<font face="Verdana, Arial, Helvetica, sans-serif" size="2">Originally posted by B Watson:
It is actually not that cut and dry Plato90s
First, the VC analogy is flawed since in that situation you generally have no real liquidation value to assets. If the IP was worth anything, liquidation would not be in the cards but rather an exit would be achieved via an M&A transaction, albeit at fire sale prices. The assets usually consist of office furniture, computers, etc of which there is a rather robust supply in the secondary market at the moment.
I come from this world and I will in no way support the insane investment decisions made by several prominent VC funds, but remember that the whole game is to create moon shots and the vast majority of your deals will blow up on the pad.
Now - re the good money after bad situation for the creditors - DIP financing is NOT risk capital. It historically provides an excellent risk adjusted return. Remember that the DIP lenders are in a first out scenario in-terms of priorities in a liquidation. By virtue of this their greatest exposure is either fraud on the part of the company in the representation of its assets or bad underwriting of those asset values. This being said, GE pulling out is rather interesting since they have been a prominent DIP lender for the past 15 years.
Keep in mind that DIP facilities are over the Chinese wall from the people who originally got in these debt securities. These are viewed as new deals and stand on their own. That is why you will often see a lender who already has exposure to a credit taking part of a DIP facility.
So the issue lies with the unsecured creditors, which is back to my original argument. If the residual assets of the bankrupt estate are at very depressed levels, as is the case do to the market circumstances, they have little incentive to pull the plug if there is a rational chance that they can recover more from a conversion to equity. </font>
I was actually thinking of telecom, not the dot-com, VC's. The telecom industry is full of startups who spent $10 to build networks which are worth $1 today.
Given the massive depreciation, overcapacity, etc..., the general trends has been for debtors and VC's to pull the plug. Multiple telecoms worth billions at their peak are now in bankruptcy and facing liquidation.
If it can happen to telecom, it can happen to UA.
---------------
While I agree DIP financing is generally safe, it first requires that the existing creditors of UA agree to DIP. Bank One may become the lead investor for DIP financing, but the plan must first pass muster with other creditors holding UA debt.
If the other creditors aren't satisfied, they can try to force UA into Ch. 7, regardless of what management and Bank One wants.
Once the creditors agree to restructureing,
then the DIP lead investor is in firm control. UA isn't there yet, as far as I know.