DIP Financing Guarantees: Impediments And Approvals

Debtor-in-possession financing ("DIP financing"), which is new short-term financing obtained by an insolvent company after the commencement of an insolvency proceeding, is a recurring theme for two primary reasons. First, insolvent companies are generally desperate for an immediate infusion of cash to sustain operations. Second, creditors will usually provide such financing only on a super-priority basis, jumping ahead of existing secured creditors of the insolvent company. The court is then called upon to perform a cost/benefit analysis to determine whether DIP financing should be approved.

Adding a wrinkle to the standard DIP financing scenario, suppose that Company A and Company B are insolvent affiliates. Suppose also that a DIP lender is only willing to provide financing to Company A if Company B provides a super-priority secured guarantee. In this case, it would appear that the secured creditors of Company B would be asked to bear the cost of the desperation of