Page 49 - Bankruptcy Volume 1

Accountants advising a debtor-in-possession are often instrumental in assisting the debtor with obtaining
DIP financing by gathering the necessary financing information required by the lender, analyzing the
impact on the debtor of obtaining versus not obtaining DIP financing, assisting with negotiations with
the secured lender, analyzing the impact of the proposed DIP terms on all classes of creditors, preparing
a budget to accompany the motion seeking approval of DIP financing, and testifying at any hearing on
the proposed DIP financing.

Defensive DIP Financings

Often, the assets of Chapter 11 debtors are subject to perfected liens in favor of secured creditors. In
many cases, the prepetition secured lender continues to finance the debtor postpetition through a DIP
loan. Loans provided by secured creditors are often resized for the working capital needs of the debtor.
In exchange, the secured creditor often obtains repayment of the prepetition secured debt in a lump sum
(a rollup) or repayment of the prepetition secured debt over a period of time (a creeping rollup). A se-
cured creditor may also receive superpriority liens, additional collateral, releases, and other enticements
in exchange for providing DIP financing.

A secured lender may seek cross-collateralization. Whether or not cross-collateralization violates the
Bankruptcy Code is a matter of much debate. The one appellate court that has addressed the issue, the
Court of Appeals of the 11th Circuit, has held that cross-collateralization is a violation of the Bankrupt-
cy Code. The enticements provided to the debtor-in-possession lenders may affect the interests of other
parties. For example, unsecured creditors may be concerned that the additional collateral provided to the
secured lender in exchange for DIP financing will reduce recovery to unsecured creditors.

Although debtors present an obvious credit risk, there are many reasons DIP lenders may be interested
in providing DIP financing. Usually, the DIP lender believes there is a high probability of repayment in
full. The DIP lender may decide to provide DIP financing because the DIP lender is seeking collateral
value protection or is seeking a new type of collateral. Some DIP lenders provide DIP financing as a
means to maintain influence over the bankruptcy case outcome.

Offensive DIP Financings

New lenders, such as banks specializing in "new money" situations, banks specializing in specific types
of financing (for example, asset-backed loans), hedge funds, distressed private equity, or stalking horse
purchasers, may also provide DIP financing. Typically, new money DIP financing is sized for working
capital needs and allows for repayment of certain prepetition secured debt. The new money DIP financ-
ing often primes prepetition secured lenders, typically second-lien lenders, that are not repaid with bor-
rowings under the DIP financing facility.

A lender may offer DIP financing as part of a loan-to-own strategy. The loan-to-own strategy refers to
the strategy whereby a lender invests in a manner that will result in the conversion of either the DIP loan
or the lender’s prepetition debt into a controlling equity stake in the reorganized company when it
emerges from bankruptcy. Additionally, DIP lenders may provide DIP financing because the associated
financing fees are lucrative. Sometimes new lenders provide DIP financing because they want to pur-
chase the company or its assets, typically through a sale under Section 363 of the Bankruptcy Code.

Cash Collateral

Generally speaking, a debtor-in-possession may use the property, other than cash collateral, in the ordi-
nary course of business and without prior court approval. However, the debtor-in-possession may use

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