Does debtor-in-possession financing add value?
Maria Carapeto
London Business School
March 7, 2016

PhD Programme, London Business School, Sussex Place, Regent’s Park, London NW1 4SA,
United Kingdom. Telephone: +44 (0) 171 262 5050. Facsimile: +44 (0) 171 724 7875. Email:
mcarapeto@lbs.ac.uk.
I would like to thank my supervisor Julian Franks, Kjell Nyborg, Lakshmanan Shivakumar,
Michael Brennan, Henri Servaes, Jan Mahrt-Smith, David Goldreich, Clara Raposo, Oren
Sussman, Mark Britten-Jones, Will Holt, Aneel Keswani and Rainer Kiefer for very helpful
comments on earlier drafts of this paper. This work was presented at the TMR Workshop on
Financial and Economic Efficiency (Florence, 1998), Institute of Finance and Accounting Seminar
(London Business School, 1999), Financial Management Association (Barcelona, 1999) and
European Financial Management Association (Paris, 1999). I would also like to thank Jonathan
Eaton and Russell Lloyd for providing access to the databases used in this study.
Financial support from Fundacao para a Ciencia e a Tecnologia is gratefully acknowledged.
Does debtor-in-possession financing add value?
Abstract
In this paper I analyse the role of debtor-in-possession (DIP) financing in the bankruptcy
process. I examine the plans of reorganisation of a large sample of Chapter 11s and find
that successful reorganisations benefited from DIP financing. The size of DIP financing is
shown to have a positive impact on recovery rates. DIP financing is also associated with
a larger probability of a successful reorganisation, thus favouring larger recovery rates. I
also find evidence of larger management turnover in firms with DIP financing,
particularly when the DIP lender has no pre-petition relation with the debtor.
Key words: Bankruptcy reorganisation and liquidation; Debtor-in-possession financing;
Recovery rates; Deviations from absolute priority; Management turnover.
JEL classification: G32, G33.
Does debtor-in-possession financing add value?
In this paper I examine the importance of debtor-in-possession (DIP) financing and its
contribution to the wealth of the stakeholders involved in the reorganisation of bankrupt
firms. DIP financing provides lending to troubled companies in Chapter 11 and is
usually a short-term lifeline in the form of working capital. The Code essentially aims to
induce lenders to provide credit to the debtor and at the same time encourage the
trustee or debtor-in-possession to incur expenses to maintain the collateral securing a
claim.
Dhillon et al. (1996) and Chatterjee et al. (1998) analysed stock and bond price
responses to the announcement of DIP financing and also the likelihood of a successful
reorganisation, when a firm emerges from bankruptcy with its independence preserved.
They observed that new financing in bankruptcy is a positive signal to the market and
DIP firms are involved in fewer liquidations. I employ a different approach, based on the
plans of reorganisation of Chapter 11 firms. I use a sample of 389 large publicly-traded
US firms that filed for Chapter 11 during 1986-1997, including both those with DIP
financing and those without DIP financing. I compare recovery rates for all claimants of
each firm to determine if DIP financing adds value to the company. I also examine the
sub-sample of DIP financing firms to assess whether relatively larger amounts of DIP
financing produce higher recovery rates, following a suggestion by Adams (1995). I find
that there is no significant relation between the presence of DIP financing and recovery
rates. However, DIP financing has a positive impact on creditors’ recovery rates as the
size of the new loan increases. This is consistent with firms with larger new loans being
subject to more monitoring from lenders and so less likely to over-invest. Gilson (1990)
presents evidence that bank lenders exercise significant influence over financially
distressed firms’ investment and financing policies. This indicates that DIP financing
1
should be considered as a positive signal for creditors only when the size of the loan is
considerably large. This evidence contrasts with that presented by Dhillon et al. (1996)
and Chatterjee et al. (1998), where the size of the new financing does not seem to be an
issue.1 Gilson (1989) observed that bank lenders are frequently responsible for
dismissing management in financially distressed firms. I find evidence of larger
management turnover for DIP firms, contrasting with Chatterjee et al. (1998). This role is
less evident when the DIP lender is also a pre-petition creditor.
Like Dhillon et al. (1996), Chatterjee et al. (1998) and Elayan & Meyer (1999), I also
show that DIP financing does contribute to successful emergence from bankruptcy. 2 In
particular, I find that when firms did not obtain DIP financing they are more likely to be
liquidated, and unsecured claimants would get lower recovery rates. In this way, since
getting DIP financing improves the probability of a successful reorganisation (or
decreases the probability of a liquidation), it is possible that, upon the announcement of
DIP financing, the market may actually be reacting to a smaller probability of liquidation
and not necessarily to higher recovery rates when compared with other bankrupt
companies without DIP financing. I also run logit models to assess the likelihood of a
successful emergence from Chapter 11, based on some firm characteristics and features
of the bankruptcy processes.
The paper is organised as follows: The next section provides a brief description of DIP
financing. Section II presents the literature review. The hypotheses are introduced in
Section III. The data and methodology are presented in Section IV. Section V provides
the results, including recovery rates, the impact of DIP financing in successful
reorganisations and the assessment of probabilities of a successful reorganisation,
management turnover, the bankruptcy venue and the determinants of DIP financing.
Section VI concludes.
2
I.
Debtor-in-possession financing
The market for debtor-in-possession (DIP) financing in Chapter 11 filings has
experienced great development since 1984, when Chemical Bank created a separate DIP
financing unit. Other banks have entered this market, namely Bankers Trust New York,
Citibank and General Electric Capital Corp. They have experienced minimal losses on
these loans because of their priority status.
The company filing for a Chapter 11 that needs new financing has to file a motion for
authorisation, which involves a two-step process. First, there is an interim financing
order authorising the borrowing of a limited amount to enable the company to operate
for a few weeks. Then, the entry of a permanent (final) order will potentially grant
borrowing up to the full amount of the lender’s commitment. 3
The conditions of new financing are considered in Section 364 of the Bankruptcy Code.
There is a hierarchy for obtaining post-petition financing, implying that the debtor first
has to seek unsecured credit before the Court will grant any kind of greater protection to
a new lender (see Rochelle, 1990). Following the legal fiction that a Chapter 11 is a new
legal entity, the Court can permit new financing with priority over pre-petition
unsecured creditors, with super-priorities over other post-petition creditors (even postpetition priority administrative expenses and taxing authorities), and secured by liens
that have priority over pre-petition liens (priming liens) where the holders of such claims
are adequately protected. However, there must be assets sufficient enough to cover both
the new loan and all pre-petition secured debt not expressly subordinated by the Court’s
order to the debtor-in-possession lender’s lien (Fitch Research, 1991).4 See Appendix A
for a detailed examination of the different types of DIP financing.
3
II.
Literature review
Ostrow (1994) states that the decision whether to approve new financing is directly
related to the likelihood that creditors would get more from the distribution under the
plan of reorganisation. However, sometimes there is little time to consider that an
immediate liquidation could be more profitable for the creditors, and the focus is instead
on whether the debtor should be permitted an opportunity to reorganise. This implies
that the total value of the firm available for distribution to the claimants may be smaller
than without this new financing. Rohman & Policano (1990) say that even when the
debtors are not confronted with imminent default, they may choose to file for Chapter 11
as a means to secure new financing and so preserve their flexibility to accommodate
future growth. In this way, rather than the last resort, DIP financing can be viewed as a
“pro-active” strategy. Perhaps surprisingly, the bankrupt companies see their terms of
credit improve, both in accessibility and in cost, because there is only one post-petition
creditor - the debtor-in-possession bank (Millman, 1990).
Empirical studies in this area have essentially focused on the market reaction to the
announcement of DIP financing and on the bankruptcy outcome. None of these studies
considered the plans of reorganisation themselves, which provide the ultimate means of
comparison between firms with DIP financing and firms without DIP financing, in terms
of recovery rates and deviations from absolute priority rules. Also, these studies did not
try to assess probabilities of a successful reorganisation once in Chapter 11, based on
characteristics of the firm and the bankruptcy process.
Datta & Iskandar-Datta (1995) examined the restructuring activities of 135 financially
distressed companies that filed for Chapter 11 during 1989-1990. They found significant
evidence for the fact that, during the two-year period prior to filing for bankruptcy, these
firms were unable to obtain financing; however, after the filing, the infusion of new
4
capital via fresh loans is large, which may be explained by the super-priority status
conferred to post-petition debt. In this way, the authors argued that firm value might not
decrease, as there is an opportunity to invest in positive NPV projects.
Dhillon et al. (1996) used a sample of 25 firms with debtor-in-possession financing and
80 firms without debtor-in-possession financing that filed for Chapter 11 during the
period of January 1990 to December 1993 and showed the signalling role of this new
financing. The announcement of debtor-in-possession financing is associated with
positive abnormal returns on equity securities and positive (weak evidence) abnormal
returns on debt securities. Also, firms that employ debtor-in-possession financing have
more successfully reorganisations - higher percentage of firms emerging successfully
from Chapter 11 and higher ex-post EBIDT (Earnings Before Interest, Depreciation and
Taxes) as a proportion of total assets and sales.
Chatterjee et al. (1998) examined a sample of 55 publicly traded firms that filed for
Chapter 11 from January 1990 to December 1995 and received approval for DIP
financing. Their results support the benefits of the certification and monitoring role
provided by DIP lenders, that outweigh the high priority of DIP financing. They also show
some evidence of management entrenchment. DIP financing is associated with a positive
stock and bond price response, which may suggest the absence of wealth transfers from
pre-petition creditors to high priority DIP lenders. They found that most firms that
obtained DIP financing are not in economic distress. When compared to bankrupt firms
without new financing, DIP firms show a significant larger probability of successfully
emerging from Chapter 11 and not being involved in posterior filings.
Elayan & Meyer (1999)5 used a sample of 123 firms with debtor-in-possession financing
and 337 firms without debtor-in-possession financing that filed for Chapter 11 over the
period 1980-1995. They support the signalling role provided by DIP lenders that DIP
5
firms face a lower probability of liquidation. DIP financing is associated with a positive
stock price response, in particular if the DIP firm was subsequently liquidated or the
lender was a pre-existing creditor or a bank. Larger loans (relative to total assets) and
the first DIP transaction (as opposed to subsequent transactions) are also associated
with a more positive market reaction. In addition, they found a shorter duration under
bankruptcy proceedings for DIP firms, which may indicate lower bankruptcy costs. 6
III. Hypotheses
Datta & Iskandar-Datta (1995) claim that with DIP financing the firm value suffers less
erosion, due to an opportunity to invest in positive NPV projects. Dhillon et al. (1996)
and Chatterjee et al. (1998) analysed the effect of DIP financing in the stock and bond
markets and found a positive impact. This suggests that the concession of DIP financing
does add value to the firm. Adams (1995) points out that it is not the concession of DIP
financing per se that matters, but its size, implying that small loans should not make
much of a difference. These effects should then be reflected in the payments received by
the claimants upon reorganisation, which are stated in the plans of reorganisation.
