Replacement Financing describes loans from an existing or new lender necessary to implement a restructuring program. It is usually money loaned by a new lender to a distressed borrower where the proceeds on loan are used, at least in part, to pay off the old debt that is in default.
The availability of replacement financing is on the rise. Many investors which typically purchased the debt of companies in financial distress have transitioned instead to lending funds to distressed companies. Most of the companies in financial distress obtaining these loans have no other way to borrow money, other than from lenders which specialize in making loans to borrowers who are in financial distress.
Bank loans can be difficult to obtain in distressed situations as banks are typically required to make loans that comply with federal or state regulations preventing the lending of money to other than solvent, credit-worthy borrowers. The fact that a borrower is in a distressed financial situation almost always prevents obtaining new financing from a bank or similar financial institution.
Hard money lenders, offering higher interest rates, are the answer for some distressed entities. The danger of these higher interest rates, in conjunction with the expectation that these are short term loans, can lead to big problems. Some of these lenders intend the loan to be a stepping stone to ultimately foreclose on the collateral, depriving the borrower of that collateral. Some refer to these hard money lenders as “loan to own” lenders. DCR is experienced in this area and can provide important guidance to help mitigate the risks inherent in replacement financing and provides referrals to several lenders to give the borrower options as to the terms of the loans.