This excellent Article by business school professors Sandeep Dahiya and Korok Ray provides a mathematical framework as an analytical tool to assist bankruptcy judges when confronting a Debtor-in-Possession financing situation. The U.S. Bankruptcy Code provides enhanced priority and security features to debtor-in-possession (DIP) loans which can be obtained from a lender with whom the borrower may have no past lending relationship. The enhanced priority of DIP financing, and the choice of a DIP lender, significantly affect the investment decisions made by the firm. This Article shows that DIP loans from an existing lender leads to a higher level of investment. The authors also show that a higher priority of DIP financing also leads to higher investment by the firm. A bankruptcy judge should take these incentives into account when approving the DIP loan. The authors conclude with extensive mathematical models to assist judges and firms in evaluating DIP loan decisions.
Sandeep Dahiya & Korok Ray,
A Theoretical Framework for Evaluating Debtor-in-Possession Financing,
Emory Bankr. Dev. J.
Available at: https://scholarlycommons.law.emory.edu/ebdj/vol34/iss1/5