A debtor in possession seeks approval of a $120 million DIP facility that will prime the pre‑petition first‑lien lender’s $300 million claim. The first‑lien lender objects, arguing adequate protection is impossible because the collateral is worth only $250 million. What must the debtor demonstrate to obtain the priming lien, and how can it structure the DIP to overcome the objection?

To prime the pre‑petition first‑lien lien, the debtor must show (1) the DIP financing is necessary to preserve the estate, without it, the business would collapse and all creditors would be worse off, and (2) the objecting lender is adequately protected. Adequate protection can take the form of a replacement lien on post‑petition assets, periodic cash payments to cover the diminution in collateral value, or an equity cushion if one exists. Here, the collateral is undersecured ($250M vs. $300M claim), so there is no equity cushion. The debtor could offer a replacement lien on all post‑petition accounts receivable and inventory, and/or agree to pay down the pre‑petition debt over time from operating cash flow. It might also limit the DIP to a priming lien only on a defined “carve‑out” portion of the collateral, leaving the remainder undisturbed. The court will weigh whether the proposed protections give the pre‑petition lender the “indubitable equivalent” of its secured claim.

Follow-up pressure:

1. If the pre‑petition lender instead pushes for a roll‑up of its entire $300 million into the DIP, how does that change the dynamics for unsecured creditors?
2. What is the “necessity” standard and how does it differ from the “adequate protection” requirement?
3. Could the debtor avoid priming altogether by using cash collateral? Describe the cash‑collateral stipulation process and the consensual hurdles.