DIP Financing and Bankruptcy ABL: How Section 364 Loans Get Structured, Priced, and Approved

When a company files Chapter 11, the existing ABL revolver dies on the petition date. Drawing requests stop. Cash dominion mechanics that protect the lender stay on, but the borrower can no longer access availability. Within hours -- sometimes minutes -- of filing, the debtor needs a new source of liquidity to fund payroll, professional fees, and operations through the case. That new source is the DIP loan.

DIP financing is the most heavily structured product in the asset-based lending world. It is governed by federal bankruptcy law, requires court approval, includes elaborate priority and protection mechanics, and operates against a budget the debtor cannot meaningfully exceed without going back to the judge. This is the playbook that Donald Clarke -- author of Asset Based Lending Disciplines, the first textbook published on the discipline -- has taught restructuring lenders at GE Capital, JP Morgan Chase, Lloyds, and Barclays for four decades, and the same playbook we run on live distressed deals through ABLC.

Section 364: The Statutory Backbone

Per Proskauer, DIP financing is "the lifeblood of a chapter 11 case." It is also entirely a creature of Section 364 of the Bankruptcy Code. Section 364 sets up a hierarchy of options, and the debtor must move up the ladder only if the rung below is unavailable.

• Section 364(a) -- ordinary course, unsecured. No court approval required. Almost never sufficient to fund a Chapter 11 case.
• Section 364(b) -- outside the ordinary course, unsecured. Court approval required. Rare for DIP financing because few lenders will lend unsecured to a debtor in possession.
• Section 364(c)(1) -- superpriority administrative expense. Court approval required after a showing that unsecured credit is unavailable. Repaid before all other administrative expenses.
• Section 364(c)(2) and (c)(3) -- senior lien on unencumbered property, or junior lien on encumbered property. Most common structure when there is unencumbered collateral available.
• Section 364(d) -- priming lien on already-encumbered property. The most aggressive option: the DIP lender's lien primes (ranks senior to) existing prepetition liens on the same collateral. Requires a showing that (1) no other financing is available without priming, and (2) existing lienholders' interests are "adequately protected."

The vast majority of DIP loans are structured under Section 364(c)(1) plus (c)(2) and/or (c)(3) -- superpriority administrative claim plus liens on unencumbered or junior position on encumbered collateral. Priming DIPs under 364(d) are the headline-grabbing exception and almost always require either consent from the primed lender or a robust equity cushion in the collateral.

Why the Incumbent ABL Lender Almost Always Wins the DIP

Per Proskauer's 2025 analysis, "the risk of non-consensual priming is extraordinarily rare, particularly for a secured lender with a valid lien on substantially all assets and no credible evidence of a sizable equity cushion." Translation: the incumbent ABL lender has structural leverage no one can replicate.

The incumbent already has:

• First-priority UCC-1 filings on accounts, inventory, equipment, and (typically) deposit accounts.
• DACAs in place at every operating bank.
• A current borrowing base, field exam, and appraisal package.
• An existing intercreditor agreement with any term lenders.
• Months or years of monthly reporting and operational visibility.

A third-party priming DIP lender has to displace all of that and convince a bankruptcy judge that the incumbent's collateral interest is adequately protected. The combination of structural advantage and statutory burden is why over 80% of DIP loans in middle-market Chapter 11 cases come from the incumbent ABL lender -- usually structured as a roll-up of the prepetition revolver plus an incremental new-money tranche.

The roll-up

A roll-up converts prepetition revolver debt into DIP debt -- moving it up in the priority stack from a prepetition secured claim to a postpetition superpriority claim. Roll-ups are a common feature of incumbent DIPs because they (a) get cash from postpetition collections applied to the most senior claim first and (b) give the DIP lender control over the case from day one.

Roll-ups are controversial. Unsecured creditor committees often object. Some courts require a "creeping" roll-up (only as new collateral is generated) or limit the percentage of prepetition debt that can be rolled. The mechanic is heavily negotiated in the interim DIP order.

The DIP Term Sheet: What Changes vs a Going-Concern ABL

Structurally, a DIP ABL looks similar to a normal ABL -- borrowing base, advance rates, eligibility, reporting. Operationally, it is a different animal. Five categories of terms get materially tightened.

1. Budget control

Per SouthStar Capital, every DIP loan operates against a 13-week rolling cash flow forecast filed with the court. The budget governs every dollar the debtor can spend -- operating expenses, payroll, professional fees, vendor payments, capex. Variance covenants are tight: typical permitted variance is 10-15% on a line-item basis and 5-10% on aggregate disbursements, tested weekly. Bust the budget covenant and the lender can sweep cash, accelerate, and seek stay relief.

2. Milestone covenants

DIP loans include hard date-driven milestones that move the case forward:

• Interim DIP order entered within 2-5 days of filing.
• Final DIP order entered within 30-45 days.
• Bidding procedures motion filed within 30-60 days.
• Stalking horse APA executed by a specified date.
• Auction completed within 60-120 days.
• Sale closing or plan confirmation within 90-150 days.

Milestone misses are events of default. The DIP lender is the de facto case manager.

