Debtor-in-possession financing orDIP financing is a special form offinancing provided for companies infinancial distress, typically during restructuring under corporate bankruptcy law (such asChapter 11bankruptcy in the US orCCAA in Canada[1]). Usually, this debt is considered senior to all otherdebt,equity, and any othersecurities issued by a company[2] — violating anyabsolute priority rule by placing the new financing ahead of a company's existing debts for payment.[3]
DIP financing may be used to keep a business operating until it can be sold as agoing concern,[4] if this is likely to provide a greater return to creditors than the firm's closure and aliquidation 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.[5]
Two notable examples are the government financing ofChrysler[6] andGeneral Motors[7] during their respective 2009 bankruptcies.
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[8] while French law had long treated the practice assoutien abusif, requiring employees and state interests be paid first even if the end result was liquidation instead of corporate restructuring.[9]
