How To Make Money on Market DIPs... Or Not
Aleris, which filed for bankruptcy a week ago and had a $1.575 billion DIP in place, has seen the DIP get hammered in the secondary market to a low of 77 bid earlier today, after allocating yesterday. Unlike an ISDA auction, DIPs, especially purchased in the secondary market, seem a guaranteed way to part with capital in a very rapid timeframe. The incremental selling pressure on the DIP is due to numerous existing prepetition holders who subscribed in order to obtain roll up rights on their nearly worthless holdings (pre-petition loan priced at 6 today), hoping to make them less worthless. After holders got their allocations and pro rata rollup, they ended up stuck with even more useless paper, thereby generating a frenzy of offers in the market.
Funds that had some extra money lying around and put it into the DIP, now don't have any extra money, and are cursing both the concept of DIPs and Deutsche Bank who served as DIP loan arranger and administrative agent. Zero Hedge is still kinda interested where private equity sponsor Aleris has its equity maked in the name.