According to an article in Reuters, credit markets are finally loosening for corporations who have filed Chapter 11 bankruptcy. Many investors are taking a close look at investing in bankruptcy loans given to companies who have filed Chapter 11 bankruptcy as debtors in possession.
The article said:
“Several fund managers are going to investors for money to take advantage of the potentially fat returns offered on debtor-in-possession, or DIP, loans that companies typically use to keep operations running during a bankruptcy. Sankaty Advisors LLC is raising $400 million for a fund to invest in DIP loans, JP Morgan is raising a distressed debt fund, and Colony Financial Inc (CLNY.N) plans to use some of the money from its initial public offering this week to invest in bankruptcy finance.”
Bankruptcy loans received during a Chapter 11 bankruptcy can mean the difference between liquidation and the ability of a company to restructure their debt obligations and survive economic troubles in the long-term. For many companies, obtaining credit before bankruptcy is nearly impossible or they are able to secure just enough credit to survive; but after filing Chapter 11 bankruptcy as a debtor in possession, the same company is often able to obtain credit far beyond what they could have imagined before bankruptcy.
Many investors see bankruptcy loans as a cash cow because they have a reputation for being lucrative and having few defaults. Positioning themselves as a lender also gives the bankruptcy loan investors lots of advantages in the bankruptcy because they basically direct how the company will develop their bankruptcy plan and control the direction of the case.