Debtor-in-Possession (DIP) Financing
Debtor-in-Possession, or DIP, Financing is credit obtained after a bankruptcy filing to fund a debtor's operations and restructuring while the debtor remains in possession of its business under Chapter 11.
Chapter 11 businesses often need new liquidity immediately
Bankruptcy does not stop payroll, rent, inventory purchases or professional costs.
A debtor may have entered Chapter 11 precisely because ordinary liquidity disappeared. DIP financing supplies operating capital while the restructuring or sale proceeds.
Section 364 creates different levels of lender protection
Ordinary-course unsecured credit can receive administrative-expense treatment. If that is unavailable, the court can authorize stronger protections.
The statute permits increasingly senior forms of credit, including superpriority status and liens, but the debtor must satisfy the requirements applicable to the requested level.
Priming existing liens requires more
Section 364(d) permits a senior or equal lien on already encumbered property only if the debtor cannot obtain the credit otherwise and the existing lienholder's interest is adequately protected.
The debtor bears the burden on adequate protection in that hearing.
DIP documents can influence the whole case
A DIP agreement can contain budgets, milestones, sale deadlines, reporting obligations, events of default and limits on estate spending.
The financing therefore provides liquidity while also shaping the pace and strategic options of the Chapter 11 case.
DIP economics should be separated into liquidity, priority and control
Assume a debtor receives a $150 million DIP facility at SOFR plus 8%, with a 3% upfront fee, a weekly budget and a 90-day sale milestone.
The borrower gets $150 million of committed liquidity. The lender gets more than an interest rate: it may receive superpriority status, liens, reporting rights and case milestones that influence strategy.
Those terms should be analyzed separately.
A high coupon can be expensive but still tolerable if the financing preserves a viable business. A low coupon paired with aggressive milestones or broad priming rights can have a larger effect on stakeholder value.
The relevant question is therefore not simply “What is the DIP rate?” It is “What financing, priority and governance package did the estate exchange for the liquidity?”
Common mistakes
Treating every DIP as superpriority priming debt Priority packages vary.
Assuming court approval removes credit risk A distressed debtor can still fail to repay the DIP.
Ignoring milestones and budgets Those terms can control restructuring strategy as much as the interest rate.
Example
A Chapter 11 debtor needs $100 million to fund payroll, vendors and professional fees. Existing lenders offer a DIP facility secured by estate assets and granted superpriority administrative status. If the facility also seeks liens senior to existing collateral claims, the debtor must satisfy the additional Section 364(d) requirements.
Example
A Chapter 11 debtor needs $100 million to fund payroll, vendors and professional fees. Existing lenders offer a DIP facility secured by estate assets and granted superpriority administrative status. If the facility also seeks liens senior to existing collateral claims, the debtor must satisfy the additional Section 364(d) requirements.
Professional note
DIP financing is not automatically a priming loan. Identify the exact Section 364 authority, lien package, superpriority status, roll-up amount, milestones, budget controls and adequate-protection package.
Related terms
- Superpriority Debt
Superpriority debt is debt given a priority position ahead of specified existing obligations through contractual lien or payment arrangements, a liability-management transaction, or, when applicable in bankruptcy, a court-approved debtor-in-possession financing structure.
- Restructuring Support Agreement (RSA)
A Restructuring Support Agreement, or RSA, is a contract among a financially distressed company and supporting creditors or other stakeholders that sets the agreed framework for a restructuring and requires the parties to support specified transactions, subject to the agreement's conditions and termination rights.
- Forbearance Agreement
A forbearance agreement is a contract in which a creditor agrees, subject to specified conditions and for a limited period, not to exercise certain rights or remedies arising from identified defaults.
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