Lenders that wouldn’t spare a dime for retailers as they struggled to avoid bankruptcy are now falling over themselves to supply new debt after they do file.
Debtor-in-possession loans, which fund a company through court-supervised reorganizations, have become one of the hottest pieces of paper for yield-chasing investors to get their hands on. The rising number of retailer bankruptcies has helped fuel $15.5 billion of DIP loans this year, data compiled by Bloomberg show. It’s making 2017 one of the busiest years for DIP loans since the Great Recession.
Lenders are clamoring for the debt for a few reasons. There’s no safer place for a creditor to be during a bankruptcy process. DIP lenders get paid before anyone else, making them appealing to existing lenders who can use them to jump ahead of others in the repayment line. DIPs also lure new investors because they often pay more than debt issued before the bankruptcy, have short maturities, and can give lenders a key seat at the negotiating table when deals are made.
“It’s a place to put your dollars short-term with a nice yield,” said Shap Smith, head of restructuring finance at Citigroup Inc. “It’s a great alternative to the more traditional market, which can be expensive.”
Consider the case of Toys “R” Us, which filed for Chapter 11 in September after a squeeze by its vendors left it unable to manage its $5 billion debt load.
Lenders including Franklin Resources Inc. and Marathon Asset Management vied to provide $3.1 billion of DIP loans that are helping to keep the retailer’s shelves stocked through the holidays while refinancing some of its existing debt.
Rate Shaved
In one $450 million piece of the debt, demand from investors allowed the retailer to cut its proposed borrowing rate by 0.75 percentage point to 6.75 percentage points more than the London interbank offered rate (for a total of about 8.1 percent currently), people with knowledge of the debt sale said. That will potentially save America’s biggest toy seller about $4.4 million in interest over the life of the borrowing, data compiled by Bloomberg show.
A spokeswoman for Franklin declined to comment, while a representative for Marathon didn’t respond to requests for comment.
“With a lowly rated retailer like Toys, there’s lots of risk and it’s a coin flip whether the company’s going to survive or not and stay out of bankruptcy,” said Moody’s analyst Charlie O’Shea. “A lender there will be skittish. But if that same company files Chapter 11 that same lender may become very comfortable because of the structural protection.”