TRANSCRIPT
DIP financing or debtor in possession financing is the advance of funds usually on a secured basis and often on a super senior secured basis to a company that's in external administration.
It might seem counterintuitive to want to lend funds to a company in financial distress but it's actually a key feature of the US restructuring market and in fact there are often multiple lenders looking to be the DIP financier to a company in Chapter 11. In the 2008/2009 credit crunch, for example, over US$100 billion was raised in DIP financing.
There are a number of reasons why DIP financing is popular in the US. The first of those is that it's an opportunity for funds to earn very lucrative fees and interest at rates which are usually an uplift on prime. Another reason is that DIP financing loans are usually fully funded from day one and because of the length of time that a complex Chapter 11 takes to work through, the loans are funded for a considerable period. The sums advanced are often very significant; for example in the US bankruptcy of Toys R Us the US Bankruptcy Court approved a DIP financing package of $3.1 billion. Unfortunately that wasn't enough to save that ailing business but also DIP financing can be the difference between corporate rehabilitation and failure. Another reason why DIP financing is popular is that it can provide a platform for the DIP financier to execute a loan to own strategy.
Of course we don't have Chapter 11 in Australia and our closest analogous regime is voluntary administration. We do have lending to companies in voluntary administration and we have some very significant and high-profile examples in the Australian market – for example Nexus Energy, last year's funding by CBS Networks of the Ten Network during its voluntary administration (and in fact CBS then executed a loan to own strategy on the back of that funding). Another example is the advance by Gordon Brothers to SurfStitch when it was in voluntary administration to enable it to trade during the key Christmas trading period in Australia.
There are probably two impediments to the popularity of DIP financing in Australia.
The first of those is that we don't have an equivalent statutory mechanism to enable the DIP financier to take super senior priority over existing secured creditors, but that wouldn't, you would think, deter existing secured creditors from becoming DIP financiers.
Another impediment which can be overcome with a court application is the need to obtain an extension of time to register a security interest granted by a company in external administration, in order for that security interest to be enforceable against the debtor and third parties.