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 distres ...

, 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, wheth ...

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 debtor ...

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 ...

equity Equity may refer to: Finance, accounting and ownership * Equity (finance), ownership of assets that have liabilities attached to them ** Stock, equity based on original contributions of cash or other value to a business ** Home equity, the dif ...

, 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 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 spec ...

, 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 redistrib ...

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 automoti ...

and

General Motors The General Motors Company (GM) is an American Multinational corporation, multinational Automotive industry, automotive manufacturing company headquartered in Detroit, Michigan, United States. It is the largest automaker in the United States and ...

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.

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

Examples

American law vs. French law

See also

References

External links