3. Carve-outs

The DIP order carves out a fixed dollar amount of postpetition fees for debtor and committee professionals, plus a smaller pre-default fee carve-out and a US Trustee fee carve-out. Without a carve-out, professionals would not work on the case knowing the DIP lender could foreclose on cash before they got paid.

4. Borrowing base mechanics under bankruptcy

Eligibility tightens. New ineligibility categories appear specific to bankruptcy:

• Critical vendor payments. AR collected from customers who received critical vendor payment authority is sometimes carved out of availability.
• Section 503(b)(9) claims. Goods delivered within 20 days of the petition date become priority administrative claims -- the lender reserves against the corresponding exposure.
• Reclamation reserves. Section 546(c) reclamation demands trigger inventory reserves.
• Cure cost reserves. If the debtor needs to assume contracts (especially leases) to operate, cure amounts get reserved against availability.

For background on how reserves work in non-bankruptcy ABL, see our walk-through of borrowing base reserves.

5. Pricing

DIP pricing reflects the case risk. Typical 2025 ranges:

• Spread: SOFR + 600-900 bps for incumbent DIPs; SOFR + 800-1,200 bps for third-party priming DIPs.
• Closing fees: 2-4% of commitment.
• Exit / backstop / commitment fees layered on top.
• Tight no-call period -- often the full case length.

The all-in IRR on a typical DIP runs 12-18% for incumbent deals and 15-25% for priming third-party deals. These are not relationship loans.

Adequate Protection: The Statutory Trade for Priming

When a DIP lender primes existing liens under 364(d), the displaced lienholder is entitled to "adequate protection" of its interest in the primed collateral. The mechanics are negotiated and approved in the DIP order. Standard forms of adequate protection include:

• Replacement liens. A new postpetition lien on collateral coming into the estate, junior only to the DIP lien itself.
• Superpriority administrative claim. If the replacement lien proves insufficient, a 507(b) superpriority claim for the diminution in collateral value.
• Cash payments. Periodic adequate protection payments to the prepetition lender during the case.
• Equity cushion. Reliance on the spread between collateral value and primed debt as protection. Courts generally require a 20%+ cushion to find equity-cushion-only protection sufficient; under 10% is almost always insufficient.

The equity cushion analysis turns on collateral valuation. This is where field exams and appraisals -- the discipline at the heart of Asset Based Lending Disciplines -- become directly material to bankruptcy court outcomes. A well-documented, recent NOLV appraisal makes or breaks the priming argument.

The Interim Order, Final Order, and 14-Day Sprint

Most DIP loans are approved in two stages. At the first-day hearing (usually within 2-5 days of filing), the court enters an interim DIP order approving an emergency draw -- typically capped at the amount needed to fund operations for the next 30-45 days. This is the cash that keeps the company alive.

Within 30-45 days, the court holds a final DIP hearing and enters the final DIP order approving the full facility. Between interim and final, the unsecured creditors committee (UCC) negotiates objections -- typically focused on the roll-up, the size of the professional fee carve-out, the scope of liens, the milestones, and challenge rights to investigate the prepetition lien.

The 14-day sprint between filing and the first significant UCC objection deadline is the most active negotiation window in any Chapter 11 case. Deals are made or broken in those two weeks.

Who Lends DIP Capital

The active DIP lender universe in 2025 falls into three groups:

• Commercial bank ABL groups (incumbent DIPs). Wells Fargo Capital Finance, JPMorgan ABL, Bank of America Business Capital, PNC Business Credit, Huntington Business Credit, BMO Sponsor Finance. Almost always lead when they hold the prepetition revolver.
• Specialty finance and BDC platforms. SLR Credit Solutions, Wingspire, North Mill, Gordon Brothers Finance Company, Crystal Financial. Frequent third-party DIP providers, especially in retail, food, and asset-heavy industries.
• Private credit funds. Ares, Antares, Owl Rock, Apollo, Sixth Street. Increasingly active in larger DIPs and priming DIPs, often as part of broader stalking horse / loan-to-own strategies.

For sponsor-backed debtors, see how the pre-bankruptcy sponsor-backed ABL structure shapes who is positioned to lead the DIP.

What Companies and Boards Should Do Pre-Filing

Three moves we recommend to any board considering a Chapter 11 filing:

1. Engage the incumbent ABL lender early. Six to eight weeks before filing, run a serious conversation. The incumbent is the only lender with the data to commit quickly, and the only lender who can roll up prepetition debt without an objection fight.
2. Stress-test the borrowing base for petition-date eligibility hits. Critical vendor payments, 503(b)(9) claims, reclamation, and cure costs all compress availability post-filing. The DIP facility needs headroom for these hits. A clean borrowing base review pre-filing prevents nasty surprises.
3. Get the field exam and appraisal current. If a priming fight is possible, recent collateral diligence is the single most important piece of evidence in the equity cushion analysis. A 12-month-old field exam will not carry the day.

For the underlying due diligence work that supports a DIP filing, see the ABL due diligence checklist. For the field exam preparation that drives the collateral valuation, see the field exam playbook.

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