swaps and rights offerings that put more equity into the company instead of debt. They are also doing prearranged bankruptcies more often, which can help keep debt down and decrease the amount of exit financing needed.
In today's environment, rights offerings are becoming more popular for companies that require additional capital to get out of bankruptcy, said Sam Greene, managing director at Miller Buckfire.
Along those lines, cable company Charter Communications Inc said on Friday it filed for a prearranged bankruptcy in which its debt restructuring will include a rights offering for certain bondholders.
FINDING THE MONEY
The issues for bankruptcy financing is that, when the credit markets tightened up last year, loans to bankrupt companies -- even the DIP loans that were once coveted by lenders because they are repaid first -- dried up.
Liquidity right now in terms of fresh loans to distressed companies is very low. It's the lowest point I've ever seen it, which is forcing people to be creative in terms of how they structure DIP and exit financing, said Kris Hansen, co-chair of the nationwide financial restructuring group at Stroock & Stroock & Lavan LLP in New York.
Some companies have managed to find small amounts of exit financing. U.S. restaurant chain Buffets Holdings Inc, for instance, lined up a $120 million exit loan earlier this month.
And there is the possibility there could be more deals in the asset backed market for companies that have enough hard assets.
Because of the current disruptions in the syndicated loan market, most companies will find it more challenging to raise exit financing and instead may attempt to reinstate existing debt or, if there is hard asset collateral, turn to asset backed financing instead, said Bruce Mendelsohn, co-head of Americas Restructuring at Goldman Sachs.
But doing a traditional syndicated term loan is going to be very difficult and it's going to be very expensive.
FRONTIER TAKES A DIP
Some companies have tested the exit finance market and decided a better choice is to wait it out. Frontier Airlines Holdings Inc arranged a $40 million DIP earlier this month to refinance one that would have expired next month.
Marshall Huebner, co-head of Davis Polk & Wardwell's restructuring group and Frontier's lead counsel, said the company met lenders and discussed both an extension of its bankruptcy financing and exit financing before deciding to extend.
Now we have the multi-month period necessary to run the right kind of process to get the most advantageous exit financing, Huebner said.
There is no virtue in staying in Chapter 11 for an unreasonable amount of time, but I think right now the benefits of dealing from a position of strength and potentially having a turn in the capital markets easily outweigh the nominal incremental costs of being in bankruptcy.
(Editing by Andre Grenon)