Debtor-in-Possession (DIP) Financing

A company entering Chapter 11 typically has limited cash and no access to traditional credit markets. Without new financing, operations would grind to a halt — employees unpaid, suppliers refusing to ship, and value rapidly eroding. DIP financing bridges this gap, providing working capital and, in some cases, funding professional fees (lawyers, bankers) during the case. The Bankruptcy Code incentivizes DIP lending by offering lenders protections unavailable outside bankruptcy: super-priority claims, priming liens, and cross-collateralization.

DIP financing sits at the very top of the repayment waterfall. The priority order becomes: (1) DIP facility — super-priority administrative claim with priming liens, (2) post-petition administrative expenses (employee wages, professional fees), (3) pre-petition secured debt, (4) pre-petition unsecured debt, (5) equity. 'Priming' means the DIP lender can obtain a lien senior to existing secured creditors — the court approves this if existing lien holders are 'adequately protected' (e.g., through an equity cushion or replacement liens).

DIP facilities are expensive: interest rates of SOFR + 500–1000 bps, 2-3% origination fees, and tight covenants. Milestones are critical: DIP lenders often require the debtor to meet specific case milestones (file a plan within 90 days, emerge within 180 days) or face an event of default. Roll-up provisions allow DIP lenders who were also pre-petition lenders to 'roll up' their pre-petition exposure into the DIP facility, effectively jumping the priority queue. Budget controls tie disbursements to a court-approved 13-week cash flow budget.