Know How Financial Marketplace Works - A Short Introduction

According to a major news article about debtor in possession financing, over 150 companies defaulted on corporate debt in the previous year causing a spike in bankruptcy exit loan financing demand. Just who is exiting corporate bankruptcy?

In a large number of cases they are household names like Six Flags theme-park. Six Flags entered chapter 11 bankruptcy and exited with a secured credit facility of almost $850M financed by a syndicate including JP Morgan Chase. Six Flags is a great example of a company whose business is going well but due to maturing leveraged debt with no one was willing to refinance it. Hence, their only way out was to default and enter bankruptcy protection. Emerging from bankruptcy, there is a new market and a new class of financing available to them.

OK, don't start looking at your screen funny, first let me define a couple of terms for you. Ill start with the concept of exit loans.

When a company enters bankruptcy protection, they do so with the plan to exit from bankruptcy. In order to successfully exit, they need financing. This type of financing is referred to a leveraged loan or distressed debt.

A second question is why would someone loan money to a company that has a high chance of failure. The answer to the question is that the more risk the higher the payback and high flying investors love it! The are referred to as dip loan investors.