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| vol 18, num 2 | March 2021 |
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| Why You Should Consider DIP Lending |
| It may seem counterintuitive for banks and other lenders to provide loans to companies in bankruptcy, but they often do. All companies, especially those in bankruptcy, need liquidity to continue operating. Ensuring the availability of cash is one of the most important considerations in a chapter 11 reorganization, because debtors are often unable to reorganize without adequate cash flow.
The market for debtor-in-possession (DIP) financing is significant. In 2019, DIP-financing volume was more than $18 billion, compared to about $10 billion in 2018. DIP lenders are typically secured creditors who have an interest in the outcome of the bankruptcy case and lend in order to enhance their own recovery. There has, however, been an increase in the number of DIP facilities funded by third parties for investment and more strategic purposes, such as acquiring a debtor’s assets in a “loan to own” transaction. Regardless of a lender’s goals, DIP lenders continue to enjoy very favorable treatment in bankruptcy.
Types of DIP Financing
Congress anticipated that lenders might be nervous extending credit to companies in bankruptcy, so the Bankruptcy Code gives DIP lenders some powerful protections, which include:
- If the trustee or DIP is otherwise unable to obtain unsecured debt, the court can authorize the trustee or DIP to obtain such debt and may:
- treat such debt as an administrative claim having priority over most other administrative claims;
- grant a lien on unencumbered assets; or
- grant a junior lien on encumbered assets; and
- If the trustee or DIP is still unable to obtain debt, the court may grant a lender a lien that is senior or equal to existing liens on estate assets.
The strongest of these protections is the “priming lien” under § 364(d). A priming lien is typically only available as a last resort and will only be granted if the holders of existing liens consent or if the trustee or DIP can demonstrate it has equity in its assets above the existing secured debt, or the existing lienholders are adequately protected from diminution in the value of their collateral. Existing lenders will often insist on obtaining a priming lien and superpriority administrative claims, providing the maximum protection possible for their DIP financing facility. |
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| Recent Cases Enforcing a Pre-Petition Waiver of the Automatic Stay |
| In this time of COVID-19, creditors and debtors alike have looked for ways to address the financial squeeze the pandemic has imposed on the global economy. On the one hand, debtors are likely to look for more time for their business operations to return to “normal.” On the other hand, creditors are likely to look for certainty of results in an otherwise uncertain time. As a result, creditors may demand from their debtors — as part of a negotiation, a plan of reorganization or a pre-petition forbearance agreement — that the debtor agree to waive the protections of the automatic stay under 11 U.S.C. § 362 in any future
bankruptcy filing. |
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| Register Today for ASM! |
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| ABI is pleased to announce the return of the Annual Spring Meeting April 12-22 — this year in a cutting-edge virtual format. Employing the same innovative platform that made last fall’s Insolvency 2020 event such an astounding success, this conference — always one of the most significant annual gatherings of bankruptcy and insolvency professionals in
the country — will introduce a number of new and improved online networking features.
This year, the Secured Credit Committee will be partnering with the Real Estate Committee to host a panel titled "The Continued Impact of COVID-19 on the Distressed Real Estate Market."
Speakers for this panel include:
- Evan B. Blum, Alvarez & Marsal Holdings, LLC; New York
- Eve H. Karasik, Levene, Neale, Bender, Yoo & Brill L.L.P.; Los Angeles
- George Klidonas, Latham & Watkins LLP; New York
- Janine M. Figueiredo, Hahn & Hessen LLP; New York
- Lisa Vandesteeg, Levenfeld Pearlstein; Chicago
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