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 use ...
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, w ...
bankruptcy
Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the deb ...
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 Loan, borrowed or otherwise withheld from another party, the creditor. Debt may be owed by a sovereign state or country, local government, company, or an individual. Co ...
,
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 for ...
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 an accounting term for 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 n ...
,
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 (law), company is brought to an end. The assets and property of the business are redistributed. When a firm has been liquidated, it is sometimes referred to as :wikt:wind up#Noun, w ...
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
FCA US, LLC, Trade name, doing business as Stellantis North America and known historically as Chrysler ( ), is one of the "Big Three (automobile manufacturers), Big Three" automobile manufacturers in the United States, headquartered in Auburn H ...
and
General Motors
General Motors Company (GM) is an American Multinational corporation, multinational Automotive industry, automotive manufacturing company headquartered in Detroit, Michigan, United States. The company is most known for owning and manufacturing f ...
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
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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 t ...
*
Bankruptcy
Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the deb ...
*
Bankruptcy alternatives
Bankruptcy is a legally declared inability or impairment of ability of an individual or organization to pay their creditors. In most cases personal bankruptcy is initiated by the bankrupt individual. Bankruptcy is a legal process that discharges m ...
*
Shareholder loan
Shareholder loan is a debt-like form of financing provided by shareholders. Usually, it is the most junior debt in the company's debt portfolio. On the other hand, if this loan belongs to shareholders it could be treated as equity. Maturity of sha ...
*
Seniority (financial)
In finance, seniority refers to the order of repayment in the event of a sale or bankruptcy of the issuer. Seniority can refer to either debt or preferred stock. Senior debt must be repaid before subordinated (or junior) debt is repaid.The America ...
*
Bail out (finance)
Bail is a set of pre-trial restrictions that are imposed on a suspect to ensure that they will not hamper the judicial process. Court bail may be offered to secure the conditional release of a defendant with the promise to appear in court when r ...
*
Default
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Distressed securities
In corporate finance, distressed securities are security (finance), securities over companies or government entities that are experiencing Financial distress, financial or operational distress, Default (finance), default, or are under bankruptcy. ...
*
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 i ...
*
Liquidation
Liquidation is the process in accounting by which a Company (law), company is brought to an end. The assets and property of the business are redistributed. When a firm has been liquidated, it is sometimes referred to as :wikt:wind up#Noun, w ...
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