DIP financing is a unique form of financing for firms going through a bankruptcy process, such as Chapter 11. With liquidity in the leveraged finance arena still sparse, more lenders might recoil from the risk of DIP deals. Firms usually get DIPs from either their current banks, existing loan and bond holders, or a firm that specializes in DIP financing. With big DIP financers such as General Electric Capital Corp. shying away, firms might have to rely more on current creditors for bankruptcy financing.
"At least in the first two quarters of 2009, we would expect to see DIPs arranged by current bank lenders and creditors in cases where there is a clear and viable reorganization plan," said Diane Vazza, head of Standard & Poor's Global Fixed Income Research Group. One risk is that some previously planned reorganizations turn into liquidations, as is the case with Circuit City. Although this does not necessarily mean that DIP lenders will lose money, as financing is often extended for liquidation cases, the risk that lenders provide a DIP based on a reorganization plan which falters could be increasing. A few major blowups and the availability of bankruptcy financing could be further damaged. Moreover, more firms might decide to enter bankruptcy with cash on hand as a way to protect themselves from financing risks. In general, any firm with weaker turnaround prospects could have limited options other than selling assets to generate liquidity or move to Chapter 7 liquidation altogether.
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