Hypothesis 1: Claimants of firms with DIP financing show higher recovery rates than those
of firms without DIP financing. In particular, the larger the size of DIP financing, the higher
the recovery rates.
Dhillon et al. (1996), Chatterjee et al. (1998) and Elayan & Meyer (1999) show that firms
with DIP financing are more likely to successfully reorganise. Schwarcz (1985) argues
that obtaining new financing can act as a good signal to trade creditors and have them
re-establish the terms of the trade credit with the company, thus increasing the
likelihood of a successful reorganisation. These studies emphasise the positive role of
DIP financing in a successful reorganisation. This is a very important issue, as far as
6
bankruptcy is often associated with asset sales at depressed prices, in particular with
piecemeal liquidations, which constitute a significant dead-weight loss (see Andrade &
Kaplan, 1998). Also, the productivity of the plants of Chapter 11 firms that were
converted to Chapter 7 is much lower than those that remained in Chapter 11, as
documented by Maksimovic & Phillips (1998), which suggests a lower value for the
former firms. The positive impact of DIP financing should however be reduced in two
circumstances: a) when the new loan is secured by a lien on already encumbered assets
with equal or senior priority to the existing liens (priming liens); b) when the DIP lender
is a pre-existing creditor and obtains an increase in the seniority of his pre-petition debt.
These situations suggest a lack of confidence of the DIP lender in a successful
reorganisation of the firm. Also, when DIP financing is granted by the Court shortly after
filing for bankruptcy, this should not indicate necessarily good news, as far as there was
not enough time to examine the financial situation of the firm, and so its true needs.
Thus, successful reorganisations should be associated with more time to obtain DIP
financing upon filing for bankruptcy.
Hypothesis 2: DIP financing increases the probability of a going concern and so reduces the
probability of liquidation, which involves lower recovery rates. The presence of priming
liens or increased seniority of pre-petition loans, and a short time to obtain DIP financing
increase the probability of liquidation.
Chatterjee et al. (1998) argue that the evidence of management turnover in firms with
DIP financing is not significant. The authors compared management turnover in their
sample of DIP financing firms to those of Hotchkiss’ (1995), but it is possible that in this
last sample some firms actually received DIP financing. This suggests that the two
samples may not be independent, thereby limiting the validity of their results. Gilson
(1989) observed that bank lenders frequently initiate top management changes in
financially distressed firms. Gilson (1990) adds that bank lenders wield considerable
7
influence over investment and financing policies in financially distressed firms. Since
the DIP lender is usually a bank with considerable expertise in the DIP financing market
and the bankruptcy process, one should expect a larger monitoring and disciplining role
in DIP firms, and eventually more management turnover. When the new financing was
provided by a pre-petition creditor, this disciplining role should then be less evident, due
to a previous relation with the debtor.
Hypothesis 3: Management turnover is larger in firms with DIP financing. In particular,
management turnover is larger when the new financing was granted by a new lender,
without a pre-petition relation with the debtor.
IV. Data and methodology
A.
Data sources
The main source for the data used in this paper was the Bankruptcy DataSource. This
database includes bankruptcy information for every publicly-traded company with
assets in excess of $50 million7 that are in bankruptcy proceedings, have defaulted on
public debt, or have issued a distressed exchange offer. The database begins in 1986.
I compiled a list of 389 firms that went bankrupt from the 1st January 1986 to the 31st
December 1997.8 Of these firms, 212 reorganised independently, 40 were acquired in
bankruptcy, 57 were liquidated in Chapter 11, 13 were converted to Chapter 7 and 4
were dismissed; the result is unknown or still pending in 63 cases. The Bankruptcy
DataSource
(BKRDATA
- Plans of Reorganization) supplied complete
plans of
reorganisation, with data concerning the satisfaction of all the claims, for 172 firms that
reorganised successfully, including 72 debtors that raised DIP financing during the
bankruptcy process. Also, complete plans of liquidation were compiled for 21 firms,
8
including 5 cases of DIP financing. The SEC (Securities Exchange Commission) filings
(including the 8Ks, 10Ks and 10Qs) were also used to check and complement the
information contained in BKRDATA.
The stock prices and the number of outstanding shares were extracted from the Center
for Research in Security Prices (CRSP), Bloomberg and Datastream, upon emergence
from Chapter 11. Occasionally there was no market value for the stock because the firm
might have become private. In these cases (37 firms), I used the estimates provided in
the plans of reorganisation (when a range of values was provided, I used the mid point).
The same criteria was applied to the prices of debt securities, preferred stock, options,
rights and warrants, where the sources included Bloomberg and DataStream, and
ultimately the plans of reorganisation themselves. In the absence of market values or
estimates for debt and preferred stock, the face value and the liquidation preference
value were used instead, respectively (only 16 (2) firms in my sample had market values
for debt (preferred stock)); as for options, rights and warrants, I used the Black-Scholes
valuation model to price these securities (in 33 cases).9
All the news concerning the evolution of the bankruptcy process for the Chapter 11
firms were picked from the Dow Jones News Retrieval and also from the Bankruptcy
DataSource (BKRDATA - DataPage and News Notes, and BKRNEWS). The DataPage
covers such aspects as filing data, business reports, five year summary financials,
descriptions of outstanding securities and schedules of assets and liabilities; it also
supplies the creditors and equity-holders committees, the twenty largest unsecured
creditors list and lists of attorneys and other appointed professionals. The News Notes is
a search base that compiles significant news and developments (i.e. scheduled
hearings), including some relevant dates (filing date, confirmation date and effective
date), DIP financing (amounts, dates, agents), reasons and type of filing, industry,
9
trustees, previous LBOs, acquisitions and mergers, top management, etc.
B.
Methodology
In order to obtain values for recovery rates and deviations from absolute priority for the
different classes of claimants I constructed a table for each company, containing a
summary of its plan of reorganisation:
1) A description of the claims in terms of “secured”, “unsecured” and “equity” 10
11
Administrative claims were not considered in the analysis for two reasons: first, in most
of the cases their value is still unknown as of the confirmation date; second, these
claims always get paid, thus not incurring any write-downs or deviations from absolute
priority (see Tashjian et al. (1996)).
2) The estimated allowed claims
One should note the limitations that the use of the estimated allowed claims bring
about. As pointed out by Weiss (1992), these values usually rely on management
valuations that the Court accepts, unless a creditor manages to establish another
amount through costly hearings; sometimes, the quantities involved are understated, as
the Court might fail to provide the appropriate interest; also, the Court generally accepts
management’s view on whether the classes of creditors are impaired 12, and so the
creditors may think it is not worth the effort and cost to show otherwise.
3) The amounts received upon reorganisation, distributed by the sub-classes “cash”,
“debt”, “preferred stock”, “shares” and “options”13
4) The amounts that should have been distributed to all claimants, had the absolute
priority rules been enforced14, the percentage recovery rates and the percentage
deviation from absolute priority rules. It should be noted that recoveries for
10
equity were obtained as a percentage of the ownership upon reorganisation, allowing
for dilution. In this analysis I follow closely the same methodology as Franks & Torous
(1989, 1994), LoPucki & Whitford (1990), Weiss (1990), Eberhart et al. (1990), Fabozzi
et al. (1993) and Tashjian et al. (1996).
C.
Data analysis
Table I describes the time-series distribution by filing date for the sample of 389 Chapter
11s, consisting of 135 firms with DIP financing, 191 firms without DIP financing and 63
cases where the result is unknown or still pending. For the complete cases, the
companies were classified by type of bankruptcy outcome: independence preserved
(65%), acquired or merged (13%), liquidated in Chapter 11 (17%), converted to Chapter 7
(4%) and dismissed (1%).
When a firm commences a Chapter 11 proceeding, it is usually the result of a voluntary
action of the management of the distressed company. However, creditors can also file an
involuntary bankruptcy petition or even ask for the immediate liquidation of the firm, if
the company is not paying its debts as they come due. An involuntary petition must be
filed by a minimum of three creditors and the unsecured portions of their claims in
aggregate should be at least $10,000 (see KPMG (1997, p. 323)). There is no
requirement, though, that the debtor be insolvent or unable to pay his debts as they
mature, as pointed out by Saft (1993). The firm will then either agree with the filing and
file a voluntary petition, or ask the Court to move for dismissal, if the management
thinks the creditors have no just cause. Another possible classification of different
bankruptcies is in terms of prepackaged bankruptcies (pre-packs) and the more
traditional (conventional) Chapter 11 cases. A pre-pack is a form of corporate
restructuring where the terms of the reorganisation are negotiated outside the Court,
between the debtor and the creditor (under Subsection 1126(b) of the Bankruptcy Code,
11
that permits negotiation between debtor and creditors prior to filing for bankruptcy). In
order to become effective, the company must file a bankruptcy petition and a plan of
reorganisation that has to be ratified by the Court, like a traditional Chapter 11. It is
important to consider pre-packs and non-prepacks separately as far as Tashjian et al.
(1996) found substantial differences between these two types of filing: prepackaged
bankruptcies are less lengthy and involve larger recovery rates than conventional
Chapter 11s. Table II presents the distribution of bankrupt companies by type of filing
and bankruptcy outcome. They include 90% of voluntary filings and 22% of pre-packs.
The most common case is a voluntary filing that is a non-prepack (69%) and the most
unusual is an involuntary filing that is accepted by the company and followed by a prepack (1%).
Chatterjee et al. (1998) noted that DIP firms are in less economic distress than non-DIP
firms. Table III compares the two sub-samples, with DIP financing and without DIP
financing, in terms of some selected financial characteristics, measured at the
accounting year end prior to filing for Chapter 11. Firms that obtained new financing are
generally more profitable, with larger values for revenue and income in terms of total
assets. This table shows the incidence of equity committees in the sample of bankrupt
firms as well. Equity committees seem to be more abundant in Chapter 11s with DIP
financing, which indicates that equity has some value in these firms. Table III also
displays the time spent in bankruptcy15 by the sample of Chapter 11 firms. Time in
bankruptcy does not appear to be (significantly) much higher for firms with DIP
financing (only in terms of medians), but these firms account for a smaller proportion of
the pre-packs in the sample, that are less lengthy than traditional Chapter 11s. If I
compute the time in bankruptcy for DIP firms and non-DIP firms, by type of filing, there
are no significant differences.16 These results contrast with Elayan & Meyer (1999), who
found the bankruptcy process to be less lengthy for DIP firms.
12
Table IV lists the DIP lenders for a sub-sample of 124 firms that obtained DIP financing.
Chemical, GECC and CIT are the banks that are more involved in this market, although
some financial institutions, like Foothill Capital, for example, are also well represented
(with smaller average loans). This distribution agrees with the study by Chatterjee et al.
