The Hedge Fund Law Report

The definitive source of actionable intelligence on hedge fund law and regulation

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By Topic: Debtor-In-Possession Loans

  • From Vol. 2 No.10 (Mar. 11, 2009)

    Can Hedge Funds Make DIP Loans to Bankrupt Companies in which they Also Own or Acquire Equity Interests?

    Given the high number and size of bankruptcies predicted to occur during 2009, hedge fund managers see an interesting opportunity in distressed investing generally, and in particular in providing debtor-in-possession (DIP) financing to companies reorganizing under chapter 11 of the Bankruptcy Code.  Extending or continuing DIP loans may give rise to legal obligations, in particular when the lender has or during the term of the DIP loan acquires an equity interest in the bankrupt borrower.  While the law does not prohibit ownership of both equity and debt of bankrupt company, investment in various levels of the capital structure of a chapter 11 debtor may require certain disclosures, special precautions with respect to information acquired as a lender and special care with respect to actions taken as an equity owner (especially a majority owner).  We discuss certain legal considerations for hedge funds in connection with simultaneous investments in equity of a chapter 11 debtor and participation in a DIP loan to the same debtor.

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  • From Vol. 2 No.6 (Feb. 12, 2009)

    Hedge Funds Step into the Breach as Traditional Lenders Exit the Debtor-In-Possession Loan Market

    Debtor-in-possession (DIP) financing long has served as a lifeline for companies during a Chapter 11 restructuring process.  Chapter 11 debtors use DIP loans to finance their operating expenses, including payments to bankruptcy lawyers and other advisors, and such financing generally is perceived as necessary for a debtor to restructure and avoid liquidation.  However, the market for DIP loans, like other types of credit, has all but frozen of late.  Notably, GE Capital, one of biggest players in the DIP lending market, with $1.75 billion of such loans made in 2007, pulled out of the business in the last quarter of 2008.  But just as the supply of DIP loans has constricted, the demand for such loans has grown dramatically.  GE executives reportedly predicted in September 2008 that the market for DIP loans could grow to $12 billion in 2009.  As traditional lenders such as GE pull out of the business, at least temporarily, Chapter 11 debtors are looking increasingly to hedge funds to step into the lending breach and preserve the viability of the restructuring process.  We explain the role hedge funds are assuming in the DIP loan market, common terms of hedge fund DIP loans, how hedge fund protect themselves when making such loans and borrower considerations.

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