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, typically during restructuring under corporate bankruptcy law (such as
Chapter 11 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 debto ...
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 diff ...
, and any other
securities 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,
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 automotiv ...
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.
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 ...
*
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 debto ...
*
Bankruptcy alternatives
*
Shareholder loan
*
Seniority (financial)
*
Bail out (finance)
*
Default
*
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-shee ...
*
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 ...
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