Bankruptcy financing seen more costly as wave hits

By Emily Chasan and Caroline Humer

NEW YORK (Reuters) - There are likely to be a slew of bankruptcies this year, but the process will be more challenging and costly than ever as a drought in bankruptcy loans has changed the rules of the game.

Companies like VeraSun, Tronox and LyondellBasell's Lyondell Chemical Co have said the credit crunch sent them scouring markets for months to locate debtor-in-possession, or DIP, financing that would allow them to keep operating during bankruptcy.

While some lenders expect the market to recover by the middle of next year, restructuring experts say the financing markets have been exceedingly difficult to navigate.

"DIP financings are either not available in any significant size, or if they are available the pricing is scary," said Henry Miller, co-chairman of turnaround advisory firm Miller Buckfire & Co LLC.

DIP financing, which allows bankrupt companies to pay suppliers and employees as they try to become profitable again, had long been a popular form of financing as DIP lenders are typically among the first creditors repaid in a bankruptcy.

However, tight lending markets now mean many companies must rely on existing lenders or other parties with a stake in the bankruptcy's outcome to provide the DIP.

"DIP financing is not easily available. It's expensive. It's scarce -- and that used to be the easiest part of a bankruptcy filing," said David Resnick, co-head of investment banking at Rothschild.

Despite a jump in bankruptcy filings last year, new DIP loans were sharply lower in 2008 than in the two most recent bankruptcy waves, according to data from Thomson Reuters LPC. In 2008, the number of new DIP loans was about 35 percent below the number issued during the economic downturn in 2002, and about 46 percent below the number issued in 2005 ahead of changes to the bankruptcy code, the data showed.