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Tennenbaum collects $330m for DIP fund

The hybrid fund manager is one of several firms, including Bain affiliate Sankaty Advisors, trying to take advantage of the dearth of lenders for bankruptcy loans.

Hybrid investment firm Tennenbaum Capital Partners has raised $330 million for a fund that will extend loans to companies in bankruptcy.

Being placed by Greenhill & Company, the fund held a first close last month on $230 million. Its final target is unclear.

Tennenbaum has provided debtor-in-possession (DIP) loans to bankrupt companies in the past, but the DIP fund would be the firm’s first dedicated pool of capital with the sole purpose of providing the loans. Returns on DIP loans can range from the single digits to more than 20 percent, a source told PEO.

DIP loans have been traditionally provided by only a few lenders, including GE Capital and (now bankrupt) CIT Group. Both institutions slowed down their DIP lending in the credit crisis, making it much harder for bankrupt companies to find money to help fund the reorganisation process.

With the dearth of DIP lenders, returns on DIP loans have increased from the single digits into the teens. A restructuring executive with Barclays Capital told Reuters in October that returns on DIP loans have leveled out at 10 to 12 percent. “There aren’t many situations where you can get a 15 percent return on a DIP the way you may have been able to get earlier this year,” said Mark Sharpiro, head of Barclays' global restructuring and finance group.

Other firms have moved in to seize on the DIP opportunity, including Bain affiliate Sankaty Advisors, JPMorgan and hedge fund Aladdin Capital.

Some private equity firms like Sun Capital Partners have also provided DIP loans to their bankrupt portfolio companies as a way to guide them through bankruptcy and regain control of them after their debt has been cut in reorganisation.