(Reuters) – Debtor-in-possession loans, which help companies fund operations during a bankruptcy, are becoming a new way for distressed investors to take ownership of a bankrupt company, billionaire investor Wilbur Ross said on Friday.
In bankruptcy situations, distressed investors often seek to buy a debt security that will allow them to convert their stake into equity ownership of the company. In bankruptcy lingo, that debt instrument is called the “fulcrum security” and it has historically been fairly low in the company’s capital structure.
However, as lenders have pulled back on making debtor-in-possession loans, which are typically near the top of a bankrupt company’s capital structure, Ross said in comments to the Wharton Restructuring Conference in Philadelphia.
“Nowadays there is a new kind of fulcrum security, and that is the debtor-in-posession loan,” said Ross, who is the founder of private equity firm WL Ross & Co, a specialist in distressed investing.
“It may seem like a funny way to acquire a company, — to make the debtor in possession loan — but I believe you’re going to see that more and more,” Ross said.
Debtor-in-possession, or DIP, loans are usually the first loan a company gets when it files for bankruptcy. DIP financing in the past had been an active sector of lending because the lenders are highest in the capital structure and first in line to be paid back by the companies. But such funds have been extremely difficult for companies to find in the past few months since the global credit crisis has caused lenders to pull back on all types of loans.
“I think you’re going to start seeing people making debtor-in-possession loans and ending up with the company,” Ross said.
(Reporting by Emily Chasan; Editing by Bernard Orr)