What Is DIP Financing?
In Chapter 11, the company itself, called the debtor in possession, keeps running the business under court supervision rather than handing the keys to a trustee. Operating through bankruptcy still requires cash, and prepetition lenders are usually unwilling to extend more credit on normal terms, so Section 364 of the Bankruptcy Code lets the court authorize new borrowing with extraordinary protections.
DIP lenders are often the company's existing secured creditors, who lend defensively to protect their position and steer the case, though outside distressed funds also compete for DIP mandates. Because the loan requires a bankruptcy judge's approval after notice to other creditors, DIP terms are negotiated in the open and frequently contested at the first hearings of a case.
How DIP Loans Are Structured
The defining feature is priority. DIP claims typically receive superpriority administrative status, meaning they are paid before other administrative and unsecured claims, and the loan is secured by liens on the debtor's assets. Where unencumbered collateral is scarce, the court can approve priming liens under Section 364(d) that jump ahead of existing secured lenders, but only if those lenders' interests are adequately protected.
Economics reflect the leverage lenders hold at a desperate moment: floating spreads of several hundred basis points over SOFR, substantial upfront and exit fees, and maturities measured in months to match the expected case timeline. DIP agreements also impose milestones, such as deadlines to file a plan or launch a Section 363 sale, and sometimes roll up prepetition debt into the DIP, upgrading the old loans to the new loan's priority.
Why DIP Financing Matters
The DIP lender effectively holds the case's purse strings. Budgets, milestones, and default triggers written into the DIP credit agreement shape how fast the case moves and toward what outcome, whether that is a standalone reorganization or a sale. Many DIPs convert into exit financing, positioning the lender in the reorganized company's capital structure, and in loan-to-own strategies the DIP is a deliberate step toward taking control.
Scale can be enormous: Hertz arranged 1.65 billion dollars of DIP financing during its 2020 Chapter 11, and LATAM Airlines raised well over 2 billion dollars in the same period. For restructuring candidates, interviewers expect a clear explanation of superpriority, priming, adequate protection, and why a lender might fight hard for the right to provide the DIP rather than avoid the borrower entirely.
