Explain the concept of 'priming' in DIP financing. Under what conditions can a court approve DIP financing that primes existing liens?
An advanced Restructuring question — expect it in final rounds and case-heavy interviews (IB, PE, Big-4 Transaction Services).
THE SHORT ANSWER
Priming means the DIP loan gets super-priority over existing secured creditors, ranking ahead of their liens. Courts approve priming only if: (1) the existing secured creditor is adequately protected (e.g., via replacement liens or cash payments), (2) the DIP financing is necessary for the company's survival, and (3) the company cannot obtain financing on better terms. In the US, Section 364(d) of the Bankruptcy Code allows priming, but it's rare and requires a hearing. In Germany, priming is not typical under InsO; DIP financing often gets priority only over unsecured claims.
WHAT INTERVIEWERS LISTEN FOR
- ✓Priming: DIP ahead of existing secured
- ✓Adequate protection requirement
- ✓Necessity and inability to obtain better terms
- ✓Jurisdictional differences (US vs. Germany)
COMMON MISTAKES
- ✗Claiming priming is automatic
- ✗Ignoring adequate protection
- ✗Assuming same rules globally
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