Making a bad situation even worse

I was struck by the recent 8K filing by Buffets Holdings, Inc. Earlier this year, Buffets filed for bankruptcy under a mountain of debt, rising commodity prices and a sluggish consumer. At the time Buffets filed for bankruptcy, the credit crisis had not yet hit full stride. If Buffets were to file today, my bet is they would be in liquidation and not battling for survival. The Buffets 8K disclosed that lenders needed to amend the DIP credit agreement so the company would not be in default.

This highlights a big problem; companies seeking bankruptcy protection have a new hurdle: finding money to survive the bankruptcy process. While Buffets has some financing to survive for now, it sure looks like it’s over for that concept.

If banks are not lending to healthy companies, who is going to lend to bankrupt companies? The frozen credit markets are going to limit lending to struggling companies that need loans just to make it through Chapter 11 restructuring. Without the debtor-in-possession financing, companies filing for bankruptcy might not have any choice but to liquidate. This issue was made clear by Bennigan’s and Linens 'n Things, which was forced to liquidate last week.

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