Debtor-in-Possession (DIP) Financing Defined Winston Rowe And Associates
Debtor-in-possession (DIP) financing refers to financing for a business that retains control of its assets and continues to operate while under the Chapter 11 bankruptcy reorganization process.
By: Winston Rowe and Associates
Under the jurisdiction of the bankruptcy court, such post-bankruptcy lenders assume a senior position on liens and security interests in the business assets, normally by consent of the pre-bankruptcy senior lenders.
In practice, the continued operation of the business allows the debtor in possession to reorganize, reposition itself, and improve its chances of repaying its debts.
DIP financing is important since it extends a lifeline to any business in Chapter 11 bankruptcy, enabling it to maintain payroll and suppliers, stabilize operations, restructure its balance sheet, and eventually repay creditors and emerge from bankruptcy.
A business in bankruptcy is normally able to obtain DIP financing only by giving its post-bankruptcy lenders protection in the form of a senior lien position.
While a senior lien position ensures that the lender will be repaid fully even in liquidation, it also limits the business with strict payment terms, which can hinder the reorganization process.
Strict oversight by the bankruptcy court serves as an additional protection to DIP financing lenders, helping to assure that new credit can be extended to businesses in bankruptcy.
Breaking Down Debtor-in-Possession Financing (DIP Financing)
Since Chapter 11 favors corporate reorganization over liquidation, filing for protection can offer a vital lifeline to distressed companies in need of financing. In a debtor-in-possession financing, 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. If the lender has found that the company is worthy of credit after examining its finances, it stands to reason that the marketplace will come to the same conclusion.
DIP financing is frequently provided via term loans. Such loans are fully funded throughout the bankruptcy process, which means higher interest costs for the borrower. Formerly, revolving credit facilities were the most utilized method — a favorable arrangement for the borrower, as it offers good flexibility and the option of reducing interest expenses by actively managing borrowings to minimize funded amounts.
This articles is published by Winston Rowe and Associates https://www.winstonrowe.com