Meaning
Specialized credit facilities provided during insolvency ensure the business has liquidity for daily operations. This debtor in possession financing is often secured by senior liens on the assets of the company, giving the new lender priority over existing creditors. It provides the capital needed to pay employees and purchase supplies while funding the legal costs of the reorganization.
The availability of this funding stops when the reorganization plan is confirmed or the case is converted to a liquidation.
Operational Funding
Maintenance of business continuity requires immediate access to cash that the company might otherwise lack. Secured by court orders, debtor in possession financing allows the management team to keep the company running while negotiating with stakeholders. This liquidity is vital for preserving the value of the enterprise as a going concern.
Superpriority Status
Lenders who provide these funds receive a high level of protection to encourage them to take on the risk. The debt often takes precedence over all other administrative expenses and prior secured claims through a priming lien. This legal standing makes it one of the most secure positions in a bankruptcy capital structure.
Budgetary Control
Access to the funds is usually contingent on strict adherence to a court-approved spending plan. The lender monitors every expenditure to ensure the cash is used efficiently to reach a restructuring milestone. Failure to meet these financial targets can result in the loss of funding and the end of the reorganization attempt.
