The DIP Financer of Last Resort?
Over at the ‘Glom Michelle Harner has an excellent post on prospects for a GM bankruptcy. For me one of the striking things about the current financial crisis has been how big of an issue bankruptcy hasn’t been. After all, Chapter 11 is supposed to be the way that one restructures over-leveraged firms that maintain some core of profitability. GM cannot go into bankruptcy, so the argument goes, because among other things there is no way that it could get the debtor-in-possession financing that it would need to operate. (DIP financing consists of loans extended to companies in bankruptcy. The financing gets priority as an administrative expense of the estate, so it is less exposed to bankruptcy risk than the pre-petition financing, but it still consists of a bet on a successful reorganization.) The Economist is reporting that some have suggested that the government should provide DIP financing to GM. I suspect that there will be little political enthusiasm for this approach because any Chapter 11 will require a substantial rewriting of GM’s labor contracts, and I think that in a large part it is the political clout of the UAW within a resurgent Democratic party that is giving GM’s panhandling much of the serious attention that it has received.
The non-political case for government DIP financing for GM is that the company’s inability to get money to operate in bankruptcy is a product of the credit crisis rather than a realistic reflection on the company’s ability to reorganize. This is essentially the argument made a couple of weeks ago when the Fed intervened directly in the short-term commercial paper market. The claim was that the freezing up of the short-term paper market couldn’t possibly reflect a spike in the real risk associated with what are, after all, regarded as some of the safest commercial loans that it is possible to make. DIP financing, however, is something different. Unlike short-term paper, loans to DIPs are some of the riskiest bets than a lender can make. It may well be that GM really cannot get enough DIP financing to operate (I’m not entirely convinced, as I suspect that in part the DIP financing claim is a ploy to get direct infusions of government cash), but if this is the case it is by no means clear that GM’s woes are driven entirely by the credit crunch. Indeed, the withholding of DIP financing is one of the ways in which the market signals that we are better off taking a business out behind the barn to be shot rather than keeping it on life support in Chapter 11.
It is worth pointing out, on this front, that Circuit City, which filed for Chapter 11 last week, was able to get a $1.1 billion line of credit as DIP financing. Obviously, $1.1 billion is chump change in comparison to what it would cost to operate GM in bankruptcy, but it isn’t true that the DIP finance markets are closed to all comers.