Contributing Authors: Franklind Lea, Principal, The Brattle Group, and Julia Zhu, Senior Associate, The Brattle Group
Published by the American Bankruptcy Institute Journal, August 2023 Issue
While debtors are focused on survival, in Chapter 11 bankruptcy cases, lenders providing debtor-in-possession (DIP) financing typically have other motivations. Unsurprisingly, these motivations may or may not align with a debtor’s interests.
The terms of DIP loans, such as interest rates and fees, are heavily influenced by lender motivations. Interest rates and fees on DIP loans can vary widely, with higher rates for riskier loans. It’s not uncommon to see smaller debtors face even steeper costs. Other common factors that influence DIP loan terms include:
- Classification as an administrative or priority expense
- Collateral quality
- Repayment position
- Collateral liquidity
- The likelihood of a successful exit
Many DIP lenders are already involved in bankruptcy cases as creditors, suitors, or equity holders, which can affect their motivations. For example, an existing creditor may refinance pre-petition debt with a DIP loan, and a stalking-horse bidder may provide DIP financing to control the debtor and the sale process.
To understand lender motivations, practitioners should consider the specific circumstances of the transaction. Nonfinancial terms, such as control and protection of interests, can be as important as interest and fees. Gain a deeper understanding of how lenders think before you accept the terms of a DIP loan during a bankruptcy proceeding in the full article below.