As defaults and bankruptcy filings continue to mount, the leveraged finance market is seeing not only a rise in debtor-in-possession loans, but also more non-traditional players such as insurance companies and collateralized loan vehicles investing in DIPs. Michele Kovatchis, senior v.p., corporate finance at Heller Financial, said that more CLOs, banks and insurance companies, such as Prudential and MassMutual, are participating, as they become increasingly comfortable and familiar with the DIP concept. Grace Healy, spokeswoman for Prudential's Capital Group, and officials MassMutual could not provide comment by press time.
Buysiders attribute the growth in DIP investment to the rise in defaults, but believe investments by CLOs are still at its embryonic stage.Dan Norman, senior v.p. and portfolio manager at ING Pilgrim said that retail mutual funds have always been able to invest in DIPs, but CLOs have not always been able to as they have more ratings restrictions. Clearly there is a huge upside for CLOs to invest in the loans, he said, adding, DIPs are great investments, providing competitive spreads and strong collateral. Art Zimmer, portfolio manager at OppenheimerFunds, an ongoing investor in DIPs, explained that since DIPs have not been rated, a CLO needs to have a private rating done or put in an indenture to the deal informing investors that the fund will invest. In terms of an increase in DIP volume, Zimmer said, "We've gone from a 2% to a 7% default environment, so now we're looking at 10 DIPs for every 2 we used to look at."
In the past CLOs were not keen to invest in DIP loans as they resemble revolvers, but "Everyone is looking at ways to broaden investments," Kovatchis said. This year has also seen a slew of very big deals, she added, such as USG and Ames Department Stores. Banks that historically have not syndicated DIPs but lead on defaulting credits, such as Goldman Sachs, are also playing a larger role, she noted. Andrea Rachman, a spokeswoman for Goldman declined to comment on whether there has been an increase this year in Goldman's involvement.
Consolidation among commercial banks that usually participate in DIP loans has further contributed to the participation of non-traditional players, noted Michael Romer, a director at Fitch. The ratings agency has developed specific criteria for DIP lending arrangements in response to investor and issuer interest. The new ratings criteria focus on the company's viability as a going concern and its ability to successfully reorganize. Rating criteria provided by other ratings agencies could not be determined by press time.