Free Falling With a Parachute That May Not Open: Debtor-In-Possession Financing in the Wake of the Great Recession

Jarrod B. Martin, University of Miami
Kristofor Nelson, University of Miami
Eric Rudenberg, University of Miami
Jonathan Squires, University of Miami

Abstract

Debtor-in-possession (DIP) financing is one of the most important building blocks of a Chapter 11 bankruptcy case. The recent economic downturn, however, has frozen the DIP financing market. Absent the financing necessary to reorganize, many companies will be forced to liquidate. Who will fill the void in DIP financing as banks exit the market? This note seeks to explore alternative options—local banks, the government, and private equity or hedge funds—that may fill the vacuum left by the banks, and the risks and rewards associated with DIP financing. As these alternate institutions go forward, the landscape of DIP financing may forever change, with not only increasing risk of loan default and inflationary concerns, but also the opportunity to profit.