(1998) of a sample of 55 firms with DIP financing, where those three banks were the
most important ones as well. Also, Dhillon et al. (1996) report that, for 25 Chapter 11s
with new financing in 1990-1993, 5.8% in value and 20.0% in number of new loans
came from one bank only, Chemical, and 64.7% in value and 48.0% in number from
three banks (General Electric Capital Corporation and CIT Group, besides Chemical),
whereas my sample is more diversified with respect to the sources of funding. We can
see that DIP financing is associated with a few number of liquidations: 24 (19%) out of
124 firms.
Table V evidences the importance of DIP financing in terms of some selected financials,
by type of filing. The average (median) loan considered in the sub-sample of firms with
DIP financing is $91.0 ($35.0) million and its proportion of the total assets of the firm,
measured at the year end prior to filing for Chapter 11, has a mean of 15.6% and a
median of 11.3%.17 This compares with the study by Chatterjee et al. (1998) with a
higher average loan size of $121.6 million. Dhillon et al. (1996) obtained a mean loan
size of $75.0 million (median of $125.9 million) and the percentage of DIP financing on
total assets of 11.1% (17.5%). Their sample has negative skewness, as oposed to the
positive skewness of my sample, which implies that they have many higher values than
those reported here, not only in size of DIP financing, but also in terms of its proportion
of the firm’s assets. This extends to the value of the assets as well, where the means
(medians) are $875.2 ($243.8) million in my sample and $461.0 ($1,318.0) million in
their sample. Pre-packs show lower levels of DIP financing, with an average (median)
loan of $54.9 ($35.0) million, which can be explained by the perspective of less time
13
spent in Chapter 1118 and so less need for new financing while in bankruptcy.
Table V also refers to the days in bankruptcy until the firm gets DIP financing, with a
mean of 78.6 and a median of 30.0 days. Though the variation is quite high (standard
deviation=174.6), there is a concentration on the left-hand side of the distribution,
implying that most of the firms are given the new loans shortly after filing for Chapter
11. This is corroborated by the first and third quartiles of the distribution.
V.
A.
Results
Recovery rates
Recovery rates give the percentage of the face value of a creditor’s claim that is repaid
upon reorganisation. In the case of equity-holders, recovery rates give the percentage of
ownership upon reorganisation, allowing for dilution. In order to assess the role of DIP
financing in terms of its contribution to the value of the firm, recovery rates were
calculated for the several stakeholders involved - secured creditors, unsecured creditors
and equity-holders. Table VI reports the results for the two groups of firms, with and
without DIP financing. We can see for the total sample that recovery rates are usually
higher for firms without DIP financing than for firms with DIP financing, but these
values are not very significant, except for equity-holders. Average recovery rates for firms
with DIP financing and without are, respectively, 93.3% and 90.7% for secured creditors,
48.0% and 55.5% for unsecured creditors, 10.9% and 20.8% for equity-holders. The
lower recoveries for equity-holders suggest that there is no coalition between them and
the DIP lender. In order to investigate these lower equity recovery rates, another
alternative indicator was used: total payments to equity as a percentage of the total
distribution to claimants. Despite retaining a smaller ownership in DIP firms, equity-
14
holders recoveries given by the new metric are not significantly different between DIP
and non-DIP firms, which reflects the larger stock value of DIP firms.
Some firms displaying a small amount of new financing can however affect this
comparison. For a sub-sample of 25 conventional Chapter 11s with DIP financing in the
amount of at least 20% of the estimated total debt, and 68 firms without DIP financing,
we can see that creditors recover significantly more in the former firms. 19 This important
result shows that the size of DIP financing does seem to lead to higher recovery rates for
the claimants. This may be because firms with larger DIP loans (in proportion to firm
size) will be subject to more monitoring from the lenders. Due to the possibility of
erosion in the value of the collateral that usually secures the DIP loan, the new lender is
likely to exert more monitoring the larger the loan, despite its super-priority status, in
order to avoid incurring substantial losses (in case the value of the collateral becomes
smaller than the amount of the loan). Adams (1995) also points out that more critical
than the source or form of the new financing while in bankruptcy, it is the size that
matters. This also agrees with Elayan & Meyer (1999), who found a stronger stock price
response to the announcement of larger relative DIP loans.
One can argue that one reason for creditors in these firms to recover more is the fact
that they might be more solvent. For a sub-sample of 19 firms with DIP financing in the
amount of at least 20% of the estimated total debt, the regressions of the recovery rates
for secured and unsecured creditors on the percentage of income in terms of total assets
(one measure of profitability) and the percentage of DIP financing in terms of the
estimated total debt, produce the following results (variables in percentage, p-values in
brackets):
Income
DIP value
 1.035 *
Total assets
Estimatedtotal debt
(0.156) (0.081)
(0.032)
UnsecuredCreditorsRecoveries 31.9  2.289 *
N  19
R 2  37.7%
(1)
15
Income
DIP value
 0.220 *
Total assets
Estimatedtotal debt
(0.000) (0.924)
(0.207)
SecuredCreditorsRecoveries 85.6 - 0.045 *
N  19
R 2  9.8%
(2)
Regression (1) shows that when controlled for firm solvency, the size of DIP financing (as
a percentage of estimated total debt) does contribute positively to larger unsecured
creditors’ recoveries. However, this is not the case in Regression (2), where the p-values
are not significant.
The sample of pre-packs is quite modest (14 firms) and so the fact that unsecured
creditors in pre-packs with DIP financing recover significantly less than DIP nonprepacks should not be given much relevance. In fact, if I discard three cases where the
unsecured creditors received at least 95.6% of their payments in shares, and recovered
on average only 6.4% of their claims (with a median of 7.1%), the results are quite
different: the mean (median) recovery rate is now 53.3% (58.2%), and these values are
not significantly different from the non-DIP pre-packs (p-value=0.145 (0.195)). This
analysis suggests a very optimistic valuation of the stock in those three firms at the time
of the reorganisation plan.
The following sub-sections deal with four additional issues related to recovery rates. In
DIP firms, do creditors receive a larger proportion of their payments as equity because
they believe in the quality certification role provided by the DIP lender? Do creditor
recoveries violate absolute priority rules? Do creditors recover less in the event of a
liquidation and how crucial was to have obtained DIP financing? Do secured creditors as
a class have stronger bargaining power when the new financing was granted by a prepetition (secured) creditor?
16
A.1. The medium of exchange in the reorganisations
Table VII sets out for each class of claimants in both Chapter 11s with DIP financing and
without DIP financing, the percentage of the total payments received in the form of cash,
debt, preferred stock, options and common stock. The classes considered are secured
creditors, unsecured creditors and equity-holders. The majority of payments in firms
with DIP financing is in the form of common stock (36.3%) and debt (32.5%), whereas in
firms without DIP financing the bulk of the payments is in the form of debt (44.8%) and
cash (27.1%). Unsecured creditors receive significantly more common stock and less
debt in firms with DIP financing, showing their confidence in the performance of these
firms after bankruptcy. Equity-holders get more options but less cash and common
stock in the event of DIP financing.
A.2. Deviations from absolute priority
In the sub-sample of 72 Chapter 11s with DIP financing there are 23 cases where
priority was held, 27 cases where priority was violated for unsecured creditors only and
22 cases where priority was violated for secured creditors, using Weiss’ (1990)
classification. These results give an average incidence of deviations from absolute
priority rules of 68.1%, including 39 cases (79.6%) where shareholders actually received
some consideration. The pattern for the 100 Chapter 11s that did not obtain DIP
financing is very similar: priority was held in 39 cases, priority was violated for
unsecured creditors in 37 cases and for secured creditors in 35 cases. The average
incidence of deviations from absolute priority is 61.0%, with equity receiving some
consideration in 53 cases (86.9%). This compares with 77.8% and 85.7% cases,
respectively, in Frank & Torous (1989), 78.4% and 93.1% in Weiss (1990), 96.2% and
80.0% in Fabozzi et al. (1993). These results suggest that there are less violations of
absolute priority in large companies, which constitute the sample in the present
17
study, since the samples of the other authors are more diversified in terms of company
size.
DIP financing does then seem not to impact in the incidence of deviations from absolute
priority. This observation supports Chatterjee et al. (1998), who showed that DIP
financing is associated with a positive stock and bond price response, suggesting the
absence of wealth transfers amongst the claimants. The magnitude of deviations from
absolute priority rules is also not significantly different between the two groups of firms,
as reported in Table VIII. Unsecured creditors and equity-holders gain on average, to the
detriment of secured creditors. On average, deviations in DIP firms and non-DIP firms
are, respectively, -4.2% and -3.3% for secured creditors, 3.6% and 0.2% for unsecured
creditors, 0.6% and 3.1% for equity-holders. However, there is some weak evidence of a
less positive deviation for equity-holders in DIP firms, which suggests that shareholders
in firms without new financing are able to extract more value from the secured creditors
than those in firms with new financing. This implies that there is no coalition between
the old shareholders and the new lender in order to extract value from creditors. The
consideration of non-prepacks with DIP financing in the amount of at least 20% of the
estimated total debt produces negative average deviations for equity-holders, but this is
not significantly different from zero (p-value=0.560). Interestingly, a pseudo-median
company does not exhibit deviations from absolute priority.
A.3. Recovery rates and liquidation
In theory, one dissenting creditor can effectively prevent confirmation of a plan if he
shows that it does not grant him at least what he would get in a liquidation; in practice,
however, this is very difficult to prove. Moreover, because the valuations are based on a
going concern framework, and so higher than in a liquidation setting, it is unlikely that
the creditor could get more otherwise. In this way, Schwarcz (1996) argues that a cram18
down is very important as a threat to induce junior classes to accept a plan of
reorganisation proposed by more senior creditors or the debtor-in-possession because of
this risk of actually ending up getting less. Ravid & Sundgren (1998) in fact report very
modest recoveries for a sample of 61 small Finnish firms that filed for bankruptcy
between 1982 and 1992 and were liquidated in a piecemeal liquidation. Creditors
recovered on average 35.6% of their claims, with a median recovery rate of 33.7%. So, do
Chapter 11 creditors really get less in a liquidation?
I compared recovery rates between 126 firms that reorganised successfully from Chapter
11 and 21 firms that were liquidated (in either Chapter 7 or Chapter 11). Only
conventional Chapter 11s were considered. In all 21 cases of liquidation, secured
creditors always received full payment or the collateral, and equity-holders always
recovered nothing. Figure 1 provides recovery rates for unsecured creditors. Panel A
shows unquestionably that unsecured creditors do recover substantially more (pvalue=0.029) when firms reorganise (mean=49.1%, median=39.3%) than when they
liquidate (mean=28.7%, median=14.1%), which legitimates the credibility of the cramdown threat. In addition, Panel B indicates that unsecured creditors in firms without
DIP financing receive substantially less (p-value=0.043) in a liquidation (mean=28.6%,
median=11.7%) than in a successful reorganisation (mean=49.2%, median=42.5%). This
also happens with DIP firms, but the values are not significant due to the small subsample (5 firms) of DIP firms that were liquidated. These results show that unsecured
creditors do recover more in a successful reorganisation than in a liquidation.
