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Abstract: 

In most chapter 11 cases, existing first-lien lenders provide post-petition financing to preserve collateral value and maximize recovery. In some situations, a stressed borrower may threaten to pursue a hostile chapter 11 path seeking to implement a restructuring without the existing lenders’ consent. In that scenario, there are threats of a “priming DIP loan.” In response, the existing secured lender must assess if that threat is credible. While facts matter, in most cases, even when threatened, a priming DIP never materializes due to its many legal and structural challenges. This is particularly so where the existing lenders have validly perfected liens on substantially all assets and value indicators — usually in the form of early indications from a sale process — suggest the value of the collateral is unlikely to clear the existing lenders’ secured claim. We explain our view below and the significant hurdles that a debtor must clear to thread this needle.

Keywords: Debtor-in-Possession Financing; Priming DIP Liens; Adequate Protection under 11 U.S.C. § 364(d)(1); Prospect Medical Holdings

Affiliations:  1: Proskauer; 2: Proskauer.