Today, loans to debtors-in-possession — i.e., DIP loans — are all the rage. A DIP loan is a loan to a company that commences a chapter 11 case, providing it with the liquidity it needs to operate and restructure while in bankruptcy. As investors are looking for ways to put money to work, they are setting their sights on the DIP loan market as a way to realize meaningful returns. For instance, Eaton Vance , Aladdin Capital and General Electric have all announced their intention to raise funds to purchase or make DIP loans to distressed companies. There is no question that many other banks, hedge funds and private equity funds are focused on understanding and potentially beginning to participate in the world of DIP financing as well.
So, what does a curious, potential DIP lender need to know?
The DIP loan process is conducted out in the open in bankruptcy court and the making of a DIP loan needs to be approved by the bankruptcy judge. As part of this process, the company’s stakeholders may object to the DIP loan in whole or focus on specifics, such as rates, fees, covenants, conditions and the like.