Bankruptcy financing gets pricier and more elusive

By Caroline Humer

NEW YORK (Reuters) - Financing is getting pricier and more elusive for companies that file for bankruptcy.

Debtor-in-possession - or DIP - financing is the fuel that keeps companies going through bankruptcy, allowing them to continue paying their suppliers and their employees as they try to become profitable again.

It has been a popular and lucrative form of financing for much of the last decade, as the DIP lender is usually the first to be paid back when the company emerges from bankruptcy or liquidates.

But now, as companies head into bankruptcy, they are finding they have few assets that have not already been promised as collateral to lenders, making it difficult to secure DIP financing. In addition, the tight credit markets that may have helped drive them into bankruptcy are limiting the availability of loans after they file.

"I think the fact that DIP financing is more difficult to get is an absolute truism," said Lisa Donahue, a co-head of restructuring firm AlixPartners' Turnaround and Restructuring practice.

Companies are heading into bankruptcy with few assets to use as collateral because they have so much other debt tied to assets, she said. "Unencumbered assets to actually put a DIP on top of are very difficult to get," she said.

In addition, the lack of liquidity and competition make DIP loans harder to get, she said, pushing rates and fees to unprecedented levels.

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