Supplier Bankruptcies: A Bridge to Liquidation?

Contrary to popular belief, many of the supplier bankruptcies of late have not been limited to the hard-hit domestic automotive industry. Even chemical suppliers are getting caught in the perfect storm of borrowing challenges and reduced customer demand. Consider how Tronox, an Oklahoma City-based chemical company, recently filed for bankruptcy protection according to a story in the Wall Street Journal (registration and subscription required). But Tronox is actually one of the lucky bankrupt suppliers. Unlike many faced with outright immediate liquidation, they were able to obtain "about $125 million in so-called debtor-in-possession financing from a group led by Credit Suisse," according to the above-linked story. "Those funds will be used to help the company stay afloat long enough for an orderly wind-down of operations, whether that is through the sale or closure of various assets, according to people familiar with the matter."

Still, it would be an overstatement to say that debtor in possession (DIP) financing is making a comeback. The Journal notes that "since the summer, such lending has largely dried up as part of an overall credit crunch ... [but] now this market is opening up as some bankruptcy loans, like that of Tronox, are being assumed by the company's prebankruptcy lenders. But their incentive isn't to rehabilitate companies, but rather to keep them afloat long enough to find a buyer ... Such loans, called 'defensive DIPs,' or 'DIPs of necessity,' by bankruptcy insiders, are often very short term with restrictions or demands for a quick auction process followed by liquidation. One recent example is electronics retailer Circuit City, which filed for bankruptcy protection in mid-November. The company said Friday it must find a buyer by next week or it will begin to liquidate its remaining stores.

Is the re-emergence of this new type of DIP a positive occurrence from a supply risk perspective? The answer, unfortunately, is no. Suppliers are much more likely to face eventual liquidation in this environment than being able to restructure and emerge from bankruptcy even with this new type of financing available. Which is why it's more important than ever to proactively invest in systems and processes to detect potential supplier financial viability issues and take action before it's too late.

Jason Busch

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