Answers / Restructuring

Explain how a debtor-in-possession (DIP) financing can prime existing liens. Under what conditions would a court approve such priming?

An advanced Restructuring question — expect it in final rounds and case-heavy interviews (IB, PE, Big-4 Transaction Services).

THE SHORT ANSWER

DIP financing can prime existing liens if the existing lender is adequately protected, typically through a valuation cushion or replacement liens. In the US, court approval requires showing that the debtor cannot obtain financing otherwise and that the priming is necessary to preserve going-concern value. The primed lender must receive 'adequate protection'—e.g., periodic cash payments, additional liens, or an administrative expense claim. This is contentious and often leads to litigation, as it dilutes the primed lender's collateral.

WHAT INTERVIEWERS LISTEN FOR

  • ✓Adequate protection requirement
  • ✓No alternative financing
  • ✓Necessity for going-concern value
  • ✓Litigation risk

COMMON MISTAKES

  • ✗Claiming DIP always primes without conditions
  • ✗Ignoring adequate protection
  • ✗Assuming it's easy to get court approval

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