Meaning
Senior debt facility provided to a company that has filed for bankruptcy protection to fund its ongoing operations during reorganization. Debtors in possession use this capital to pay for raw materials and payroll while they develop a plan to exit insolvency. This loan usually takes priority over all existing pre-petition debt.
It is subject to court approval and strict monitoring by the lenders.
Lender Seniority
Financing of this type is attractive to banks because of its super-priority status. If the company fails to reorganize, the dip financing is repaid first from the sale of assets. This security makes it possible for distressed companies to access credit markets when they would otherwise be locked out.
Operational Funding
Businesses need a steady supply of cash to keep the doors open. Without dip financing, a company would be forced to liquidate immediately upon filing for bankruptcy. The availability of these funds allows the business to honor customer warranties and maintain supplier relationships.
Reorganization Support
Stability provided by the loan allows the management team to negotiate with creditors. The goal is to return the company to profitability as a going concern. Effective use of the capital improves the chances of a successful turnaround.
