The DIP facility is the most powerful instrument in a Chapter 11 case. It funds operations, and through its budget, covenants, and milestones it sets the schedule and constrains the outcome. Whoever provides the DIP exercises more practical control over the case than any other party except the judge.
Cash collateral first
Before considering new financing, a debtor must address cash collateral — cash subject to an existing lien, including cash generated post-petition from encumbered receivables and inventory. Section 363(c)(2) forbids its use without either the secured creditor's consent or a court order, and since operating cash is almost always encumbered in a leveraged structure, this motion is filed on day one.
The court may authorise use if the secured creditor receives adequate protection — replacement liens on post-petition collateral, periodic cash payments, or a demonstrated equity cushion. Many cases run entirely on consensual cash collateral use without any new money, particularly where the lender group prefers not to increase its exposure.
How a DIP is structured
Section 364 provides an ascending ladder. Post-petition credit may be obtained as an administrative expense; if that is insufficient, with superpriority over other administrative claims; if still insufficient, secured by liens on unencumbered property or junior liens on encumbered property; and finally, under Section 364(d), secured by a priming lien senior to existing liens — but only if the primed creditor consents or receives adequate protection.
Priming without consent is genuinely contested and requires the debtor to demonstrate it could not obtain financing otherwise. In practice, most DIPs are provided by the existing lender group precisely to avoid a priming fight, which is one reason incumbent lenders have such structural advantage in Chapter 11.
Roll-ups and defensive DIPs
A roll-up converts pre-petition debt into post-petition superpriority debt, typically at a ratio to new money advanced. A lender providing $200mm of new money might roll up $400mm of pre-petition exposure, elevating that portion from an ordinary secured claim to a superpriority claim ahead of administrative expenses.
Roll-ups are contentious because they transfer value from other creditors to the DIP lender without new consideration — the rolled-up debt already existed. Committees object routinely, courts approve them regularly on the reasoning that the financing would not otherwise be available, and the negotiated ratio is one of the clearest indicators of the relative leverage in a case.
The budget and the milestones
The DIP is governed by an approved budget, almost always a 13-week cash flow forecast, with variance covenants permitting only a defined deviation — commonly 10–15% on a cumulative basis, tested weekly. Exceeding the variance is an event of default. The budget therefore functions as a continuous operating covenant, and every material expenditure must fit within a line the lenders have approved.
Milestones impose the schedule: file a plan by day X, obtain disclosure statement approval by day Y, confirm by day Z, or the DIP defaults. Aggressive milestones compress the case and reduce the leverage of parties who benefit from time, which is precisely their purpose. For an analyst, the DIP budget exhibit is also the single best publicly available example of a real 13-week model — prepared under genuine pressure, by people whose jobs depended on it, and filed as a public exhibit.