A.4. When the pre-petition lender provides DIP financing
Sometimes the debtor-in-possession lender already has a pre-petition relationship with
the debtor. By providing new financing, he is trying both to protect his collateral base
and give an appearance of normality towards the debtor’s customers and suppliers, to
19
ensure that the going concern of the collateral is maintained. At the same time, he is
avoiding the concession of a stronger negotiating position to the manager resulting from
the possibility of a new lender, while avoiding making concessions to the debtor that
might weaken his existing claims. DIP lenders are often pre-petition creditors, well
informed with respect to the value of the firm. In Table V an average of 42.7% of DIP
lenders were pre-petition (usually secured) creditors. In pre-packs the mean is even
higher, at 63.2%.
The most advantageous aspect of DIP financing for a DIP lender is perhaps the
possibility of collateralising his pre-petition claims with property collateralising his postpetition claims (Cott, 1992). In this way, the collateral for the lender’s pre-petition claims
secures the collateral for his post-petition claims and vice-versa, and he can effectively
condition post-petition financing on the concession of additional collateral for his prepetition loan.20 Also, when the new financing is provided by existing secured lenders,
they sometimes have to prime themselves (Kleiman, 1992); in exchange, they can ask for
(a) the conversion of their pre-petition claim into post-petition and (b) the interest
payments on pre-petition debt to be continuously paid through the bankruptcy period.
For example, Servam Corp./Service America Corp. had a pre-existing credit agreement of
$70 million with General Electric Capital Corp. This lender agreed to provide postpetition financing of an additional $35 million conditional on the consideration of the
full amount of his loans - $105 million - as DIP financing. A different concession was
made to F&C International, where Star Bank NA, a former creditor, lent $17.65 million
as DIP financing in exchange for the full payment of his pre-petition loan on the effective
date. This evidence supports LoPucki & Whitford’s (1990) suggestion that if the postpetition lender is a former creditor, his bargaining power will be strengthened. Table V
reveals that in 7.3% of the firms with DIP financing there was either a situation where
some liens were primed as a result of the new loans, or the DIP lenders benefited from
20
increased seniority of their pre-petition loans.
One should then expect to find higher recovery rates and more positive (less negative)
deviations from absolute priority rules for pre-petition (secured) creditors that are also
DIP financing providers than for secured creditors when we have a new lender, in firms
with DIP financing. Recovery rates for all classes of claimants (secured creditors,
unsecured creditors and equity-holders) and absolute priority rules do not seem to be
significantly affected by the fact that a pre-petition lender is a post-petition lender as
well (results not reported). However, the means of payment are affected. Old lenders that
also provided DIP financing get a significantly (p-value=0.063) larger proportion of cash
(mean=47.5%, median=29.5%) and a smaller proportion of debt (mean=40.5%,
median=18.7%) as a means of payment settlement than in the case when the DIP lender
does not have a pre-petition relation with the DIP firm (mean=26.0% and median=3.9%,
for cash; mean=63.8% and median=84.7%, for debt). In some way, this can actually be
considered as a larger recovery rate for these creditors that are both pre-petition and
post-petition lenders, because the debt is usually over-valued.
The amount of the lender’s commitment is not necessarily constant throughout the
bankruptcy process, as either the firm or the lender may decide to change it. Here are a
few examples: Value Merchants, Inc. obtained a $60 million loan from Congress
Financial and raised it to $65 million; Smith Corona Corp. reduced its loan from
Chemical Bank and Bank of America Illinois from $24 million to $10 million; MEI
Diversified saw its $10 million loan cancelled by LaSalle National Bank; Citibank
granted Leslie Fay Companies, Inc. a $150 million loan, and reduced it to $80 million
when the company obtained a new $80 million loan from First National Bank of Boston.
Table V indicates that in 8.9% of the DIP firms, the new loan was either terminated or
the provider was replaced.
21
In some cases, however, the new lender with a previous relationship with the debtor may
voluntarily agree to forgive the post-petition loan. This happened with Physicians
Clinical Laboratories, Inc., where a group of pre-petition secured lenders forgave $9.8
million in DIP financing. Also, Trans World Airlines, Inc. obtained a loan of $251 million
from Icahn & Co. units (belonging to his CEO) and never paid it back. In this case,
however, the loan did not get super-priority status. In pre-packs there were no
situations of DIP financing terminated or provider changed, nor DIP financing with
priming liens or increased seniority of pre-petition loans.
B.
DIP financing and its contribution to successful reorganisations
Chatterjee et al. (1998) found that DIP firms are more likely to reorganise with the
independence preserved than non-DIP firms (72% and 54%, respectively), they are less
likely to merge or be acquired (8%, as opposed to 18%) and liquidate less (10%, as
opposed to 16%).21 Dhillon et al. (1996) got more successful reorganisations with DIP
financing than without (medians of 85% and 50%, respectively). Elayan & Meyer (1999)
also report more successful reorganisations with DIP financing than without (averages of
90.0% and 78.6%, respectively). This evidence suggests that the concession of DIP
financing has a positive impact on the likelihood of a successful emergence from
bankruptcy.
Figure 2 tries to answer two questions. Firstly, given that a firm obtained (did not obtain)
DIP financing, what is the probability that it will reorganise successfully or liquidate
(Panels B and D)? This is Chatterjee et al.’ (1998), Dhillon et al.’ (1996) and Elayan &
Meyer’s (1999) point. Secondly, given that a firm reorganised successfully (was
liquidated), what is the probability that it obtained (did not obtain) DIP financing (Panels
A and C)?
22
I compared my sample of 135 firms that obtained DIP financing with 191 firms that did
not receive DIP financing, by type of filing and bankruptcy outcome. The values are
given as a proportion of the total cases in each box. Panels A and C show that there are
significantly fewer (p-value=0.000) liquidations than successful reorganisations in
Chapter 11, especially in the case of pre-packaged bankruptcies (28.5% liquidations in
traditional Chapter 11s and 2.7% liquidations in pre-packs). For firms that emerged
successfully, there are significantly fewer (p-value=0.000) firms with DIP financing than
without DIP financing in prepackaged bankruptcies (31.0% of firms with DIP financing),
and no significant difference (p-value=0.463) in conventional Chapter 11s (48.1% of
firms with DIP financing). Also, pre-packs use significantly less (p-value=0.050) DIP
financing than non-prepacks (31.5% of firms with DIP financing in pre-packs versus
44.3% of firms with DIP financing in conventional Chapter 11s). The fact that pre-packs
are less lengthy makes new financing during the reorganisation process not so vital as
with traditional Chapter 11s. For conventional Chapter 11s that were liquidated, the
proportion of firms with DIP financing (34.7%) is significantly smaller (p-value=0.000)
than the proportion of firms without DIP financing. Panels B and D add that in nonprepacks, DIP bankruptcies are significantly more successful (p-value=0.054) than nonDIP bankruptcies (77.7% versus 66.7%). This evidence demonstrates the important
result that if a firm did not get new financing in bankruptcy, the probability that it was
liquidated is substantially larger.
B.1. Failure to obtain DIP financing
In order to assess the role of DIP financing as a deterrent to liquidation, one should try
to separate the cases where firms sought for new financing and failed to obtain it from
those where firms did not try to get DIP financing. Action Auto Rental Inc. and Child
World are examples of firms that claimed to have been liquidated because they failed to
23
attract new financing during bankruptcy. Since it is extremely difficult to determine for
sure whether the absence of DIP financing indicates failure to obtain it or just a decision
not to get it at all, one can only wonder about the magnitude of the probabilities
involved. Using the values for conventional Chapter 11s from Figure 2 - Panels (A) and
(B), we can obtain the upper bounds for P(DIP financing failure/Successful reorganisation)
and P(DIP financing failure/Liquidation) as 0.519 and 0.653, respectively, which are
significantly different from each other at the 5.4% level. This suggests that there is a
larger scope for cases of a failed DIP financing in liquidations that in successful
reorganisations. We can reproduce this analysis for pre-packaged bankruptcies as well,
using the values from Figure 2 - Panels (C) and (D). However, due to the very small
sample of liquidations (2) it is not possible to make precise extrapolations.
B.2. Prediction of successful reorganisations
Since Altman’s (1968) Z-score model a whole panoply of authors have studied different
distress classification models. These studies concentrate on the assessment of
probabilities of a firm going bankrupt, according to some relevant financial ratios. In this
section I examine a different issue: Once in Chapter 11, what is the probability that a
firm will reorganise successfully (either with the independence preserved or through an
acquisition
in
bankruptcy)?
What
are
the
main
ingredients
for a successful
reorganisation?
Table IX presents two logistic regressions that try to assess the probability of a firm
successfully emerging from bankruptcy. The first one is for the whole sample of both
firms with DIP and without DIP financing. The second one is for firms with DIP financing
only.
The first logistic regression22 shows that the probability of success increases with the
24
size of the firm (measured by the logarithm of its liabilities), which suggests that the
claimants stand to lose a lot if the firm does not reorganise successfully. Obtaining DIP
financing is a positive factor, as argued by Dhillon et al. (1996), Chatterjee et al. (1998)
and Elayan & Meyer (1999), and also seen previously, but if there is any need to prime
existing liens or the seniority of pre-petition loans has to be increased, the overall effect
is negative. Pre-packs and involuntary filings usually have positive outcomes, implying
that the firm filed for bankruptcy before there was much time to erode its value.
Chairman changes during bankruptcy and equity committee appointments impact
positively in the likelihood of success of a bankrupt firm. However, the appointment of a
trustee suggests that the firm is not very sound.
In the second logistic regression 23 we can see that the more time it takes to obtain DIP
financing, the more likely is a firm to reorganise successfully in Chapter 11. This implies
that creditors should not agree to a fast DIP financing concession, and judges should
not grant new loans without careful analysis of the situation of the bankrupt firms.
Changes of chairman, the appointment of an equity committee and involuntary filings do
not seem to explain successful reorganisations with DIP financing.24
C.
Management turnover
Chatterjee et al. (1998) compared CEO turnover (and also president turnover) for 16
cases of DIP financing with Hotchkiss’ (1995) results, and obtained a significantly lower
level for this characteristic in study.25 They also found ample monitoring by DIP
financing lenders, who charge large spreads and fees.
