Debtor-in-possession financing

Several recent papers have documented the benefits of debtor-in-possession (DIP) financing in the restructuring of firms in Chapter 11. However, the view on benefits is not unanimous and some legal scholars have raised doubts about DIP financing's effects on debt-holders and the possibility of...

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Bibliographic Details
Published in:Journal of banking & finance 2004-12, Vol.28 (12), p.3097-3111
Main Authors: Chatterjee, Sris, Dhillon, Upinder S., Ramı́rez, Gabriel G.
Format: Article
Language:English
Subjects:
Bank loan
Bank loans
Banking
Bankruptcy
Bonds
Chapter 11
Comparative analysis
Debt
Debt restructuring
DIP
DIP financing
Fees & charges
Finance
Financial analysis
Loans
Monitoring costs
Rates of return
Securities prices
Studies
Wealth effects
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Summary:Several recent papers have documented the benefits of debtor-in-possession (DIP) financing in the restructuring of firms in Chapter 11. However, the view on benefits is not unanimous and some legal scholars have raised doubts about DIP financing's effects on debt-holders and the possibility of expropriative wealth transfers. In this paper we address this issue by analyzing both stock and bond price data for a comprehensive sample of DIP loans and find significant positive abnormal stock and bond returns at the announcement of DIP loans. Also, we do not find evidence of wealth transfers from junior to senior debt-holders. Further, we examine the DIP loan process in detail and we document important institutional features of DIP loans such as maturity, covenants, fees and interest charges. We find evidence of intense monitoring using covenants. We also find higher fees and charges associated with DIP loans. We argue that overall the results are consistent with the information processing role of financial intermediaries.
ISSN:0378-4266
1872-6372
DOI:10.1016/j.jbankfin.2004.05.003