DIP Financing Priority in Chapter 11, Explained
The question
A company enters Chapter 11 with a $50 million superpriority DIP facility (unsecured), $10 million in other administrative claims, $200 million of pre‑petition first‑lien secured debt (collateral valued at $250 million), and $100 million of general unsecured claims. If the enterprise value is $280 million, compute recoveries for every class and state which class is the fulcrum.
General educational practice only. This is not an actual, confidential, leaked, or firm-provided interview question. Check important technical details against primary learning materials.
Study explanation
The waterfall:
- Pre‑petition first‑lien secured claim: paid from its collateral. Collateral value $250M exceeds the $200M claim, so they receive $200M in full. No deficiency claim.
Remaining enterprise value after collateral distribution = $280M - $200M = $80M of unencumbered estate value.
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Administrative claims (including the DIP superpriority) total $60M ($50M DIP + $10M other). These are paid from unencumbered value ahead of general unsecured claims. They receive full payment of $60M, leaving $20M.
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General unsecured claims of $100M: receive the remaining $20M, or a 20% recovery.
Equity receives nothing. The fulcrum security is the general unsecured claims, as they are the class where value runs out.
Follow-up pressure:
- How would the answer differ if the DIP had been granted a priming lien on the first‑lien collateral? (The DIP would then take a portion of the collateral before the pre‑petition first‑lien, likely reducing the first‑lien recovery.)
- If the collateral value had been only $180 million, how does the waterfall change and which class becomes the fulcrum?
- Why might the unsecured creditors’ committee challenge the DIP facility if it includes a roll‑up of the pre‑petition debt, even if the arithmetic appears to work?
Balance sheet
| Cash | 150 |
| Accounts receivable | 120 |
| Inventory | 90 |
| Total current assets | 360 |
| PP&E, net | 400 |
| Goodwill | 150 |
| Other assets | 40 |
| Total assets | 950 |
| Accounts payable | 80 |
| Deferred revenue | 40 |
| Total current liabilities | 120 |
| Long-term debt | 380 |
| Total liabilities | 500 |
| Total equity | 450 |
| Total liabilities & equity | 950 |
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The rest of this topic
Distress, bankruptcy and recoveries