Table X shows that there is significantly more CEO and chairman turnover with DIP
firms, in three different circumstances: before & during, during and after bankruptcy.26
This result contrasts with Chatterjee et al. (1998) and can be supported by Gilson’s
25
(1989, 1990) work. Gilson (1989) found that bank lenders are often responsible for
management turnover in financially distressed firms. Gilson (1990) reported a larger
influence of bank lenders over investment and financing policies of firms in distress,
especially if they are turnaround experts.
In order to assess the disciplining role of the new lender, I compared management
turnover (changes of CEO and Chairman) during bankruptcy between a sub-sample of
53 DIP firms that obtained new financing from pre-petition creditors and a sub-sample
of 54 DIP firms that obtained new financing from one of the top five banks (in terms of
DIP financing concession in the present study). The results (not reported) are quite
significant (p-value=0.026): on average, there are 35.8% changes in top management
when the DIP lender already has a relation with the debtor, as opposed to 64.8% when
we have a new lender. One could think that pre-petition lenders are better informed
about the profitability of the firm than new lenders. In this way, we would see better
firms obtaining new financing from pre-petition lenders and so the management
turnover would be smaller in these cases. I then compared the ratio of income to total
assets prior to filing for bankruptcy between a sub-sample of 38 firms that obtained DIP
financing from pre-existing creditors and a sub-sample of 32 firms where the lender was
one of the top five banks. The ratios are 1.4 and 1.6, respectively, and are not
significantly different from each other (p-value=0.552). These results seem to support
the disciplining function of a new bank lender with some DIP financing expertise during
bankruptcy.
D.
Bankruptcy venue and time in bankruptcy
The bankruptcy venue has been the subject of some discussions in the past. Weiss’
(1990) evidence suggests that it can actually pay the debtors to “shop around” and
choose the jurisdiction they think will be more favourable for them, like the Southern
26
District of New York, for instance. Betker (1995) argues that the venue of a case in New
York does not affect the distribution that equity gets, when other firm characteristics are
taken into account. Skeel (1998) talks about the district of Delaware and the Southern
District of New York. He says that in New York, the bankruptcy processes are extremely
slow as opposed to Delaware, where it takes the firms less time to emerge. Delaware’s
specialities are pre-packs and speed27. The coefficient of correlation between a venue in
New York and time in bankruptcy is significantly positive 19.4% (p-value=0.001; N=284).
In the case of a venue in Delaware, this correlation is also significant, but negative: 28.9% (p-value=0.000; N=284). If I consider traditional Chapter 11s only, the time in
bankruptcy in Delaware is significantly smaller than in the other bankruptcy venues
(mean=457.3 days in Delaware and mean=656.1 days in other venues, p-value=0.019;
median=420.5 days in Delaware and median=531.5 days in other venues, pvalue=0.009). Delaware is also faster for pre-packs, at least in terms of medians
(mean=82.9 days in Delaware and mean=116.8 days in other venues, p-value=0.188;
median=42.0 days in Delaware and median=73.0 days in other venues, p-value=0.018).
E.
Determinants of DIP financing
The importance of obtaining DIP financing has already been established. But what are
the factors that influence the concession and size of DIP financing? Table XI presents
the results of two regressions. The first one is logistic and tries to assess the
determinants of DIP financing. The second one is OLS and explains the magnitude of
DIP financing in proportion of the estimated total debt in terms of some relevant
variables.
In the logistic regression28, we can see that the more profitable a firm is, measured in
terms of the proportion of income and revenue in the total assets, the more likely it is to
obtain DIP financing. Equity committees, which can be viewed as a proxy for firm
27
solvency, as they are authorised only when equity has some value, seem to be more
abundant in Chapter 11s with DIP financing. This evidence supports Chatterjee et al.
(1998), who found DIP firms more profitable, and also some previous results in this
paper.
Pre-packs are negatively associated with DIP financing, as seen before. However, some
other qualitative values increase the probability of DIP financing. Changes of CEO
during bankruptcy are positively related with DIP financing, as previously discussed,
and so is the choice of Delaware as the bankruptcy venue. During the 80’s the New York
district was very popular amongst large debtors as the choice for the bankruptcy venue.
Skeel (1998) states that since the beginning of 1990, Delaware has surpassed New York
as the bankruptcy venue choice for large companies. Delaware is a “debtor-friendly”
district, as far as judges usually approve “first day orders” (use of cash collateral,
payment to employees and DIP financing) almost immediately, without holding a hearing
to give creditors an opportunity to respond. In fact, the coefficient of correlation between
a venue in Delaware and time to obtain DIP financing is -17.1% (p-value=0.074;
N=110)29. This fact is significant, especially because many firms that file for bankruptcy
in Delaware are domiciled (incorporated) there but do not necessarily have their
corporate headquarters in that state.
In the OLS regression, the size of DIP loans in terms of the estimated total debt
decreases with the total debt of the firm (given by its log-liabilities), and increases with
the profitability of the firm, measured by its current ratio and income as a proportion of
the assets.
When a firm has a large proportion of its assets encumbered, it should be more difficult
to obtain new financing once in Chapter 11, as this is essentially asset-based. The
negative coefficient for the proportion of secured debt in terms of fixed assets
28
corroborates this idea. Priming liens and a pre-petition lender granting the new
financing are positively associated with the size of DIP financing, and so is obtaining new
financing from one of the top five banks (in terms of total amount of DIP financing
provided in my sample). Activities that need larger amounts of DIP financing seem to be
manufacturing consumers and retail. This agrees with Chatterjee et al. (1998), who
found that the companies with DIP financing are mostly wholesale and retail firms, as
they need working capital to continue their activities.
VI. Conclusion
Debtor-in-possession financing does seem to have a positive role in the bankruptcy
process. Its presence does not significantly affect recovery rates and deviations from
absolute priority, but when its size is considerable there is a positive impact on recovery
rates. This evidence, together with the fact that DIP financing contributes decisively
towards a successful reorganisation in Chapter 11, by lowering the probability of a
liquidation, explains the positive stock and bond price response found by Chatterjee et
al. (1998) and Dhillon et al. (1996). DIP firms show higher management turnover,
especially if the DIP lender has no pre-petition relation with the debtor-in-possession.
This fact is consistent with Gilson’s (1989, 1990) disciplining and monitoring role of the
new lender and contrasts with the findings of Chatterjee et al. (1998).
Judges should be more careful when agreeing to DIP financing. They should refrain from
hastening their (favourable) decision, as quick approvals have been shown to be
associated with liquidations.
29
Appendix A: Types of DIP financing
“Ordinary course” unsecured credit
Under Subsection 364(a) the Court may authorise the debtor to obtain unsecured credit
in the ordinary course of his business. This covers utilities, inventory, rent and freight
charges, but not debt service, buying a capital asset, unusually large purchases of
supplies or any advance of funds, under the supposition of either buying the debtor in
the event of a reorganisation plan or assisting in the liquidation of the business. This
claim will be treated as an administrative priority which is the lowest priority for postpetition debt, and is usually confined to trade suppliers. If the debtor wants some credit
out of the ordinary course of his business, Subsections 364(b), (c) or (d) should be seen
instead.
Credit outside the “ordinary course”
Under Subsection 364(b) the debtor-in-possession is authorised to obtain unsecured
credit outside the ordinary course of his business, unless the Court orders otherwise, to
the extent that the repayment can be a priority over any or all administrative expenses.
In practice, lenders will always seek protection for their claims beyond the
administrative priority, and so they will attempt to proceed under the following sections.
Secured post-petition credit
In case the company cannot obtain new financing as an administrative priority, the
Court can then grant additional protection in the form of a lien on collateral of the
debtor. The debtor has to present a record demonstrating that alternative sources of
funding were sought. There are three possibilities for such protection:
30
a) Super-priority rights, under Subsection 364(c)(1) of the Code, meaning it has priority
over administrative expenses and pre-petition unsecured claims; it grants a first claim
on the proceeds of all unencumbered assets and also on the residual proceeds from
the liquidation of assets with pre-existing liens (usually, a carve-out for a limited
amount of legal fees is provided).
b) Lien on unencumbered assets of the debtor, under Subsection 364(c)(2) of the Code,
not subject to pre-petition liens. This option is seldom used as far as, by the time a
debtor files for Chapter 11, he usually has few remaining unencumbered assets.
c) Junior lien, under Subsection 364(c)(3), on property already encumbered. This
approach is used only if there is substantial equity or as a supplement to other
sources of repayment considered in Section 364 of the Code.
Priming liens
In case the debtor has a fully liened balance sheet, i.e. a high level of encumbered
assets, obtaining debtor-in-possession financing might be difficult, because of lack of
protection afforded to the lender. However, it is still possible to get new financing under
the provisions of Subsection 364(d) of the Bankruptcy Code. The existing lien-holders
may then be primed (effectively subordinated) to new debt, if and only if they are
adequately protected, providing there is substantial equity in the collateral. As Fitch
Research (1991) points out, adequate protection, however, does not require timely
payment of such creditors. This new lien - the priming lien or super-priority lien - is
then equal or senior in priority to the existing liens on those assets. The debtor bears
the burden of proof on this matter: he has to prove that the secured creditor is oversecured, and so he will not be harmed by his position being subordinated in this way.
Another possibility can be the provision of adequate protection by giving liens on
different assets, or even paying current interest.
31
Appendix B: The ranking of claims in bankruptcy
Upon the emergence from bankruptcy, claims get satisfied according to their rank in the
hierarchy. Gilson (1995) presents the relative position of all claims in the queue for the
distribution of the firm value.
1. Secured claims
2. Super-priority claims
3. Priority claims
Administrative expenses
Wages, salaries or commissions
Employee benefit claims
Claims against facilities that store grain or fish produce
Consumer deposits
Alimony and child support
Tax claims
Unsecured claims based on commitment to a federal depositary institutions
regulatory agency
4. General unsecured claims
5. Preferred stock
6. Common stock
32
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35
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36
Endnotes
1
However, because they considered larger loans than I did, there were not many cases
where obtaining a small amount of DIP financing or not getting anything at all would not
make much difference in terms of the abnormal returns of the securities of such firms.
2
In this paper a firm “reorganises successfully” when it emerges from bankruptcy with
either its independence preserved or is acquired or merged. The reason why mergers and
acquisitions are considered as a successful outcome is because the characteristics of the
claims settlement are more similar to those firms that organised independently than to
those that were liquidated.
3
R. H. Macy & Co., for instance, received an interim DIP financing of $60 million two
days after filing for bankruptcy, and two weeks later the Court approved its $600 million
DIP financing line; Wherehouse Entertainment, Inc., on the other hand, got its interim
financing of $30 million 50 days after the filing, and the final approval one month later.
4
The debtor-in-possession can also use the cash that is collateral for the secured
claims. Miller et al. (1990) say that the debtor has to prove that the secured parties’
interests in the cash are or can be adequately protected.
5
This study is contemporary to mine, and so we reached our conclusions independently.
