Co insurance effect & Rescue financing

Lesson 6 of 9 • 1 upvotes • 12:02mins

Isha Jain

Co insurance effect The co-insurance effect is an economic theory which suggests mergers and acquisitions (M&A) decrease the risk involved in holding debt in any of the combined entities  Under this theory, one would expect the increased diversification caused by acquisitive activities to reduce the cost of borrowing for the combined entity. Even when the acquiring company takes on another company’s debts, the financial strength of the combined entity theoretically shields itself from default better than any of the companies could have done singly. Therefore, the co-insurance effect suggests firms that merge will experience financial synergies through combining operations  Since the combined entity should be more financially secure, it can reduce the cost of issuing new debt, making it cheaper to raise additional funds Rescue financing Other name “Debtor-in-possession financing” (DIP Financing) Meaning Debtor-in-possession financing (DIP financing) is a special kind of financingmeant for companies that are financially distressed and in bankruptcy. ... DIPfinancing is unique from other financing methods in that it usually has priority over existing debt, equity and other claims. Origin of debtor in possession financing  Only companies that have filed for bankruptcy protection under Chapter 11 in the United States and the CCAA in Canada can utilize it, which usually happens at the start of a filing. The Singapore regime is the first to import US Chapter 11-style DIP priority funding mechanisms into a jurisdiction with primarily English-law based corporate law and insolvency regimes. Factors of DIP Financing Debtor-in-possession financing (DIP financing) is a special kind of financing meant for companies that are financially distressed and in bankruptcy.  It is used to facilitate the reorganization of a debtor-in-possession by allowing it to raise capital to fund its operations as its bankruptcy case runs its course.  DIP financing is unique from other financing methods in that it usually has priority over existing debt, equity and other claims Process of DIP Financing companies that have filed for bankruptcy protection under Chapter 11 in the United States /CCAA in Canada  the court must approve the financing plan consistent to the protection granted to the business.  Oversight of the loan by the lender is also subject to the court's approval and protection If the financing is approved, the business will have the liquidity it needs to keep operating. When a company is able to secure debtor-in-possession financing, it lets vendors, suppliers and customers know that the debtor will be able to remain in business, provide services and make payments for goods and services during its reorganization. Lenders and the debtor must agree to a "DIP budget," which can include a forecast of the company's receipts, expenses, net cash flow and outflows for rolling 13-week periods.  It must also factor in forecasting the timing of payments to vendors, professional fees, seasonal variations in its receipts and any capital outlays. Once the DIP budget is agreed upon, both parties will agree on the size and structure of the credit facility or loan