D-I-P: R.I.P.?

So-called "debtor-in-possession" financing is a standard aspect of large Chapter 11 cases.  For example, Barclays agreed to provide DIP financing to Lehman Bros. as part of its deal to buy Lehman's North American operations.

Yet according to Steve Jakubowski the DIP loan can no longer be taken for granted. Jakubowski, in an interview about the "prospects and pitfalls" of a possible GM bankruptcy on National Public Radio's Planet Money, notes that "today banks are de-leveraging their balance sheets--nobody wants to be in the business of loaning money to GM or any other company. The cost of a DIP loan would be astronomical." Jakubowski contends that even if GM wanted to file bankruptcy, "the lending environment is such that it will not permit a protracted Chapter 11 for any company in any industry."* [Insert government bailout here?]

If DIP loans are in fact dried up, the implications for the top bankruptcy and restructuring practices are dire. By federal statute (written by lawyers of course), claims for attorney fees are accorded the highest priority status in a bankruptcy proceeding. That is why debtor's counsel is such a coveted role: the Weils and the Kirklands built their lucrative restructuring practices by getting paid off the top.

*The NPR interview has some moments of awkward comedy: as Jakubowski explains bankruptcy principles (e.g., the difference between secured and unsecured creditors), the interviewer replies, "I see, I see, I see." But it's obvious he doesn't.

-posted by brian