We Have Our First DIP Investor

For the first time in what seem forever, an external investor has funded a DIP. Today Magna Entertainment, a small Canadian racetrack operator, filed for bankruptcy which is not notable seeing how all financials seem poised to join it in liquidation purgatory. What is highly surprising is that the company managed to obtain a DIP which was not a rollup from an existing creditor, but came from MI Developments, a real-estate developer in Ontario.

MI it turns out is actually a controlling shareholder in the company, and according to Bloomberg was the third largest holder of now worthless MECA stock with 218,116 shares. Has MI simply thrown good money after worthless stock? The plot thickens - it seems MI is the stalking horse bidder for the company's various racetracks which it will purchase with $44 million cash, $15 million of cap leases assumed and a $136 million credit bid of all existing indebtedness. This labyrinthine recapitalization could only have been devised by the alchemist minds of financial advisor Miller Buckfire, who should receive props for succeeding where Lazard failed so miserably with Nortel.

Magna's Chairman Frank Stronach, in a beautiful description that is applicable to all financial institutions in the world currently, summarizes his utter failure in corporate leadership:

"Simply put, MEC has far too much debt and interest expense. MEC has previously pursued numerous out-of-court restructuring alternatives but has been unable to complete a comprehensive restructuring to date due, in part, to the current economic recession, severe downturn in the U.S. real estate market and global credit crisis. This is a voluntary filing intended to utilize a Chapter 11 process that will allow us to continue to operate the business uninterrupted while we implement a reorganization in a court-supervised environment. We expect that all employees, customers and horsemen [???] will continue to be paid in the normal course along with all post-petition vendor obligations."

Hopefully, MI did not underestimate the horsemen's expectations for recoveries in bankruptcy or else MI will realize just how brave it is to be funding a third-party DIP in a world where the apocalypse lurks just around the corner.