6
However, they did not study pre-packs and non-prepacks separately, and so their
results may suffer from some sample bias (i.e. the sample of DIP firms may have
comparatively more pre-packs than the sample of conventional Chapter 11s).
7
This restriction conditions the results of my analysis to large publicly-traded Chapter
11s.
37
8
When a firm filed for Chapter 11 more than once, all its filings were treated separately.
My sample includes 15 “Chapter 22s”, i.e. 15 firms filed twice for Chapter 11 from 1986
to 1997.
9
It should be noted, although, that this procedure provides only a lower bound estimate
in the majority of the cases, as far as the options under consideration are essentially
American and not European. However, the absence of dividends until maturity makes
this point irrelevant.
10
The category “Equity” includes preferred stock, options, rights, warrants and common
stock.
11
The Bankruptcy Code provides a classification for the different types of creditors and
the treatment of their claims (see Appendix B and also Miller et al. (1990)).
12
If a class of creditors receives less than payment in full on its claim, the class is
impaired; in that case a plan of reorganisation cannot be confirmed over its objection,
except for a cram-down (see Subsections 1123(a)(2) & (3)). Subsection 1129(b) allows
cram-down as to any dissenting class, as long as the Court finds that the “nonconsensual plan” does not discriminate unfairly, and is fair and equitable, with respect
to each class of claims or interests that is impaired under, and has not accepted the
plan. In other words, the absolute priority rule holds for the dissenting class and for
more junior classes. In this way, the non-assenting class is forced to accept the proceeds
that it would have the right to, had the firm been liquidated instead.
13
The category “Options” includes options, rights and warrants.
14
The fair and equitable requirement mentioned in Subsection 1129(b) of the Code is
usually referred to as the absolute priority rule. Under this rule, a plan should be fair
38
and equitable even if unsecured classes of creditors do not realise the full value of their
claims, providing no class junior to them receives or retains anything on account of their
claims or interests. This rule is however qualified, as far as it only applies when there is
a class of claimants that is impaired under the reorganisation plan and has not accepted
it.
15
The time spent in reorganisation is measured from the filing date to the date that the
plan of reorganisation is confirmed by the judge of the bankruptcy Court, regardless of
the outcome.
16
For pre-packs: mean=133.1 (median=69.0) days for 22 DIP firms and mean=87.5
(median=46.0) days for 49 non-DIP firms, p-value=0.183 (0.274); for conventional
Chapter 11s: mean=601.7 (median=483.5) days for 86 DIP firms and mean=619.3
(median=494.0) days for 91 non-DIP firms, p-value=0.783 (0.761).
17
There is a significantly positive correlation of 62.7% (p-value=0.000; N=105) between
the amount of DIP financing and the size of the firm, given by its total assets, measured
at the year end prior to filing for Chapter 11. This suggests that larger firms are able to
obtain bigger amounts of DIP financing.
18
We should, note, however that in pre-packs there is a substitution of time spent in
Court by time spent negotiating prior to the filing, as documented by Tashjian et al.
(1996).
19
Smaller proportions made this comparison not significant at conventional levels.
20
The Court generally performs a test for the approval of cross-collateralisation clauses:
(a) the debtor’s business operations would not survive if it were not for the proposed
financing; (b) the debtor cannot obtain alternative financing on acceptable terms; (c) the
39
lender would not accept less preferential terms; (d) the proposed financing is in the best
interest of the creditors.
21
Chatterjee et al. (1998) also found that firms with DIP financing show a significant
larger probability of not being involved in posterior filings. In my sample of 135 firms
with DIP financing and 191 firms without DIP financing, seven DIP firms and eight nonDIP firms filed for bankruptcy again, suggesting no meaningful differences in the
probability of subsequent filings for Chapter 11.
22
The overall accuracy of this logistic model is 90.8%, with 93.0% correct predictions for
firms that successfully emerged from bankruptcy and 82.5% correct predictions for firms
that were liquidated, with the optimal cut-off of 50%.
23
This logistic model has an overall accuracy of 91.2%, with 96.0% correct predictions
for firms that successfully emerged from bankruptcy and 70.6% correct predictions for
firms that were liquidated, using the optimal cut-off of 45%.
24
Curiously, obtaining DIP financing from top banks (in terms of total amount of DIP
financing in my sample - Chemical Bank, General Electric Capital Corp., CIT Group/Bus
Cred, Bankers Trust and Foothill Capital Corp.) does not make it more/less likely for a
firm to successfully reorganise. This shows that the reputation of the lender does not
influence the bankruptcy outcome for a DIP firm.
25
As pointed out before, one should note that this comparison may not be fair, as
Hothckiss’ sample might have some cases of DIP financing as well, and so the samples
are not necessarily independent.
26
CEO and chairman turnover before filing for bankruptcy are not significantly different
for my sample of bankrupt firms with and without DIP financing.
40
27
There is a high correlation of 35.2% (p-value=0.000; N=326) between a venue in
Delaware and pre-packs.
28
This logistic model has an overall accuracy of 70.4%, with 70.8% correct predictions
for firms with DIP financing and 70.1% correct predictions for firms without DIP
financing, using the optimal cut-off of 40%.
29
New York displays an insignificant positive correlation of 10.8% (p-value=0.264,
N=110).
41
Table I: Time-series distribution of bankruptcies by filing date
Firm bankruptcies by year and bankruptcy outcome. The figures are based on 135 Chapter 11s with DIP financing, 191 Chapter 11s without DIP financing and 63
unknown or pending cases. The sample period is from January 1986 to December 1997.
Years
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
Total
Independence
Acquired or merged
Liquidated in
preserved
Chapter 11
DIP
Non-DIP
DIP
Non-DIP
DIP
Non-DIP
1
1
1
1
3
1
8
6
8
13
1
2
3
15
28
1
5
4
7
10
24
1
2
2
7
12
18
6
4
4
10
8
1
2
4
3
13
10
6
1
4
3
12
9
4
1
3
1
5
6
1
3
87 (65%) 125 (66%) 22 (16%) 18 (9%) 17 (13%) 40 (21%)
Converted to
Chapter 7
DIP
Non-DIP
2
1
1
2
2
3
2
6 (4%)
7 (4%)
Dismissed
DIP
1
1
1
3 (2%)
Non-DIP
1
1 (0%)
Sub-total
DIP
1
0
1
1
9
21
14
18
18
24
22
6
135
Non-DIP
0
1
4
14
21
41
35
28
13
14
11
9
191
Unkn/
Pending
Total
1
2
0
4
2
8
2
4
2
6
9
23
63
2
3
5
19
32
70
51
50
33
44
42
40
389
42
Table II: Distribution of bankruptcies by type of filing
Firm bankruptcies by type of filing and bankruptcy outcome. The figures are based on 135 Chapter 11s with DIP financing and 191 Chapter 11s without DIP
financing. The sample period is from January 1986 to December 1997.
Type of
filing
Voluntary
Pre-pack
Non-Prepack
Total
Involuntary
Pre-pack
Non-Prepack
Total
Independence
preserved
DIP
Non-DIP
Acquired or merged
DIP
Non-DIP
Liquidated in
Chapter 11
DIP
Non-DIP
Converted to
Chapter 7
DIP
Non-DIP
Dismissed
Sub-total
DIP
Non-DIP
DIP
Non-DIP
Total
15
66
81
40
65
105
6
14
20
6
12
18
17
17
1
34
35
1
5
6
7
7
3
3
1
1
22
105
127
47
119
166
69
224
293
1
5
6
3
17
20
2
2
0
0
5
5
0
0
0
0
1
7
8
3
22
25
4
29
33
43
Table III: Financial ratios and other characteristics
Selected characteristics at year end prior to filing for Chapter 11, in successful reorganisations. A firm reorganises successfully when it emerges from bankruptcy
with either its independence preserved or is acquired or merged. The figures are based on 135 Chapter 11s with DIP financing and 191 Chapter 11s without DIP
financing. The sample period is from January 1986 to December 1997. P-values are shown in brackets.
Bankruptcy
outcome
Reorganisation
Mean
Median
a
Current assets
over
current liabilities
DIP
Non-DIP
94
131
1.4
1.2
(0.430)
1.1
0.8
(0.030)
Total assets
over
total liabilities
DIP
Non-DIP
95
134
1.2
1.1
(0.446)
1.1
1.0
(0.259)
Face value
of
long-term debt ($m)
DIP
Non-DIP
94
133
339.0
264.3
(0.360)
92.1
81.1
(0.432)
Face value
of
total liabilities ($m)
DIP
Non-DIP
135
191
726.7 1,052.970
(0.219)
191.2
225.0
(0.133)
Revenue
over
total assets
DIP
Non-DIP
93
132
1.4
0.9
(0.000)
1.3
0.7
(0.000)
Incomea
over
total assets
DIP
Non-DIP
94
132
-0.1
-0.2
(0.081)
-0.1
-0.1
(0.070)
Equity committee
appointed
(%)
DIP
Non-DIP
109
143
20.2
9.8
(0.025)
0.0
0.0
(0.020)
Time in
bankruptcy
(days)
DIP
Non-DIP
108
140
506.3
433.2
(0.184)
457.0
313.5
(0.050)
Income is Earnings Before Interest, Depreciation and Taxes (EBIDT).
44
Table IV: Characteristics of DIP lenders
DIP financing providers by amount, number of loans, average loan and number (%)a of liquidations. The figures are based on 124 Chapter 11s with DIP financing
from January 1986 to December 1997.
DIP financing providers
Bank America Bus Cred
Bank of NY
Bankers Trust
Chase Manhatan
Chemical Bank
CIT Group/Bus Cred
Citibank
Citicorp USA, Inc.
Congress Financial Corp.
First Nat Bank Boston
Foothill Capital Corp.
General Electric Capital Corp.
LaSalle National Bank
Manufacturers Hanover Trust Co.
Wells Fargo
Secured Lenders
Othersb
Unknown
Total
a
Amount ($m)
220.000
199.000
605.000
275.900
4,586.000
1,081.000
225.000
110.000
204.973
69.000
489.550
1,439.000
25.000
238.200
202.000
70.800
1,130.300
110.000
11,280.723
Number of loans
2
3
5
4
10
16
2
2
8
3
13
10
2
4
2
4
30
4
124
Average loan ($m)
110.000
66.333
121.000
68.975
458.600
67.563
112.500
55.000
25.622
23.000
37.658
143.900
12.500
59.550
101.000
17.700
37.677
27.500
90.974
Number (%) of liquidations
0
(0%)
0
(0%)
1
(20%)
1
(25%)
0
(0%)
7
(44%)
0
(0%)
0
(0%)
2
(25%)
0
(0%)
4
(31%)
1
(10%)
0
(0%)
1
(25%)
0
(0%)
0
(0%)
6
(20%)
1
(25%)
24
(19%)
In terms of the number of loans provided by each DIP lender.
