structuring-debtor-in-possession-financing

name	structuring-debtor-in-possession-financing
description	Designs DIP financing structures with priming liens, adequate protection, and budget milestones for Chapter 11 proceedings. Use when structuring DIP facilities, analyzing superpriority claims, or evaluating DIP terms.
tags	["distressed-and-restructuring"]
metadata	{"author":"casemark","practice_areas":["Restructuring","Distressed Investing","Turnaround"],"document_types":["Report"],"skill_modes":["Analysis"]}

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

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