Does Debtor-In-Possession Financing Add Value?

Abstract

In this paper I analyse the role of debtor-in-possession (DIP) financing in the bankruptcy process. I examine the plans of reorganisation of a sample of large 135 Chapter 11s with DIP financing and 191 Chapter 11s without DIP financing that went into bankruptcy in the United States over the period 1986-1997. I find that successful reorganisations benefited from DIP financing, despite DIP firms being more solvent prior to filing for Chapter11. The concession of DIP financing does not seem to significantly affect recovery rates and deviations from absolute priority. However, the size of DIP financing impacts positively on recovery rates. DIP financing is also associated with a larger probability of a successful reorganisation, does favouring larger recovery rates. This positive impact is, however, reduced in two circumstances: when the new loans are secured by a lien on already encumbered assets with equal or senior priority to the existing liens; when the new lenders obtain an increase in the seniority of their pre-success. I also find evidence of larger management turnover in firms with DIP financing, suggesting that the DIP lender has an important monitoring and disciplining role. This effect is particularly strong when the DIP lender has no pre-petition relation with the debtor. The choice of Delaware as the bankruptcy venue provides not only a faster reorganisation (for both pre-packs and non-prepacks), but also a more likely concession of the "First day orders", like DIP financing.

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