“Others” include BT Commercial Corp., Canadian Imperial Bank of Commerce, CIBC, Continental Bank, ITT Comm Fin Corp, LTCB Japan, Mellon Bank NA,
Morgan Guaranty Trust, National Bank of Canada, NCNB, Norwest Business Credit, Inc, Pittsburgh National Bank, Societe Generale SA, Star Bank NA, Sterling
National Bank & Trust Co NY and Transamerica Bus Cred Corp.
b
45
Table V: Characteristics of DIP financing by type of filing
DIP financing and its importance in terms of some selected characteristics. Total assets and total liabilities are measured at year end prior to filing for Chapter 11.
Estimated total debt and total distribution are measured at the time of the reorganisation. The figures are based on 135 Chapter 11s with DIP financing from
January 1986 to December 1997.
Panel A: Pre-packs
DIP financing ($m)
DIP financing / Total assets (%)
DIP financing / Total liabilities (%)
DIP financing / Estimated total debt (%)
Days until DIP financing
DIP financing from pre-petition lenders (%)
DIP financing terminated or provider changed (%)
DIP financing with priming liens or increased seniority of pre-petition loans (%)
Panel B: Non-Prepacks
DIP financing ($m)
DIP financing / Total assets (%)
DIP financing / Total liabilities (%)
DIP financing / Estimated total debt (%)
Days until DIP financing
DIP financing from pre-petition lenders (%)
DIP financing terminated or provider changed (%)
DIP financing with priming liens or increased seniority of pre-petition loans (%)
Panel C: Total
DIP financing ($m)
DIP financing / Total assets (%)
DIP financing / Total liabilities (%)
DIP financing / Estimated total debt (%)
Days until DIP financing
DIP financing from pre-petition lenders (%)
DIP financing terminated or provider changed (%)
DIP financing with priming liens or increased seniority of pre-petition loans (%)
Mean
54.9
17.2
14.6
21.2
42.1
63.2
Mean
97.5
15.2
20.7
29.8
85.7
39.0
10.5
8.6
Mean
91.0
15.6
19.7
28.4
78.6
42.7
8.9
7.3
Stand. deviation
54.4
14.7
12.5
15.0
80.9
49.6
Stand. deviation
255.4
13.5
22.6
46.2
186.8
49.0
30.8
28.1
Stand. deviation
236.3
13.7
21.3
42.7
174.6
49.7
28.5
26.1
Lower quartile
17.0
6.8
6.7
10.2
1.0
0.0
Lower quartile
15.0
5.1
5.8
6.4
21.5
0.0
0.0
0.0
Lower quartile
15.0
5.2
5.9
6.6
18.0
0.0
0.0
0.0
Median
35.0
10.8
9.1
17.2
21.0
100.0
Median
35.0
12.1
13.1
19.2
34.0
0.0
0.0
0.0
Median
35.0
11.3
11.5
18.9
30.0
0.0
0.0
0.0
Upper quartile
85.0
23.5
23.4
33.1
30.0
100.0
Upper quartile
80.0
22.1
31.0
37.1
57.0
100.0
0.0
0.0
Upper quartile
82.5
22.2
24.5
37.0
54.0
100.0
0.0
0.0
Sample size
19
18
18
12
17
19
19
19
Sample size
105
87
87
60
88
105
105
105
Sample size
124
105
105
72
105
124
124
124
46
Table VI: Recovery rates by type of filing in bankruptcy reorganisations
Percentage recovery rates for each claimant classa, by type of filing, in successful reorganisations. A firm reorganises successfully when it emerges from bankruptcy
with either its independence preserved or is acquired or merged. The figures are based on 72 Chapter 11s with DIP financing and 100 Chapter 11s without DIP
financing. The sample period is from January 1986 to December 1997. P-values are shown in brackets.
Type of
filing
Pre-packs
Mean
Median
Non-Prepacks
Mean
Median
Non-Prepacksd
Mean
Median
Total
Mean
Median
DIP Fin.
($m)
14
39.1
28.5
58
120.9
37.5
25
199.6
75.0
72
105.0
35.0
-
Secured creditors
DIP
Non-DIP
14
32
94.0
93.3
(0.885)
100.0
100.0
(0.548)
58
68
93.1
89.4
(0.344)
100.0
100.0
(0.227)
25
68
96.0
89.4
(0.078)
100.0
100.0
(0.047)
72
100
93.3
90.7
(0.401)
100.0
100.0
(0.440)
Unsecured creditors
DIP
Non-DIP
14
32
43.2
68.8
(0.014)
51.1
70.5
(0.024)
58
68
49.1
49.2
(0.990)
36.1
42.5
(0.752)
25
68
72.6
49.2
(0.050)
68.3
42.5
(0.048)
72
100
48.0
55.5
(0.212)
36.8
53.0
(0.076)
Equity-holdersb
DIP
Non-DIP
14
32
6.3
12.0
(0.219)
2.1
4.4
(0.333)
58
68
12.0
24.9
(0.020)
1.8
1.6
(0.420)
25
68
15.7
24.9
(0.161)
5.1
1.6
(0.741)
72
100
10.9
20.8
(0.019)
1.9
2.9
(0.264)
Equity-holdersb c
DIP
Non-DIP
14
32
1.8
3.3
(0.278)
0.9
1.5
(0.264)
58
68
5.7
7.6
(0.473)
0.2
0.6
(0.461)
25
68
6.3
7.6
(0.705)
0.7
0.6
(0.541)
72
100
4.9
6.2
(0.518)
0.3
1.3
(0.207)
Recovery rates for each class are given by the amount received by all the creditors of that class divided by the estimated allowed claim at face value for that class.
Recovery rates for equity were obtained as a percentage of the ownership retained by pre-existing share-holders, after dilution.
a
b
“Equity-holders” include holders of preferred stock, options, rights, warrants and common stock.
This column reflects a different metric for equity recovery rates: the percentage recovery rate for equity-holders is given by the proportion of their payments over the
total distribution to claimants.
c
d
The proportion of DIP financing in the estimated total debt is at least 20%.
47
Table VII: Means of payment in bankruptcy reorganisations
Percentage of the total payments received by all stake-holders in the form of cash, debt, preferred stock, optionsa or common stock, in successful reorganisations. A
firm reorganises successfully when it emerges from bankruptcy with either its independence preserved or is acquired or merged. The figures are based on 72
Chapter 11s with DIP financing and 100 Chapter 11s without DIP financing. The sample period is from January 1986 to December 1997.
Claimants
Secured creditors
Mean
Median
Unsecured creditors
Mean
Median
Total creditors
Mean
Median
Equity-holdersb
Mean
Median
Total
Mean
Median
a
Cash
DIP
Non-DIP
67
88
31.4
23.3
(0.176)
9.9
2.4
(0.267)
71
99
31.8
36.0
(0.487)
18.3
13.7
(0.660)
72
100
30.2
29.3
(0.870)
17.1
12.4
(0.417)
42
65
1.0
10.0
(0.019)
0.0
0.0
(0.047)
72
100
27.9
27.1
(0.854)
16.1
11.6
(0.366)
Debt
DIP
Non-DIP
67
88
58.6
66.6
(0.228)
76.0
87.2
(0.318)
71
99
16.5
29.8
(0.009)
0.0
6.6
(0.036)
72
100
34.0
47.3
(0.006)
25.9
49.7
(0.014)
42
65
3.4
0.7
(0.317)
0.0
0.0
(0.332)
72
100
32.5
44.8
(0.010)
25.0
46.1
(0.023)
Preferred stock
DIP
Non-DIP
67
88
0.6
0.0
71
99
2.7
1.4
(0.357)
0.0
0.0
(0.213)
72
100
1.7
1.0
(0.506)
0.0
0.0
(0.669)
42
65
1.9
0.0
72
100
1.5
1.6
(0.935)
0.0
0.0
(0.974)
Options
DIP
Non-DIP
67
88
0.1
0.0
(0.585)
0.0
0.0
(0.996)
71
99
1.3
1.3
(0.981)
0.0
0.0
(0.140)
72
100
0.5
0.9
(0.478)
0.0
0.0
(0.226)
42
65
43.3
12.9
(0.000)
21.2
0.0
(0.000)
72
100
1.8
1.0
(0.326)
0.0
0.0
(0.001)
Common stock
DIP
Non-DIP
67
88
9.9
9.5
(0.922)
0.0
0.0
(0.607)
71
99
47.7
31.5
(0.006)
46.1
10.8
(0.007)
72
100
33.7
21.5
(0.003)
30.5
14.1
(0.002)
42
65
52.4
74.5
(0.009)
70.1
100.0
(0.012)
72
100
36.3
25.5
(0.008)
34.9
18.0
(0.005)
The category “Options” includes options, rights and warrants.
b “Equity-holders” include holders of preferred stock, options, rights, warrants and common stock.
48
Table VIII: Deviations from absolute priority by type of filing in bankruptcy reorganisations
Percentage deviations from absolute priority for each claimant class a, by type of filing, in successful reorganisations. A firm reorganises successfully when it emerges
from bankruptcy with either its independence preserved or is acquired or merged. The figures are based on 72 Chapter 11s with DIP financing and 100 Chapter 11s
without DIP financing. The sample period is from January 1986 to December 1997. P-values are shown in brackets.
Type of
filing
Pre-packs
Mean
Median
Non-Prepacks
Mean
Median
Non-Prepacksc
Mean
Median
Total
Mean
Median
DIP Fin.
($m)
14
39.1
28.5
58
120.9
37.5
25
199.6
75.0
72
105.0
35.0
-
Secured creditors
DIP
Non-DIP
14
32
-1.6
-1.5
(0.882)
0.0
0.0
(0.738)
58
68
-4.9
-4.2
(0.803)
0.0
0.0
(0.357)
25
68
-1.9
-4.2
(0.200)
0.0
0.0
(0.061)
72
100
-4.2
-3.3
(0.653)
0.0
0.0
(0.533)
Unsecured creditors
DIP
Non-DIP
14
32
-0.2
-0.4
(0.899)
-0.2
0.0
(0.534)
58
68
4.6
0.5
(0.206)
0.0
0.0
(0.295)
25
68
3.6
0.5
(0.409)
0.0
0.0
(0.649)
72
100
3.6
0.2
(0.156)
0.0
0.0
(0.473)
Equity-holdersb
DIP
Non-DIP
14
32
1.8
1.9
(0.969)
0.9
0.9
(0.952)
58
68
0.3
3.7
(0.080)
0.0
0.0
(0.303)
25
68
-1.7
3.7
(0.056)
0.0
0.0
(0.326)
72
100
0.6
3.1
(0.089)
0.0
0.0
(0.322)
a
Deviations from absolute priority for each class measure the net dollar deviations as a percentage of the value of the securities that were restructured.
b
“Equity-holders” include holders of preferred stock, options, rights, warrants and common stock.
c
The proportion of DIP financing in the estimated total debt is at least 20%.
