DIP Financing
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Debtor-in-possession financing or DIP financing is a special form of
financing Funding is the act of providing resources to finance a need, program, or project. While this is usually in the form of money, it can also take the form of effort or time from an organization or company. Generally, this word is used when a firm uses ...
provided for companies in
financial distress Financial distress is a term in corporate finance used to indicate a condition when promises to creditors of a company are broken or honored with difficulty. If financial distress cannot be relieved, it can lead to bankruptcy. Financial dist ...
, typically during restructuring under corporate bankruptcy law (such as
Chapter 11 Chapter 11 of the United States Bankruptcy Code ( Title 11 of the United States Code) permits reorganization under the bankruptcy laws of the United States. Such reorganization, known as Chapter 11 bankruptcy, is available to every business, whet ...
bankruptcy in the US or CCAA in Canada). Usually, this debt is considered senior to all other
debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The d ...
, equity, and any other
securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any fo ...
issued by a company — violating any ''absolute priority rule'' by placing the new financing ahead of a company's existing debts for payment. DIP financing may be used to keep a business operating until it can be sold as a
going concern A going concern is a business that is assumed will meet its financial obligations when they become due. It functions without the threat of liquidation for the foreseeable future, which is usually regarded as at least the next 12 months or the spe ...
, if this is likely to provide a greater return to creditors than the firm's closure and a
liquidation Liquidation is the process in accounting by which a company is brought to an end in Canada, United Kingdom, United States, Ireland, Australia, New Zealand, Italy, and many other countries. The assets and property of the company are redistr ...
of assets. It may also give a troubled company a new start, albeit under strict conditions. In this case, "debtor in possession" financing refers to debt incurred while in bankruptcy, and "exit financing" is debt incurred upon emerging from reorganisation under bankruptcy law.


Examples

Two notable examples are the government financing of
Chrysler Stellantis North America (officially FCA US and formerly Chrysler ()) is one of the " Big Three" automobile manufacturers in the United States, headquartered in Auburn Hills, Michigan. It is the American subsidiary of the multinational automot ...
and General Motors during their respective 2009 bankruptcies.


American law vs. French law

The willingness of governments to allow lenders to place debtor-in-possession financing claims ahead of an insolvent company's existing debt varies; US bankruptcy law expressly allows this while French law had long treated the practice as ''soutien abusif'', requiring employees and state interests be paid first even if the end result was liquidation instead of corporate restructuring.


See also

*
Debtor in possession A debtor in possession or DIP in United States bankruptcy law is a person or corporation who has filed a bankruptcy petition, but remains in possession of property upon which a creditor has a lien or similar security interest. A debtor becomes th ...
* Bankruptcy * Bankruptcy alternatives * Shareholder loan * Seniority (financial) * Bail out (finance) *
Default Default may refer to: Law * Default (law), the failure to do something required by law ** Default (finance), failure to satisfy the terms of a loan obligation or failure to pay back a loan ** Default judgment, a binding judgment in favor of ei ...
* Distressed securities *
Insolvency In accounting, insolvency is the state of being unable to pay the debts, by a person or company (debtor), at maturity; those in a state of insolvency are said to be ''insolvent''. There are two forms: cash-flow insolvency and balance-sheet in ...
*
Liquidation Liquidation is the process in accounting by which a company is brought to an end in Canada, United Kingdom, United States, Ireland, Australia, New Zealand, Italy, and many other countries. The assets and property of the company are redistr ...


References


External links


Calpine closes $5 billion DIP financing11 USC 364 - Obtaining creditFederal Rules of Bankruptcy Procedure - Rule 4001c: Obtaining Credit
{{Debt Business terms Corporate finance United States bankruptcy law