Quick Hits: When Companies Can't Afford To Go Bankrupt
Brief scrutiny of today's headlines.
Tight credit means a growing number of companies filing bankruptcy to reorganize can't find the needed cash to complete the process.
This could force companies to liquidate and lay off tens of thousands of employees.
General Electric (GE) has cut back sharply on debtor-in-possession and exit financing, the Wall Street Journal reports.
GE hasn't publicly announced its decision to withdraw from the market -- and the company says it's still active in the field -- but the Journal, citing bankruptcy lawyers and financial advisers, says money needed to go through a bankruptcy is increasingly hard to find.
GE is one of the world's largest lenders in the sector. Last year it made restructuring loans valued at $1.75 billion.
Debtor-in-possession funding is a key element for the lawyers, layoffs and other restructuring costs central to a company's rebirth. Exit financing is used when a company leaves, or exits, reorganization. In general, banks have liked to participate in this market because the loans are made with high interest rates and are the first to be paid back.
But without such money available, companies that would generally reorganize in bankruptcy and survive will be forced to sell assets. Prospective buyers of distressed companies may not be able to borrow the funds necessary to swing the deals, forcing companies in trouble to liquidate.
Demand for debtor-in-possession financing may climb to $12 billion this year. And unfulfilled demand could punch a huge hole in the economy.
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