RPT-BREAKINGVIEWS-First Brands prompts a fresh read of Chapter 11

By Sebastian Pellejero

NEW YORK, Dec 18 (Reuters Breakingviews) - Bankruptcy finance is meant to be the quieter corner of corporate calamity. Yet the $1.1 billion loan keeping auto parts supplier First Brands afloat now trades like distressed debt. The case is unusually tangled, but the market verdict gestures toward broader unease: cash and collateral that rescue lenders rely upon are becoming less dependable.

For decades, debtor-in-possession loans have provided relative serenity. Lenders gave short-term cash in return for prioritized claims on inventory, customer bills and funds meant to carry companies through court-supervised reorganization. Between 1988 and 2008, only two such loans weren't paid back, according to Moody's, which helped build DIP lending into a $14 billion market last year.

The equilibrium is quietly shifting, however. Chapter 11 loans have grown larger and more controlling as companies enter bankruptcy with additional borrowing layers and heavier reliance on asset-backed credit. Rolling old loans into new rescue debt is now routine, with more than 80% of large DIP financing provided by existing creditors, effectively turning what was once a bridge loan into a tool for managing stressed balance sheets.

Pricing tells the story. Rescue funds using new money once yielded below 10%, but they now often surpass that threshold and include extra fees that push borrowing costs into the mid-teens and beyond. Satellite operator Ligado Networks agreed earlier this year to interest and fees exceeding 20%. Coal miner White Forest Resources and Jackson Hospital paid coupons north of 15%, with additional outlays that rivaled the interest tab.

First Brands sits at the extreme end of this shift. Its DIP loan carried an effective yield north of 20%, once deferred interest and fees are counted, compensating creditors such as Antares Capital and PIMCO for rolling over about $3.3 billion of existing debt amid disputed financial figures. The loan was trading as low as 30 cents on the dollar, Bloomberg reported last week, as spats over receivables and working capital eroded confidence in the cash meant to repay it.

The tactics are no longer confined to one messy case. Asset-based lending and supply-chain finance are enormous businesses with patchy disclosure. Prosecutors have uncovered repeated instances of fraud tied to credit backed by receivables. Lenders have responded over time by tightening budgets, accelerating milestones and adding fees. Such tools leave less room for repair when companies need time, not just discipline.

With close to $1 trillion of low-rated corporate debt due by 2028, such tradeoffs are unlikely to fade. Opaque balance sheets mean Chapter 11 credit will be increasingly priced for ambiguity. Rescue loans will be available, but not tranquility.

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CONTEXT NEWS

The $1.1 billion loan secured by bankrupt auto-parts maker First Brands to stabilize its business was quoted by trading desks at around 42 cents on the dollar, Bloomberg reported on December 11, down from between 69 cents and 72 cents on December 8, according to the Financial Times.