Debtor-in-Possession Loans

Debtor in Possession (DIP) Loans
 
Debtor-in-Possession (commonly referred to as "DIP") Financing is essentially financing provided to companies who have filed for bankruptcy protection and reorganization under Chapter 11 of the United States Code.  DIP Financing is provided on a post-petition basis after the filing date of the company's bankruptcy.
 
 
 
Key Criteria for Debtor In Possession Financing
 
There must be a viable plan to return the company to profitability and to discharge the bankruptcy.
 
There must be collateral available to secure the DIP financing. This collateral may be in the form of receivables, inventory, equipment, real estate, etc. Oftentimes, this collateral can be provided by the new asset to be acquired by the business with the DIP financing package.
 
 
 
How it Works:
 
Under Chapter 11 bankruptcy, a business files for protection from creditors while it reorganizes itself.  During the reorganization process the bankruptcy count allows the business to secure additional financing from lenders in order to continue its operations.  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.
 
 
 
Why it Matters:
 
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. 
 
 
Debtor in Possession financing for companies who have filed for chapter 11 bankruptcy. While most traditional banks & lenders won’t lend money to companies in bankruptcy, we see as the perfect opportunity to help restructure their finances.
 
There are a number of situations where D.I.P. financing can help:
 
1. Cash-Flow – During the DIP process, companies need to make sure they have enough cash to pay their ongoing bills.
 
2. Inventory – Outstanding orders for products with no ability cash to manufacture the products.
 
3. Repairs – Equipment & real estate that needs repairs to make operational.
 
4. Payoff existing debt – Some lenders want or need to be paid off, and may be willing to accept significant discounts just to walk away.
 
Debtor in Possession (D.I.P.) financing is a critical resource that helps to cover operating activities, such as capital improvements, marketing costs, and other daily expenses during Chapter 11. D.I.P. financing enables debtors to utilize accounts receivable, equipment capital, and real estate to restore profitability to their business or project value.
 
 
 
Why Chapter 11?
 
One of the key reasons companies file for Chapter 11 bankruptcy is because of the special legal protections it provides. For a company, those include the automatic stay and, in the right case, the ability to restructure its debts through a Chapter 11 plan of reorganization. Chapter 11’s protections for purchasers of assets can sometimes allow the seller to achieve through Chapter 11 a sale price that it never could have realized without bankruptcy. Likewise, Chapter 11’s DIP financing process for lenders may help the company generate liquidity, including from an existing lender, investor, or stalking horse purchaser, even if it could not do so outside of bankruptcy. 
 
 
 
When A Financial Crisis Hits:
 
Companies in financial distress often find that their need for liquidity goes up just as the availability of traditional financing goes down. The borrowing base may shrink, the ability to get further advances may be cut off, and loans may go into default. Worse, new lenders may be unwilling to make loans given the distress. For many distressed businesses, revenues may also be declining and insufficient to cover expenses without additional financing.
 
 
 
Potential Solution:      DIP Financing.
 
A company in financial distress may be already looking at a workout, restructuring, or sale of the business. They should be considered and may succeed. But, in the right situation a Chapter 11 bankruptcy can provide powerful options, including the ability to facilitate financing. If a company needs a loan but a potential lender is unwilling to make it, the Bankruptcy Code offers a way to give the lender comfort that the loan will not be challenged.
 
When a company files a Chapter 11 bankruptcy, the company’s management and board of directors usually remain in possession of the business. For that reason, the company in Chapter 11 is called a "debtor in possession" or a "DIP" for short. 
 
When the company has lined up a lender, it files a motion seeking Bankruptcy Court approval of the DIP financing. DIP financing terms include a first priority security interest, a market or even premium interest rate, an approved budget, and other lender protections. Creditors have a right to object to the DIP loan, and the Bankruptcy Court will ultimately decide whether to approve it.
 
If the company already has secured debt, to borrow funds secured by a lien equal or senior to the existing lender, the company either will need the existing lender to consent or will have to convince the Bankruptcy Court that the existing lender’s lien position will be "adequately protected" (meaning that the existing lender will not be worse off if the DIP loan is approved).
 
An existing lender itself may be willing to make a DIP loan, even if it has refused to make further advances outside of bankruptcy. Unlike a loan outside of bankruptcy, if the Bankruptcy Court gives approval to a DIP loan and finds that the loan was made in good faith, the new DIP loan will no longer be subject to legal challenge.
 
While it isn’t easy, in the right case, a distressed company may be able to use Chapter 11 bankruptcy’s DIP financing to get the financing it needs, to run a sale process or finance a formal Chapter 11 restructuring, even if it could not get a new loan outside of bankruptcy.
 
 
 
The Bottom Line:
 
When facing a liquidity crisis, a company should get legal advice from an experienced restructuring and bankruptcy attorney to make sure they consider all options. An out-of-court restructuring may be able to elevate the problem and get the business back on track. However, there are times when a Chapter 11 bankruptcy filing, despite its costs, is the best answer to solve the problem. It can be especially true if Chapter 11’s DIP financing rules help a business access liquidity that it could not get outside of bankruptcy.

 

 
               Provide a Detailed Loan Scenario on our DIP Submission Form  page and we’ll get back to you quickly.
 
                            Thank you, and we look forward to serving you now and in the future.




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