Post-bankruptcy financing harder to secure in crisis

Businesses with good credit say they are having trouble getting loans because of the credit crisis. So it's not surprising that companies operating with the protection of bankruptcy court are being left high and dry, too.

Since last year's fourth quarter, businesses that are candidates for Chapter 11 bankruptcy have encountered difficulties lining up post-bankruptcy financing, says Gregory Garman, managing partner at law firm Gordon Silver.

Rob Charles, a partner with Lewis and Roca, agreed that financing for Chapter 11 companies virtually has dried up.

Under Chapter 11, businesses seek to reorganize their finances so that they can continue operations, in contrast to Chapter 7 where a company's assets are liquidated.

A lender to a company in Chapter 11 gets priority over other creditors. So businesses often are motivated to file Chapter 11 so they can obtain loans that otherwise wouldn't be available, Garman said.

Many times, the only source of financing for a Chapter 11 company is a lender that made loans to the debtor before bankruptcy and wants to ensure the company is able to repay the original debt, Charles said.

For example, Credit Suisse -- the lead bank for a pre-bankruptcy loan to Lake Las Vegas -- arranged $127 million in financing for the resort community after it filed for Chapter 11.

Witnesses said Credit Suisse was the only source willing to lend to Lake Las Vegas after the bankruptcy started.

Later in the year, the loan market for Chapter 11 companies closed along with the rest of the credit markets, Garman said.

The typical lenders -- hedge funds, General Electric Capital Corp. and investment banks -- were no longer interested in lending to businesses in Chapter 11, Garman said.

Garman believes the lack of post-bankruptcy financing dissuaded some companies from filing for Chapter 11. That could explain why bankruptcy courts did not see as big a surge in Chapter 11 bankruptcies as expected once the economy began slipping into recession.

"There really wasn't the rush to bankruptcy that people were expecting," Garman said.

Some companies that have filed for Chapter 11 did not seek post-bankruptcy financing. Herbst Gaming, the casino and slot route operator, filed for Chapter 11 bankruptcy March 23 but has not sought a post-bankruptcy loan.

"It's difficult for companies that are overleveraged (with debt) to find a way in bankruptcy to get meaningful debtor-in-possession financing," Garman said.

Although Garman declined to comment about casino operators in Las Vegas, analysts say many casino operators in Las Vegas are facing bankruptcy because of their heavy debt loads. Herbst said debt was its downfall.

Some businesses have been able to obtain loans after filing for Chapter 11. Garman represented San Francisco-based Shearson Financial Network, which obtained $650,000 in financing from a hedge fund after filing for Chapter 11.

"Credit markets in general are starting to thaw," Garman said. "It looks like people are starting to make these loans again."

Contact reporter John G. Edwards at jedwards@reviewjournal.com or 702-383-0420.