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Recovery Slows Hedge Fund DIP Financing

By Suzanne Miller
March 2010

Keywords: debtor in possession loans, DIP financing, hedge funds, bankruptcy, Chapter 11

Early last year, when corporate defaults were headed for the stratosphere and capital was hard to come by, lenders willing to provide debtor-in-possession loans to Chapter 11 companies looked to make a killing. Some deals were churning out yields of 13 to 14 percent, up-front fees of 3 to 5 percent and exit fees of 1 to 3.5 percent — double what was common for DIP financings in 2002, the last big default cycle.

Indeed, to cash in, several firms launched hedge funds dedicated to DIP financing — the first of their kind in the market — to provide primary loans to bankrupt companies. High yields and fees weren’t the only lure. Highly collateralized DIP financing is relatively risk-free, because the loans receive priority over other claims, including bank...

Comments (2)

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investmentguy Apr 18, 2010

Heard the same thing about Steve Czech. He even had problems at his former firm, Contrarian, that he tried to blame on his partner. I heard he is at FrontPoint now, making their lives miserable too. I don't expect the guy will ever raise any assets with his uneven temperament.

orchardadvisor Apr 03, 2010

I heard that Steve Czech, formerly of Contrarian Fund, tried to launch a new middle market-focused direct lending (and DIP) fund at Gottex. Word was that, while he likely had a good opportunity to target middle market companies, he couldn't raise assets due to an egotistical and off-balance presentation style. It's too bad when a good opportunity is wasted by an under-qualified manager.

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Thursday July 29, 2010