49
Table IX: Determinants of successful reorganisations
Logistic regressions of the determinants of a successful reorganisation in Chapter 11. A firm reorganises successfully when it emerges from bankruptcy with either
its independence preserved or is acquired or merged. A firm has an unsuccessful reorganisation when it is either liquidated in Chapter 11 or its case is converted to
Chapter 7. The figures are based on 135 Chapter 11s with DIP financing and 191 Chapter 11s without DIP financing. The sample period is from January 1986 to
December 1997.
Independent variables
Constant intercept
Log(Total liabilities)
Dependent variables (p-values in brackets)
Successful reorganisation (1)a Successful reorganisation (2)b
1.146
-1.256
0.247
(0.069)
Time to obtain DIP financing after filing for bankruptcy (days)
Dummy DIP financing
Dummy Priming Liens
Dummy Pre-pack
Dummy Involuntary filing
Dummy New chairman during bankruptcy
Dummy Equity committee
Dummy Trustee
R2
Sample size
a
Logistic regression for all the firms.
b
Logistic regression for DIP firms only.
0.911
(0.047)
-1.778
(0.086)
2.034
(0.003)
1.314
(0.077)
2.150
(0.036)
2.131
(0.009)
-3.786
(0.000)
49.433
292
0.749
(0.020)
0.021
(0.082)
-2.042
(0.059)
12.526
(0.053)
-3.447
(0.000)
50.560
91
50
Table X: Management turnover by bankruptcy outcome
Management turnovera for firms that successfully reorganised or were liquidated in bankruptcy. A firm reorganises successfully when it emerges from bankruptcy
with either its independence preserved or is acquired or merged. A liquidation can occur in Chapter 11 or as a conversion to Chapter 7. The figures are based on 135
Chapter 11s with DIP financing and 191 Chapter 11s without DIP financing. The sample period is from January 1986 to December 1997. P-values are shown in
brackets.
Bankruptcy
outcome
Reorganisation
Mean
Median
Liquidation
Mean
Median
Total
Mean
Median
a
New CEO
before and during
Chapter 11
DIP
Non-DIP
109
143
34.9
18.9
(0.009)
0.0
0.0
(0.002)
23
47
56.5
10.6
(0.004)
0.0
0.0
(0.000)
135
191
40.0
16.8
(0.000)
0.0
0.0
(0.000)
New CEO
during
Chapter 11
DIP
Non-DIP
109
143
25.7
9.8
(0.001)
0.0
0.0
(0.001)
23
47
39.1
4.3
(0.003)
0.0
0.0
(0.000)
135
191
28.1
8.4
(0.000)
0.0
0.0
(0.000)
New CEO
right after
Chapter 11
DIP
Non-DIP
109
143
21.1
12.6
(0.078)
0.0
0.0
(0.070)
-
109
143
21.1
12.6
(0.078)
0.0
0.0
(0.070)
New Chairman
before and during
Chapter 11
DIP
Non-DIP
109
143
19.3
14.7
(0.362)
0.0
0.0
(0.350)
23
47
17.4
10.6
(0.603)
0.0
0.0
(0.904)
135
191
19.3
13.6
(0.226)
0.0
0.0
(0.299)
New Chairman
during
Chapter 11
DIP
Non-DIP
109
143
12.8
6.3
(0.087)
0.0
0.0
(0.075)
23
47
8.7
2.1
(0.312)
0.0
0.0
(0.212)
135
191
12.6
5.2
(0.026)
0.0
0.0
(0.018)
New Chairman
right after
Chapter 11
DIP
Non-DIP
109
143
18.3
8.4
(0.025)
0.0
0.0
(0.019)
-
109
143
18.3
8.4
(0.025)
0.0
0.0
(0.019)
Changes in CEO and Chairman.
51
Table XI: Determinants of DIP financing
Determinants of debtor-in-possession financing and of its magnitude in terms of the estimated total debt. The first regression is logistic and the second one is OLS.
The figures are based on 135 Chapter 11s with DIP financing and 191 Chapter 11s without DIP financing that reorganised as independent firms. The sample period
is from January 1986 to December 1997. P-values are shown in brackets.
Independent variables
Dependent variables (p-values in brackets)
DIP financing
Constant intercept
DIP Financing / Estimated total debt (%)
-0.465
Log(Total liabilities)
Current assets / Current liabilities (%)
Income / Total assets (%)
0.021
(0.001)
Log(Revenue / Total assets)
0.663
(0.000)
Log(Secured debt / Fixed assets)
Dummy Pre-pack
-0.839
Dummy Pre-petition lender
Dummy Top 5 Banks that provided DIP financing
Dummy New CEO during bankruptcy
1.464
(0.000)
Dummy Equity committee
0.764
(0.083)
Dummy Bankruptcy venue in Delaware
1.447
(0.000)
Dummy Manufacturing-consumers
Dummy Retail
Sample size
a
(0.086)
-3.523
(0.018)
0.042
(0.054)
0.279
(0.024)
-3.657
(0.002)
29.402
(0.004)
8.570
(0.049)
13.717
(0.002)
15.593
(0.009)
7.515
(0.091)
(0.022)
Dummy Priming Liens
R2
18.779
18.789
287a
63.763
54
Includes 113 firms with DIP financing (39.4% of the sample).
52
(A)
DIP
N=58
Mean=49.1
Median=36.1
Successful reorganisation
N=126
P-Value Means=0.990
Mean=49.1
P-Value Medians=0.752
Median=39.3
Non-DIP
P-Value Means=0.328
N=68
P-Value Medians=0.258
Mean=49.2
Median=42.5
Non-Prepacks
P-Value Means=0.029
N=147
P-Value Medians=0.010
DIP
N=5
Mean=28.9
P-Value Means=0.043
Median=23.0
P-Value Medians=0.037
Liquidation
N=21
P-Value Means=0.982
Mean=28.7
P-Value Medians=0.967
Median=14.1
Non-DIP
N=16
Mean=28.6
Median=11.7
(B)
Successful reorganisation
N=58
Mean=49.1
Median=36.1
DIP
N=63
P-Value Means=0.328
Mean=47.5
P-Value Medians=0.258
Median=36.0
Liquidation
P-Value Means=0.990
N=5
P-Value Medians=0.752
Mean=28.9
Median=23.0
Non-Prepacks
P-Value Means=0.738
N=147
P-Value Medians=0.807
Successful reorganisation
N=68
Mean=49.2
P-Value Means=0.982
Median=42.5
P-Value Medians=0.967
Non-DIP
N=84
P-Value Means=0.043
Mean=45.3
P-Value Medians=0.037
Median=39.7
Liquidation
N=16
Mean=28.6
Median=11.7
Figure 1: Recovery rates for unsecured creditors for DIP and Non-DIP firms
Percentage recovery rates for unsecured creditors by type of filing and bankruptcy outcome. A firm
reorganises successfully when it emerges from bankruptcy with either its independence preserved or is
acquired or merged. A liquidation can occur in Chapter 11 or as a conversion to Chapter 7. The values are
given as a proportion of the total cases in each box. The figures are based on 63 conventional Chapter 11s
with DIP financing and 84 conventional Chapter 11s without DIP financing. The sample period is from
January 1986 to December 1997.
53
(A)
* DIP
N=87
Mean=48.1
Median=0.0
* Successful reorganisation
N=181
P-Value Means=0.463
Mean=71.5
P-Value Medians=0.463
Median=100.0
* Non-DIP
N=94
P-Value Means=0.054
P-Value Medians=0.054
Mean=51.9
Median=100.0
Non-Prepacks
P-Value Means=0.000
N=253
P-Value Medians=0.000
DIP
N=25
Mean=34.7
P-Value Means=0.054
Median=0.0
P-Value Medians=0.054
* Liquidation
N=72
P-Value Means=0.000
Mean=28.5
P-Value Medians=0.000
Median=0.0
Non-DIP
N=47
Mean=65.3
Median=100.0
(B)
* Successful reorganisation
N=87
Mean=77.7
Median=100.0
** DIP
N=112
P-Value Means=0.000
Mean=44.3
P-Value Medians=0.000
Median=0.0
* Liquidation
N=25
P-Value Means=0.054
P-Value Medians=0.054
Mean=22.3
Median=0.0
Non-Prepacks
P-Value Means=0.010
N=253
P-Value Medians=0.010
* Successful reorganisation
N=94
Mean=66.7
P-Value Means=0.054
Median=100.0
P-Value Medians=0.054
** Non-DIP
N=141
P-Value Means=0.000
Mean=55.7
P-Value Medians=0.000
Median=100.0
* Liquidation
N=47
Mean=33.3
Median=0.0
Figure 2: Bankruptcy outcome for DIP and Non-DIP firms
Firm bankruptcies by type of filing and bankruptcy outcome. A firm reorganises successfully when it
emerges from bankruptcy with either its independence preserved or is acquired or merged. A liquidation can
occur in Chapter 11 or as a conversion to Chapter 7. The values are given as a proportion of the total cases
in each box. The figures are based on 135 Chapter 11s with DIP financing and 191 Chapter 11s without DIP
financing. The sample period is from January 1986 to December 1997. * and ** denote that the means and
the medians in the boxes in Panel A (B) are significantly different from the corresponding boxes in Panel C
(D) at the 1% and 5% level.
54
(C)
* DIP
N=22
Mean=31.0
Median=0.0
* Successful reorganisation
N=71
P-Value Means=0.000
Mean=97.3
P-Value Medians=0.000
Median=100.0
* Non-DIP
N=49
P-Value Means=0.574
P-Value Medians=0.585
Mean=69.0
Median=100.0
Prepacks
P-Value Means=0.000
N=73
P-Value Medians=0.000
DIP
N=1
Mean=50.0
P-Value Means=0.574
Median=50.0
P-Value Medians=0.585
* Liquidation
N=2
P-Value Means=1.000
Mean=2.7
P-Value Medians=0.665
Median=0.0
Non-DIP
N=1
Mean=50.0
Median=50.0
(D)
* Successful reorganisation
N=22
Mean=95.7
Median=100.0
** DIP
N=23
P-Value Means=0.000
Mean=31.5
P-Value Medians=0.000
Median=0.0
* Liquidation
N=1
P-Value Means=0.627
P-Value Medians=0.585
Mean=4.3
Median=0.0
Prepacks
P-Value Means=0.000
N=73
P-Value Medians=0.000
* Successful reorganisation
N=49
Mean=98.0
P-Value Means=0.627
Median=100.0
P-Value Medians=0.585
** Non-DIP
N=50
P-Value Means=0.000
Mean=68.5
P-Value Medians=0.000
Median=100.0
* Liquidation
N=1
Mean=2.0
Median=0.0
Figure 2: Bankruptcy outcome for DIP and Non-DIP firms (cont.)
55