Few moments in a corporate restructuring carry more consequence — or more danger — than the initial DIP financing negotiation. The terms negotiated in those first conversations will govern the company's entire Chapter 11 case: its liquidity, its flexibility, its ability to operate, and ultimately its chance of survival. Walk in unprepared, and you may find yourself locked into a facility that serves the lender's interests at the expense of the company's recovery.
CRAGSI's founding team has negotiated DIP financing from both sides of the table — as advisors to distressed companies, as distressed debt investors, and as institutional asset managers evaluating DIP facilities as potential investments. This post is a practitioner's guide to what you need to know before you walk into that meeting.
What DIP Financing Is — and What It Isn't
Debtor-in-Possession (DIP) financing is credit extended to a company that has filed for Chapter 11 bankruptcy protection. It allows the company to fund its operations during the reorganization process — paying employees, maintaining inventory, servicing customers — while it works toward a plan of reorganization or a going-concern sale.
DIP financing is powerful for two reasons. First, DIP lenders receive "super-priority" status: they are repaid ahead of virtually all pre-petition creditors, including secured lenders who held their position before the bankruptcy filing. This priority status — granted by the bankruptcy court — is what makes DIP financing available to companies that would otherwise be unable to borrow. Second, DIP facilities are approved by the bankruptcy court, which provides the lender with judicial enforcement mechanisms that conventional lenders do not have.
What DIP financing is not: a rescue. A DIP facility that is too expensive, too restrictive, or too short to allow a proper restructuring process will not save the company. It will fund its slow march toward liquidation. The distinction between a DIP that enables recovery and one that forecloses it is entirely in the terms — and the terms are negotiated, not given.
The DIP Market: Who Are the Players?
Understanding who provides DIP financing — and what their motivations are — is essential to negotiating effectively.
Existing lenders (the "roll-up" DIP). The most common form of DIP financing is provided by the company's existing secured lenders, who agree to extend additional credit in exchange for enhanced protections. In a "roll-up" DIP, the pre-petition debt is rolled into the DIP facility, giving the existing lender super-priority status for its entire exposure. This structure is powerful for the lender and potentially problematic for other creditors — and it requires scrutiny from the company's perspective to ensure that the roll-up does not give the lender effective control over the restructuring process.
New money DIP lenders. When existing lenders are unwilling or unable to provide DIP financing, the company must seek new money from distressed debt investors, hedge funds, or specialty finance companies. New money DIP lenders will typically demand higher interest rates, more restrictive covenants, and more aggressive milestones than existing lenders — reflecting the additional risk of lending to a company that its own bankers have declined to support.
Strategic DIP lenders. In some cases, a potential acquirer will provide DIP financing as a way of gaining control of the process — ensuring that the company's assets are sold through a process that favors its bid. Strategic DIP lenders may offer more attractive financial terms in exchange for exclusivity or other structural advantages that position them to win the ultimate sale. This arrangement can be appropriate, but it requires careful analysis of whether the company's board is receiving the best available outcome for all stakeholders.
The Seven Terms That Define Your DIP
DIP facilities are complex documents, but the terms that matter most can be grouped into seven categories.
1. Facility size and availability. How much can you actually borrow? The nominal facility size is less important than the availability — the actual cash that will be accessible given borrowing base limitations, reserves, and other restrictions. A $10 million DIP facility with a borrowing base that yields $4 million in actual availability is a $4 million facility, not a $10 million one.
2. Milestones. DIP facilities almost always include milestones — deadlines for specific events in the restructuring process, such as filing a plan of reorganization, commencing a sale process, or achieving confirmation of a plan. Milestones that are too aggressive can force the company into a suboptimal outcome — accepting a lower purchase price in a sale, or confirming a plan before the business has stabilized. Negotiating realistic milestones, with appropriate cure periods, is one of the most important aspects of DIP negotiation.
3. Interest rate and fees. DIP lenders charge interest rates that typically range from SOFR plus 400 basis points to SOFR plus 1,000 basis points or more, depending on the risk of the situation. They also charge origination fees, exit fees, and various other costs that can substantially increase the total cost of the facility. Understanding the all-in cost — not just the stated interest rate — is essential.
4. Covenants. DIP covenants are typically more restrictive than pre-petition loan covenants. They often include minimum liquidity requirements, maximum capital expenditure limits, weekly cash flow budgets with limited variance tolerance, and restrictions on the company's ability to make payments to certain creditors, hire advisors, or take other actions without lender consent. Covenants that are too tight can effectively give the DIP lender control over the company's operations — which may or may not be in the company's interest.
5. Carve-outs. The DIP facility will typically include a "professional fee carve-out" — a pool of funds that is reserved for the payment of the company's professionals (attorneys, financial advisors, and the creditors' committee's professionals) and is not subject to the DIP lender's super-priority claim. The size of this carve-out is critical: it must be large enough to fund the professionals needed to run an effective restructuring process. An inadequate carve-out can compromise the quality of the professionals the company can retain.
6. Events of default. What actions — or failures to act — will trigger a default under the DIP facility? Events of default in DIP facilities often include breaches of the budget variance tests, missed milestones, changes in management, and a wide variety of other triggers. Understanding the default provisions — and negotiating appropriate cure periods — is essential to maintaining control of the process.
7. Priming of existing liens. In many DIP situations, the DIP lender's super-priority claim will "prime" (take priority over) existing secured creditors who did not consent to the DIP. The ability to prime existing liens requires court approval and notice to the existing secured creditors — and it often generates objections that must be resolved before the DIP can be approved. The company's ability to prime existing liens, and the collateral available to support the DIP lender's super-priority claim, will determine what terms are achievable.
What to Do Before the Meeting
The most important thing you can do before walking into a DIP negotiation is to know your alternatives. A DIP lender's leverage comes from the company's desperation — from the perception that the only alternative to accepting whatever terms are offered is liquidation. That perception is almost never accurate.
Before you negotiate with DIP lenders, you should have a clear understanding of: what the company is worth as a going concern vs. in liquidation; who the potential alternative DIP lenders are and what terms they might offer; whether an out-of-court solution (a forbearance agreement, a bridge from existing lenders, a sale process without bankruptcy) is feasible; and what the realistic timeline for a restructuring or sale process is. Armed with this information, you can negotiate from a position of relative strength — even in a distressed situation.
The second critical preparation step is to retain the right advisors before you walk in. DIP negotiations are technical, fast-moving, and consequential. A company that enters a DIP negotiation without experienced restructuring counsel and financial advisors is at a significant disadvantage against lenders who have done dozens of these transactions. The cost of experienced advisors is invariably less than the cost of a bad DIP facility — measured in the flexibility and recovery that a well-negotiated facility would have preserved.
CRAGSI advises distressed companies navigating DIP financing negotiations — bringing practitioner-level expertise from both sides of the table. If you are evaluating a Chapter 11 filing or a DIP financing process, we offer a free, confidential consultation to assess your situation and your options.