Basics One Needs To Know Regarding Bank Loans, Stocks And Bankruptcy Law

 By: Jim Knight
OK, before you even start lowering your brow, I need to define a couple of terms for you. First , what the heck is an exit loan? When a company enters bankruptcy protection, they do so with the plan to exit from bankruptcy. In order to exit, they will need financing. This type of financing is referred to as leveraged loans or distressed debt. The next question is why would someone loan money to a organization that has a high chance of failing and going into default. The retort to the question is that the more risk the higher the payback and hedge funds love it! The are referred to as high yield credit managers.

According to a Wall Street Journal article that touched upon DIP or debtor in possession financing, 189 companies defaulted on liability last year causing a spike in exit loan financing demand. So who are these companies? In numerous cases they are household names like Six Flags theme-park. Six Flags went into chapter 11 bankruptcy and is exiting that with a secured credit facility of about $830 financed by a group of three major players including JP Morgan Chase. Six Flags is a great example of a company who's theme-park is setting record attendance levels but due to the maturity of leveraged debt with no one willing to refinance it, they were forced to default and withdrawal to bankruptcy safeguard . Emerging from bankruptcy, there is a new market and a new class of financing available to them.

So where is the hard cash coming from? Basically leveraged loans outperformed high yield bonds this past year. Thus investors are plowing their money into leveraged loan funds and pulling them from high yield credit. But it isn't just a shifting of money from the high yield credit markets, there is net new money pouring into this market. A few of the statistics that can be found on line are that is that the leveraged loan market attracted almost 1.4 billion dollars this year and over 450 million has fled from the high yield credit markets.

As a result of the leveraged loan markets surging, the issuance of corporate debt is down significantly. Some estimates show that corporate debt issuance is down almost 50% from the same period last year.

The other outstanding question is what happens to exit loans, bank loans, and high yield debt if the Fed raises rates. This is almost certain to happen as the Fed is trying to steer companies toward private sector financing as they surface from the troubles of 2008/2009.

Due to companies emerging from bankruptcy quicker and in need of financing, leveraged loan investors are in demand. This has created possibility and with opportunity comes investors. It will definately be a market to keep an eye out for as the markets and corporations shake loose from one of the worst financial crisis since the great depression. This coupled with record defaults in 09 will make a lucrative sales environment for the leveraged debt industry all together.
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