DIP Financing

Last Updated: Jun 6, 2019

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Debtor-in-Possession financing (DIP financing) is financing made available to a company during the Chapter 11 bankruptcy process, generally for the purpose of restructuring. The Debtor-in-Possession must file a motion seeking approval of the DIP financing with the Bankruptcy Court.

The typical structure of a DIP loan is an asset-based revolving facility, and DIP lenders are protected by superpriority status. Superpriority status means that claims for principal, interest, and fees from a DIP Financing are usually considered to be senior to all other claims, including pre-bankruptcy secured debt.

In order to receive superpriority status, the DIP financing and superpriority status must either be approved by (i) the existing lenders whose priority would be primed, or (ii) the Bankruptcy Court based on the belief that the existing lenders have “adequate protection”, and thus the DIP financing is acceptable.

While this preferential treatment of debt incurred post-petition may seem counterintuitive, it encourages lenders to lend to companies in bankruptcy, which can help those companies execute their reorganization plans or keep operating, thus maximizing returns for existing creditors.