Debtor-in-possession financing and its impact on emergence from chapter 11

Abstract

Debtor-in-possession (“DIP”) is referred to as the company who filed Chapter 11 petition under the U.S. Bankruptcy Code (“Code”). DIP financing is the loan provided for DIP under the Code. The special features of DIP financing are super-priority status, high security level, relatively short maturity, high fees and margins, etc. As per the amendment of the Unified Insolvency Act in Korea in September 2009, the typical form DIP financ-ing except secured credit offering was introduced to the Korean credit market, and a few companies, i.e. Dong-yang E&C, Korea Line Corp., obtained DIP financing. The credit market shrank dramatically by the global fi-nancial crisis in 2008, and this may affect DIP financing and corporate rehabilitations. This thesis examines the characteristics of firms who receive DIP financing and its impact on emergence from bankruptcy as well as whether there has been any change after the global financial crisis in 2008. The large assets-sized firms and pre-packaged filings are more likely to receive DIP financing, but the characteristics of firms for DIP financing are not affected by the global financial crisis. The firms with DIP financing are more likely to emerge from Chapter 11 than the firms without DIP financing. The effectiveness of DIP financing on emergence however, is not af-fected by the global financial crisis even though the probabilities of exit from Chapter 11 decrease after 2008. The firms with large assets size tend to complete reorganizations successfully. The liquid firms who have enough capacity to manage short-term debts are more likely to fail reorganization, and this may support the monitoring role of creditors.