Debtor-in-Possession (DIP) Financing
What Is Debtor-in-Possession (DIP) Financing?
Debtor-in-possession (DIP) financing is a special kind of financing implied for companies that are in bankruptcy. Just companies that have sought financial protection under Chapter 11 are permitted to access DIP financing, which for the most part occurs toward the beginning of a filing. DIP financing is utilized to work with the reorganization of a debtor-in-possession (the situation with a company that has declared financial insolvency) by allowing it to raise capital to fund its operations as its bankruptcy case runs its course. DIP financing is unique from other financing methods in that it for the most part has priority over existing debt, equity, and different claims.
Understanding Debtor-in-Possession (DIP) Financing
Since Chapter 11 blessings corporate reorganization over liquidation, filing for protection can offer a fundamental lifeline to distressed companies deprived of financing. In debtor-in-possession (DIP) financing, the court must support the financing plan reliable with the protection conceded to the business. Oversight of the loan by the lender is likewise subject to the court's endorsement and protection. Assuming the financing is approved, the business will have the liquidity it necessities to keep operating.
At the point when a company can secure DIP financing, it lets merchants, providers, and customers realize that the debtor will actually want to remain in business, offer types of assistance, and make payments for goods and services during its reorganization. Assuming the lender has found that the company genuinely deserve credit in the wake of examining its finances, it makes sense that the marketplace will arrive at a similar resolution.
As part of the Great Recession, two bankrupt U.S. automakers, General Motors and Chrysler, were the beneficiaries of debtor-in-possession (DIP) financing.
Obtaining Debtor-in-Possession (DIP) Financing
DIP financing ordinarily happens toward the beginning of the bankruptcy filing process, however frequently, struggling companies that might benefit from court protection will postpone filing out of inability to embrace the situation of their situation. Such indecision and deferral can burn through precious time, as the DIP financing process will in general be extensive.
Seniority
When a company goes into Chapter 11 bankruptcy and finds a willing lender, it must obtain endorsement from bankruptcy court. Providing a loan under bankruptcy law gives a lender much-required comfort in providing financing to a company in financial distress. DIP financing lenders are given primary goal on assets in case of the company's liquidation, an authorized budget, a market or premium interest rate, and any extra comfort measures that the court or lender trusts warrants inclusion. Current lenders normally need to consent to the terms, particularly in taking a secondary lounge to a lien on assets.
Authorized Budget
The approved budget is an important part of DIP financing. The "DIP budget" can include a forecast of the company's receipts, expenses, net cash flow, and outflows for rolling periods. It must likewise factor in forecasting the timing of payments to merchants, professional fees, seasonal varieties in its receipts, and any capital outlays. When the DIP budget is agreed upon, the two players will settle on the size and structure of the credit facility or loan. This is just a part of the exchanges and legwork important to secure DIP financing.
Types of Loans
DIP financing is habitually given by means of term loans. Such loans are completely funded all through the bankruptcy interaction, and that means higher interest costs for the borrower. Formerly, revolving credit facilities were the most used method, which permits a borrower to draw down the loan and repay depending on the situation; like a credit card. This considers greater flexibility and hence the ability to keep interest costs lower, as a borrower can actively deal with the amount of the loan borrowed.
Features
- Debtor-in-possession (DIP) financing will be financing for firms in Chapter 11 bankruptcy that permits them to continue operating.
- Term loans are the most common type of financing gave while generally it used to rotate loans.
- The lenders of DIP financing take a senior position on liens of the firm's assets, ahead of previous lenders.
- Lenders permit DIP financing as it permits a firm to continue operations, rearrange, and ultimately pay off debts.
