Debtor-in-Possession (DIP) Financing & Chapter 11 Waterfall Lab

Model post-petition credit facilities under Bankruptcy Code §364, priming superpriority liens, pre-petition debt roll-ups, 13-week cash budget variance covenants, and emergence recovery waterfalls.

Total DIP Claim
$61.0M
Drawn + Roll-Up
All-In DIP Rate
11.0%
SOFR + Spread
DIP Recovery
100.0%
Superpriority §364
1st Lien Combined
100.0%
Roll-Up + Residual
GUC Recovery
29.0%
General Unsecured
Covenant Status
Compliant
Budget OK
Restructuring Industry Presets:

Chapter 11 Facility & Plan Parameters

$165.0M
Total net Enterprise Value or §363 sale proceeds distributed across claims.
$
$70.0M
$
$35.0M
$
$50.0M

DIP Financing Structure (§364)

$
$45.0M
$
$25.0M
80.0%
6.5%
%
4.5%
$
$4.5M
$
$6.0M

13-Week Budget & Variance Covenants

$
$12.0M
$
$8.0M
12.5%
-4.0%

Shows claims vs actual recoveries across the statutory priority ladder: Carve-Out & Administrative claims prime all debt, followed by DIP Superpriority tranches, Pre-Petition 1st Lien, Junior Debt, and GUCs.

Tracks weekly post-petition cash balances against the mandatory Minimum Liquidity Covenant ($8M floor). Scheduled DIP drawdowns bolster liquidity during peak restructuring disbursements.

Monitors cumulative actual net cash flow against the approved budget corridor. Breaching the permitted negative variance tripwire triggers an immediate DIP Event of Default.

Emergence Absolute Priority Recovery Schedule

Claimant Class Statutory Priority Claim Amount Recovery Value Recovery %

13-Week Cash Flow Forecast & Variance Compliance Schedule

Weekly Budget Reporting
Period Receipts Operating Disb. Professional Fees Net Cash Flow DIP Draw Ending Cash Cumulative Var. %

Sensitivity: Emergence EV vs Roll-Up Sizing

Impact of emergence enterprise valuation ($M) and DIP pre-petition roll-up ($M) on Pre-Petition 1st Lien Combined Recovery (Roll-Up + Residual Claim %).

EV \ Roll-Up $0M $15M $25M $35M $45M

Sensitivity: Operational Variance vs Covenant

Impact of actual operational variance (%) and permitted variance floor (%) on Week 13 Ending Cash Balance ($M) vs Minimum Liquidity Covenant.

Actual \ Floor 5.0% 10.0% 12.5% 15.0% 20.0%

Legal Framework: Bankruptcy Code §364 & DIP Economics

1. The §364 Statutory Priority Hierarchy

When a debtor enters Chapter 11, trade vendors and commercial lenders cut off unsecured credit. To incentivize lenders to finance the debtor's restructuring runway, Bankruptcy Code §364 establishes four tiers of statutory protection:

  • §364(a) / (b): Unsecured credit incurred in or outside the ordinary course of business, entitled to administrative expense priority under §503(b)(1).
  • §364(c)(1): Superpriority administrative expense claims having priority over every other administrative claim under §507(b).
  • §364(c)(2) & (c)(3): Liens on unencumbered estate property, or junior liens on encumbered property.
  • §364(d): Senior or "priming" liens on encumbered property ahead of existing pre-petition secured lenders.

2. Priming Liens and "Adequate Protection"

Under §364(d)(1), court authorization for a priming lien requires proving that the debtor cannot obtain credit without priming, and that existing lienholders are provided Adequate Protection (§361) to compensate for any diminution in collateral value resulting from the prime.

$$\text{Diminution Risk} = \text{Pre-Petition Lien} + \text{DIP Prime} - \text{Stressed Collateral Value}$$

3. The Pre-Petition Debt "Roll-Up" Mechanism

In a roll-up, existing pre-petition lenders agree to extend new-money DIP financing on the condition that their pre-petition debt is converted ("rolled up") into post-petition DIP superpriority obligations. For instance, in a 1:1 roll-up, for every $1.00 of new money provided, $1.00 of pre-petition debt is refinanced into the DIP tranche:

$$\text{Total Superpriority Claim} = \text{DIP New Money} + \text{Rolled-Up Pre-Petition Debt}$$

Roll-ups insulate lenders against collateral valuation write-downs and cramdown risk under §1129(b), forcing junior creditors and GUCs to bear initial restructuring losses.

4. 13-Week Cash Budget Variance Testing

DIP credit agreements require weekly reporting against the approved 13-week forecast. The cumulative variance test is computed as:

$$\text{Variance \%} = \frac{\sum_{t=1}^k \text{Actual Net Cash}_t - \sum_{t=1}^k \text{Budget Net Cash}_t}{\left|\sum_{t=1}^k \text{Budget Net Cash}_t\right|}$$

A negative variance exceeding the permitted covenant threshold ($\text{Variance \%} < -\text{Permitted Threshold}$) triggers an immediate Event of Default.

Chapter 11 Restructuring Mastery Assessment

Test your knowledge of Bankruptcy Code §364 post-petition credit facilities, priming liens, debt roll-ups, and budget variance covenants.

Frequently Asked Questions

Debtor-in-Possession (DIP) financing is specialized credit extended to a company operating under Chapter 11 bankruptcy protection. Section 364 of the US Bankruptcy Code establishes an escalating hierarchy of incentives for post-petition lenders: §364(a) unsecured ordinary-course credit; §364(b) notice-and-hearing administrative expense credit; §364(c) superpriority administrative expense claims (§364(c)(1)) or junior liens on unencumbered property; and §364(d) senior or priming liens ahead of existing secured debt.

A priming lien under §364(d) allows a new DIP facility to obtain a first-priority security interest in collateral that is already subject to existing pre-petition liens, subordinating the original lenders. To prime existing lenders over their objection, the debtor must prove that alternative credit is unavailable and provide Adequate Protection (§361) against diminution in collateral value—typically through cash interest payments, replacement liens on post-petition assets, or §507(b) superpriority administrative expense claims.

A roll-up is a contractual provision in a DIP order where pre-petition secured loans are refinanced or converted into post-petition superpriority DIP debt upon court approval. Pre-petition lenders provide new money DIP commitments primarily to negotiate roll-ups, which upgrade pre-petition debt that may be undercollateralized or vulnerable to cramdown into pristine administrative superpriority claims that must be paid in full in cash or acceptable exit securities upon emergence.

The 13-week cash budget is the operational cornerstone of a Chapter 11 case. DIP credit agreements mandate weekly reporting of actual cash receipts, operating disbursements, and professional restructuring fees against budget. Lenders enforce a permitted negative variance covenant (typically 10% to 15% on cumulative net cash flow or operating disbursements). If the debtor exceeds the permitted variance, an immediate Event of Default occurs, giving the DIP lender rights to freeze credit lines, accelerate debt, and seek relief from the automatic stay to foreclose.

A Professional Fee Carve-Out is an agreed dollar reserve carved out of the DIP lender's collateral that primes even the DIP superpriority lien. It ensures that court-retained professionals—including debtor's counsel, financial advisors, official creditors' committee professionals, and statutory US Trustee fees—are guaranteed payment even if collateral values collapse and the debtor liquidates. Without a carve-out, restructuring professionals would refuse to represent estates facing severe downside risks.

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