Debtor-in-Possession Orders and Loan Agreements: Loan Structures and Common Terms, Events of Default and Remedies

Description

The primary reason for most Chapter 11 bankruptcy filings is an imminent lack of liquidity. DIP loans are typically asset-based, revolving working capital facilities put into place at the outset of a Chapter 11 filing to provide both immediate cash as well as ongoing working capital during the reorganization process. DIP financing is available in both unsecured and secured form, each of which provides a secured lender with incentives and protections to encourage it to lend money to a debtor.

A DIP loan facility may be structured as a term loan, revolving credit facility, or other form of credit. Because term loans are usually fully funded, such a structure could result in higher interest costs for the debtor. Revolving credit facilities generally have lower interest costs than a fully drawn term loan because the debtor may draw down the loan and repay only as necessary to maintain the court-approved budget. Depending on the situation, it may be appropriate for the DIP facility to be structured as a combination of both a term loan and a revolver.

The bankruptcy court must approve the terms of a DIP loan facility. In addition to collateral and a super-priority claim, DIP loans are typically designed with covenants and other protections to permit the DIP lender a full recovery even if the debtor liquidates. The loan documents and/or the DIP Order will typically provide: for a borrowing base; that all asset-sale proceeds must be applied to reduce the DIP loans and commitments; that the primed pre-bankruptcy lenders cannot exercise remedies until the DIP loan has been repaid; and that certain events, like conversion of the case to a Chapter 7 or appointment of a trustee in bankruptcy, permit the DIP lender to call the loan.

Listen as our authoritative panel evaluates the circumstances when a DIP loan is a sound strategy for a lender client. The panel will provide practice tips for selecting the appropriate DIP loan structure and for negotiating and documenting key loan terms.