Experienced Counsel Required: A Practical Guide to Debtor-in-Possession Funding

Debtor-in-possession lending comes with many benefits if a lender is guided by experienced counsel who can help navigate the many pitfalls that may arise during the negotiating of terms and the drafting of the documents, including a credit agreement and DIP orders. However, without experienced counsel, a DIP lender can face unique risks, especially if a DIP lender does not get the benefit of its bargain because either the DIP terms were poorly negotiated, the bankruptcy case does not proceed as planned, the collateral is not worth as much as the lender expected, or the DIP credit agreement is poorly drafted.

To help avoid these risks, this article will discuss the various stages of DIP lending, including negotiating a term sheet and drafting a credit agreement and order. The discussion will focus on best practices and pitfalls during each stage, including negotiating the collateral base, fees, interest rate and other unique provisions of a deal, as well as drafting provisions in a credit agreement and bankruptcy order to protect the lender and ensure it has sufficient control of the disposition of the bankruptcy case, including milestones, carve-outs, foreclosure rights and credit bidding rights.