Debtor-in-Possession Financing — DIP Financing Definition

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What is debtor financing in possession – DIP financing?

Financing of debtors in possession (DIP financing) is a special type of financing intended for companies in financial difficulty and in bankruptcy. Only companies that have filed for Chapter 11 bankruptcy in the United States and the CCAA in Canada can use it, which usually happens at the start of a filing. It is used to facilitate the reorganization of a debtor in possession (the status of a company that has filed for bankruptcy) by allowing him to raise capital to finance his operations while his bankruptcy case is continuing. DIP financing is unique compared to other financing methods in that it generally takes precedence over existing debt, equity and other receivables.

Breakdown of debtor financing in possession (DIP financing)

Since Chapter 11 promotes corporate reorganization rather than liquidation, filing for protection can provide a lifeline to struggling businesses in need of financing. In terms of financing the debtor in possession, the court must approve the financing plan in accordance with the protection granted to the company. The monitoring of the loan by the lender is also subject to court approval and protection. If the funding is approved, the business will have the cash to continue operating.

When a business is able to obtain financing from the debtor in possession, it informs sellers, suppliers, and customers that the debtor will be able to continue to operate, provide services, and make payments for goods and services. during its reorganization. If the lender has found that the business is creditworthy after examining its finances, it stands to reason that the market will come to the same conclusion.

As part of the Great Recession, two bankrupt American automakers – General Motors and Chrysler – benefited from financing from the debtor in possession.

Financing of debtors in possession: key methods

DIP financing is often provided through term loans. These loans are fully funded throughout the bankruptcy process, which means higher interest costs for the borrower. Previously, revolving credit facilities were the most used method – a favorable arrangement for the borrower, as it offers good flexibility and the possibility of reducing interest expense by actively managing the loans to minimize the amounts financed.

Financing process of debtor in possession

As noted, DIP funding generally occurs at the start of the bankruptcy process. But often, businesses in difficulty that can benefit from the protection of the courts will delay the filing of their brief because they do not accept the reality of their situation. Such indecision and delay can waste precious time, as the process of funding PID tends to be long. One step in the process is that the lenders and the debtor must agree on a “DIP budget,” which may include a forecast of the company’s revenue, expenses, free cash flow, and cash outflows for rolling periods. 13 weeks. It must also take into account the forecast schedule of payments to suppliers, professional fees, seasonal variations in revenue and capital expenditures. Once the DIP budget has been agreed, the two parties will agree on the size and structure of the credit facility or loan. This is only part of the negotiations and steps required to obtain DIP funding.

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