HMARQ Dilution
Sarge:
I don't think they would put up $60m (bridge loan) and make the debt/equity swap without convincing themselves there would be a viable market for the issue.
IMHO, you're reading too much into this $60MM Debtor-in-Possession (DIP) financing.
According to Douglas G. Baird in his classic text, "The Elements of Bankruptcy", Revised Edition, The Foundation Press, Inc., Westbury, NY, ©1993, pg 217:
"Section 364 [of the Bankruptcy Code] tells us that the trustee [in this case, the debtor-in-possession, Hvide Marine] may borrow on an unsecured basis in the ordinary course of its business, unless the court orders otherwise. Because new lenders will extend credit only if they are confident they will be repaid, these loans enjoy a priority over prepetition claims."
IOW, DIP loans usually get repaid before the repayment of claims that existed prior to the bankruptcy. Therefore, DIP loans are actually lower-risk loans than pre-petition loans. This protection is offered to post-petition lenders as an incentive for helping the company during the bankruptcy process. Often, there is simply not enough time to line up another lender without having to forego payment of payroll to employees and having the entire workforce quit, so existing lenders become the DIP financiers almost by default. Therefore, it is unwise to assume that the previous bankers' willingness to continue funding the company's operations after the filing of the Chapter 11 petition is actually a significantly positive event.
I suspect what is in their interest may serve my own, as well.
This opinion may also be a little too optimistic.
According to Baird (ibid, pg 245):
"Cases in which a debtor proposed a plan of reorganization that is confirmed and in which the firm survives as a going concern are the exception rather than the rule."
Unfortunately, under the "Absolute Priority Rule", claims held by members of a senior class that rejects a proposed plan of reorganization must be satisfied before a junior class may receive any distribution under the plan. This requirement arises when a plan proponent attempts to "cramdown" the plan over the objections of one or more classes of creditors. Therefore, with shareholders at the very bottom of the bankruptcy "food chain", the shareholders often get the proverbial shaft. Don't believe me? Take a peek at the FENYQ threads for a recent industry case in which this very scenario is now unfolding.
In short, there's nothing wrong with "spinning the wheel" on some of the more speculative investments in one's portfolio. God knows I've tried to catch my own share of falling knives. :) Just make sure that you're aware of the odds inherent in playing at the roulette table. Unless you're Rick Blaine in Casablanca, and you have a special kinship with "Black 22", the odds at the wheel are definitely stacked in favor of the house. ;-)
Sorry to rain on your parade. All of the above is just my honest opinion.
Best of luck in any event!
Razor |
