Financing Through Debtor-in-possession (dip)

For businesses that are bankrupt, there is an unique type of financing called debtor-in-possession (DIP) financing. DIP funding is available to businesses that have requested Chapter 11 bankruptcy protection, which typically occurs at the beginning of a filing. DIP financing enables a debtor-in-possession (the legal position of a company that has filed for bankruptcy) to raise money to maintain its operations while its bankruptcy case is still pending, which helps the company reorganize.

DIP funding is distinct from other forms of financing in that it frequently takes precedence over current debt, equity, and other claims. 

 

• Debtor-in-possession (DIP) finance is a type of credit that enables businesses filing for Chapter 11 bankruptcy to carry on with operations.

• The DIP finance lenders are given priority over previous lenders when it comes to asset liens.

• Term loans are the most typical form of financing supplied, but historically it used to be revolving loans. 

• Lenders permit DIP funding as it helps a corporation to maintain operations, reorganize, and finally pay off obligations. 

 

Chapter 11's preference for corporate reconstruction over liquidation makes applying for protection an essential last resort for financially troubled businesses. The court must approve the financing plan for debtor-in-possession (DIP) finance in order for the firm to be protected. When a business is successful in obtaining DIP funding, it informs suppliers, clients, and clients that the debtor will be able to continue doing business, offering services, and paying for products and services throughout its reorganization. It makes sense that the market will reach the same conclusion if the lender determined after reviewing the company's finances that it is creditworthy.

 

Debtor-in-possession (DIP) finance helped two insolvent American automakers, General Motors and Chrysler, during the Great Recession. 

 

Often begins with the bankruptcy petition process, but struggling businesses that could benefit from court protection frequently put off filing because they refuse to acknowledge the reality of their predicament. Given how drawn out the DIP financing process can be, such uncertainty and delay can cost businesses valuable time.

 

The bankruptcy court must provide its consent before a business may file for Chapter 11 bankruptcy and find a willing lender. A lender is significantly more at ease lending money to a business in financial trouble when doing so through the bankruptcy process. DIP financing lenders are given priority on assets in case of the company’s liquidation , an authorized budget , a market or premium interest rate , and any additional comfort measures that the court or lenders believes warrants inclusion. Current lenders usually have to agree to the terms, particularly in taking a back seat to a lien on assets.  

 

The budget that has been authorized is a crucial component of DIP funding. A prediction of the business's income, costs, net cash flow, and outflows for rolling periods can be included in the "DIP budget." Forecasting the timing of vendor payments, professional fees, seasonal variations in its receipts, and any capital expenditures must also be taken into account. Both parties will concur on the size and structure of the credit facility or loan once the DIP budget has been decided. This is just a small portion of the discussions and research required to obtain DIP financing.

 

Term loans are a common way to finance DIPs. Since these loans are fully funded during the bankruptcy process, the borrower will pay higher interest rates. The most popular way in the past was revolving credit, which lets a borrower take out a loan and pay it back as needed, much like a credit card. Because the borrower may actively control the loan amount, there is more flexibility and, as a result, the opportunity to keep interest rates low. 

 

Debtor in Possession Financing: A type of financing offered to businesses in need of bankruptcy relief and experiencing financial difficulties. In other words, the primary goal of DIP financing is to provide funding to save a company from bankruptcy.

 

Regular financing; it is the practice of giving a company financial funds for operations like manufacturing, merchandising, and investment.

 

The procedure for Debtor in Possession is drawn out. The judge, the U.S. trustee, and the court must all give their consent. Under Chapter 11, a number of legal requirements must also be satisfied.

 

1. Filing Requirements: In order to be eligible for DIP funding, a business must first submit a Chapter 11 petition to the bankruptcy court.

 

2. Debtor Continues to Run His Business: The person who declares bankruptcy on behalf of the business is referred to as the "Debtor in Possession." The name implies that majority ownership is still granted to the actual debtor of the capital source.

 

3. Major Decisions: The bankruptcy court is informed of major decisions made by the company, such as business default, mortgage and finance arrangements, any asset sales, lease agreements, and legal fees.

 

4. Creditors: Members of the organization may be in favor of or against the bankruptcy court's decisions. They consist of shareholders, stakeholders, and creditors.

 

5. Making a Plan: A restructuring plan needs to be finished before funding. It needs to outline precisely how the company intends to use the money to emerge from bankruptcy. 

 

After everything has been decided upon, a reorganization plan is created.

 

After filing for Chapter 11 and reaching an understanding, the debtor has four months to put out a reorganization plan. The four-month deadline may be extended if the debtor gives a good enough justification if it is missed.

 

The reorganization plan is essential as a whole since it outlines the company's post-bankruptcy operations and how creditors will be paid in the future. The following are some essential characteristics for reorganization plan confirmation:

 

1. Creditor Voting: After the proposed Chapter 11 plan is filed, creditors may vote on whether or not they approve of it.

 

2. Feasibility; the bankruptcy court must determine if the reorganization plan is feasible. In particular, the debtor must demonstrate that their business can generate enough revenue to pay for expenses.

 

3. Fair and Equitable: The restructuring strategy ought to be just and equitable. The value of the collateral must be paid to secured creditors (at least). The debtor is not permitted to keep any equity stake they have acquired until all debts have been satisfied. 

 

4. Good Faith: The restructuring plan ought to adhere to the law.

 

5. Best Interest of Creditors: If a creditor is in the debtor's "best interest," that creditor must get the same amount of money under the plan as it would under a Chapter 7 liquidation.

 

The bankruptcy court often demands a substantial amount of reasonable evidence that can ensure organizational recovery.