A federally owned lender is teaming up with Brookfield Asset Management Inc. BAM.A-T and two major financial institutions to launch a $1-billion fund to finance bankrupt companies that are seeking to restructure, joining a rush to plug a hole in the credit market.
Export Development Canada will contribute $450-million to the fund, while Brookfield will put up at least $100-million and act as manager. Canadian Imperial Bank of Commerce CM-T and Sun Life Financial Inc. SLF-T will also invest. The fund could increase in size, and EDC said it may put up as much as $1-billion in that case.
The fund will provide what's known as debtor-in-possession (DIP) financing – loans that help companies keep operating while they restructure. Such financing had become very scarce earlier this year as many of the traditional providers, including hedge funds and finance companies such as General Electric Co.'s GE Capital unit, either pulled back or pulled out entirely. The lack of DIP money threatened to leave companies that could have restructured with no choice but to liquidate for lack of operating funds.
“Our concern was to avoid having companies prematurely end up in a liquidation mode when they could rearrange their affairs through a bankruptcy proceeding but just couldn't get the financing,” said Eric Siegel, the chief executive officer of EDC.
The fund will look at deals that require at least $20-million of financing.
While EDC is government owned, meaning taxpayer money will be at risk, Mr. Siegel said that DIP lending is a relatively safe endeavour. DIP providers generally get to move to the top of the list for repayment, ahead of all other creditors, and the loans are usually secured by assets of the borrower that can be sold to cover the loan.
Mr. Siegel said he expects that with bankruptcies likely to rise because of the recession, there could be a need for as much as $5-billion of DIP financing.
“This fits very well in the government's overall economic recovery plan objectives, since having DIP financing available to companies is important at all times, but particularly important at this time,” Mr. Siegel said.
EDC is likely to face competition, bankruptcy experts say. While DIP financing was hard to come by just months ago, with the rebound in the credit markets, there have been many investors looking to get back into the business.
Private equity funds, which often provide DIP financing as a way to get a foothold in a company and eventually take it over, are one source of funds that has returned. The result is that smaller DIP loans of as much as $50-million are becoming easier to come by.
“People have been responsive to the need,” said Justin Fogarty, co-chair of the restructuring group at Davis LLP, a Toronto-based law firm. “As an insolvency practitioner, I get approached almost every week by groups of investors or people wanting to put together DIP funds to fill the market void.”
Still, DIP financing remains expensive, and for bigger deals, tough to find, so the creation of the Brookfield-EDC fund will be welcome.
“There is stuff getting done, but like the rest of the credit markets, there is some element of fragility to [the DIP financing market] and I think that this initiative will hopefully help to provide a bit of stability – certainly to mid- and upper-market companies,” said Joe Freedman, the senior managing partner at Brookfield who is responsible for the fund.
