“Seller-in-Possession” Financing?

“Seller-in-Possession” Financing?

By now, it’s no secret that DIP financing – once a mainstay of Chapter 11 reorganizations – has all but disappeared.  When available at all, post-petition debt financing in the present market has been accessible only at exorbitant prices and on terms that make it . . . well, nearly inaccessible.

In this sort of lending market, what’s a struggling Debtor-in-Possession to do?

The answer, in at least some cases, may be to negotiate for Seller-in-Possession financing.  In a March 6 article addressing this trend in the turbulent DIP financing market, The Deal’s Ben Fidler comments on the growing tendency for many DIP packages to include sale requirements.  Such so-called “fast-track” sale procedures were not unknown in prior markets.  But they are, according to Fidler, becoming “more the norm than the exception with DIPs.  Many [DIP financing packages] are laced with sale provisions, often mandating sales within a few months to avoid a default.”

In support of this observation, Fidler points to Fluid Routing Solutions Inc., who received a DIP from Sun Capital Partners Inc. that initially gave the debtor 35 days to sell its fuel systems business, and to G.I. Joe’s Holding Corp. – a sporting goods retailer doing business as Joe’s Sports & Outdoor – who obtained a $51.2 million DIP financing from Wells Fargo Retail Finance LLC . . . but with the requirement that the company find a buyer in 30 days.

Fidler goes on to comment that:

These situations often leave unsecured creditors committees in the lurch. Because of such deadlines, a debtor will usually request a bidding procedures hearing date at the first-day hearing, before committees are even formed. And by the time they are, a debtor will likely be well on its way toward a sale, leaving the committee to scramble to try to push back all the deadlines.

With lenders generally unwilling to float debtors toward reorganization and instead pushing them toward sales, this recent piece underscores the significant opportunities available for strategic buyers in this market.

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