casemark/structuring-debtor-in-possession-financing

Structuring Debtor In Possession Financing

Designs DIP financing structures with priming liens, adequate protection, and budget milestones for Chapter 11 proceedings.

When To Use

• Structuring a new-money DIP facility (revolving, term, or hybrid) for a Chapter 11 debtor
• Evaluating whether a proposed DIP credit agreement contains market terms or overreaches
• Analyzing adequate protection packages offered to pre-petition secured creditors being primed
• Building or stress-testing a DIP budget and milestone schedule
• Comparing roll-up DIP structures versus new-money-only facilities
• Advising on superpriority claim priority (§364(c)) and priming lien authorization (§364(d))

Inputs To Gather

• Pre-petition capital structure: Outstanding secured debt (first lien, second lien, mezzanine), unsecured claims, and intercreditor agreements
• Collateral package: Asset appraisals, lien perfection status, and existing equity cushion analysis
• Cash-flow forecast: 13-week (or longer) cash-flow projection showing liquidity needs, working-capital swings, and seasonal patterns
• Case milestones: Target plan confirmation timeline, sale process dates (§363), or conversion triggers
• DIP term sheet / credit agreement: Proposed terms including facility size, interest rate, fees, maturity, covenants, events of default, and carve-out provisions
• Pre-petition lender consent or opposition: Positions of existing secured creditors on priming and adequate protection
• Proposed budget: Detailed line-item DIP budget with variance tolerances

Workflow

1. Map the pre-petition lien waterfall. Identify each tier of secured claims, confirm perfection and priority, and calculate the equity cushion (or deficit) in the collateral base. Flag any cross-collateralization or cross-default provisions in existing credit documents.

2. Size the DIP facility. Tie facility size to the 13-week cash-flow forecast plus a liquidity buffer. Distinguish between new-money needs and any roll-up component. If the DIP lender proposes rolling up pre-petition debt, quantify the dollar amount being elevated to superpriority status and assess whether roll-up is proportionate to new money advanced.

3. Structure priority and liens.

   • §364(a)/(b): Unsecured credit in the ordinary course — rarely sufficient for meaningful financing.
   • §364(c): Superpriority administrative claim, senior or equal lien on unencumbered assets, or junior lien on encumbered assets.
   • §364(d): Priming lien — requires showing existing lienholders are adequately protected.
   • Determine which combination the debtor needs and draft the lien structure accordingly.

4. Design the adequate protection package. For each class of pre-petition secured creditor being primed, specify:

   • Replacement liens (on what collateral, at what priority)
   • Periodic cash payments (current-pay interest, fees)
   • Superpriority administrative claim under §507(b) as a backstop
   • Equity cushion analysis demonstrating collateral coverage [VERIFY: court-specific standards for equity cushion adequacy vary by circuit]

5. Set budget and milestone covenants.

   • Define DIP budget testing frequency (weekly or bi-weekly variance reporting)
   • Set permitted variance tolerances (typically ±10–15% on receipts, ±10–15% on disbursements on a cumulative rolling basis)
   • Tie milestone dates to case events: filing of plan/disclosure statement, §363 bid deadline, auction date, plan confirmation, effective date
   • Include default triggers if milestones are missed beyond any grace period

6. Evaluate key protective provisions.

   • Carve-out: Confirm professional fee carve-out covers debtor's counsel, committee counsel, and UST fees; verify it includes both a pre-trigger and post-trigger amount [VERIFY: local practice on carve-out sizing]
   • Challenge period: Duration for the committee (or other parties) to challenge pre-petition lien validity (typically 60–75 days)
   • Credit bidding rights: Whether the DIP lender retains §363(k) credit-bid rights and any limitations
   • Events of default: Review for hair-trigger defaults (e.g., appointment of an examiner, filing of a competing plan) that could give the DIP lender disproportionate case control
   • Waiver provisions: Flag any waivers of surcharge rights under §506(c) or marshaling

7. Stress-test the structure. Model downside scenarios — revenue shortfall, delayed sale, plan rejection — and assess whether the DIP facility provides sufficient runway. Evaluate what happens at maturity if conversion or dismissal occurs.

Output

Produce a DIP Financing Structure Report containing:

• Executive summary: Facility overview (size, type, lender, key economic terms)
• Lien waterfall diagram: Pre-petition vs. post-DIP priority stack, showing where new money and any roll-up sit
• Adequate protection analysis: For each primed creditor class, the proposed package and sufficiency assessment
• Budget and milestones table: Line-item budget with variance tolerances and milestone dates with cure/default mechanics
• Key terms matrix: Side-by-side comparison of proposed terms against market benchmarks (pricing, covenants, carve-out, challenge period)
• Risk flags: Provisions that may face court objection, committee challenge, or UST opposition
• Recommendations: Suggested modifications to terms, alternative structures, or negotiation leverage points

Quality Checks

• Confirm all lien priorities are consistent with the Bankruptcy Code sections cited (§364(c) vs. §364(d)) and match the proposed credit agreement language
• Verify adequate protection proposals cover every class of pre-petition secured creditor being primed or subordinated
• Ensure DIP budget ties to the cash-flow forecast and that variance tolerances are internally consistent
• Check that milestone dates are realistic against the court's scheduling order and local rules [VERIFY: district-specific case timeline expectations]
• Confirm carve-out amounts are sufficient to fund professional fees through a contested confirmation or conversion
• Flag any provisions that would constitute impermissible sub rosa plan treatment or case-dispositive control by the DIP lender
• Cross-check roll-up amounts against the §364 authorization being sought — courts increasingly scrutinize roll-ups that lack adequate justification