Debtor-in-possession (DIP) financing allows companies in US Chapter 11 bankruptcy to borrow money to maintain operations, fund restructuring efforts or complete asset sales. Under the US Bankruptcy Code, courts can authorise special repayment priorities and security arrangements that provide lenders with additional protection when financing a company already in financial distress.
These arrangements can also change the position of existing creditors. DIP facilities may combine new cash with the conversion of pre-bankruptcy debt into obligations carrying stronger repayment rights, potentially affecting the assets available to satisfy earlier claims. As a result, the total value of a financing facility may be substantially greater than the fresh funding available to the company.
A company filing for Chapter 11 generally remains responsible for managing its business as a debtor in possession. It can continue operating under bankruptcy-court supervision while developing a restructuring plan or arranging a sale of its assets. Obtaining financing can nevertheless be difficult because existing borrowing agreements may be in default, suppliers may tighten payment terms and lenders face uncertainty over future recoveries.
Section 364 of the US Bankruptcy Code establishes how debtors can obtain credit during bankruptcy. Ordinary-course unsecured borrowing may be incurred without separate court approval unless the court orders otherwise, while borrowing outside the ordinary course and financing involving special priorities or security rights generally require judicial authorisation.
Under Section 364(c), a bankruptcy court may approve financing with priority over specified administrative expenses or liens on company property when qualifying unsecured credit is unavailable. Section 364(d) permits new financing secured by liens ranking ahead of, or equally with, existing liens, provided additional statutory requirements are satisfied. These provisions allow a debtor to offer protections that may not have been available to lenders before bankruptcy, although they do not guarantee repayment.
DIP lenders accept the risk of financing a distressed borrower, but the bankruptcy framework allows them to negotiate stronger protections over repayment and collateral. One protection is a superpriority administrative claim, which can rank ahead of certain expenses incurred during bankruptcy proceedings. Another is a security interest over assets belonging to the bankruptcy estate.
A more consequential arrangement is a priming lien, which gives a DIP lender a lien ranking ahead of an existing secured creditor's lien over the same property. Under Section 364(d), the debtor must demonstrate that it cannot obtain the necessary credit otherwise and that the existing secured creditor's interest is adequately protected. Adequate protection can include cash payments, replacement liens or other arrangements intended to protect the value of the creditor's secured interest.
Superpriority claims and priming liens provide different protections. The former concern the ranking of claims against the bankruptcy estate, while the latter concern security interests over particular assets. Lenders may also require detailed operating budgets, regular cash-flow reporting, minimum liquidity levels and deadlines for completing a restructuring or asset sale, giving them additional oversight of the borrower's financial position.
Priority becomes particularly important when the value of a bankrupt company's assets is insufficient to satisfy all outstanding claims. DIP borrowing may provide the cash needed to preserve a business, but the security granted to new lenders can affect how much collateral value remains available to creditors who lent money before bankruptcy.
Consider a hypothetical company with $60 million in proceeds from collateral securing both a DIP facility and an existing loan.
| Claim | Amount |
|---|---|
| DIP financing secured by a valid senior priming lien | $20m |
| Existing secured loan against the same collateral | $50m |
| Unsecured creditor claims | $30m |
| Total claims | $100m |
Assume the court has authorised the DIP lender's senior lien, the existing creditor's adequate protection requirements have been satisfied, and no other expenses or claims reduce the available proceeds. The $20 million DIP loan would be paid first from the collateral, leaving $40 million for the existing secured lender. That lender would face a $10 million shortfall on its original $50 million claim, while no proceeds from the specified collateral would remain for unsecured creditors.
This is a simplified illustration rather than a prediction of how an actual bankruptcy would be resolved. Recoveries depend on lien validity, collateral values, adequate protection, other available assets, administrative expenses and the terms of the court's orders. An existing secured lender's shortfall may also give rise to an unsecured deficiency claim, subject to applicable bankruptcy law.
A financing arrangement disclosed by BioXcel Therapeutics in September 2026 illustrates how the total size of a DIP facility can differ from the amount of new liquidity committed to the borrower. BioXcel and two subsidiaries filed for Chapter 11 protection in the US Bankruptcy Court for the District of Delaware on 27 August 2026. Four days later, the company entered into a superpriority senior secured priming DIP credit agreement with affiliates of Oaktree Capital Management and the Qatar Investment Authority.
Oaktree Fund Administration served as administrative agent under the agreement dated 31 August 2026. According to BioXcel's 1 September 2026 SEC filing, the facility provided for up to $77.25 million in financing, divided between new-money commitments and the conversion of existing debt.
| Financing component | Maximum amount | Purpose |
|---|---|---|
| Initial new-money draw | $9.50m | Funding linked to interim court approval |
| Second new-money draw | $9.50m | Funding linked to final court approval |
| Pre-bankruptcy debt roll-up | $58.25m | Conversion of existing debt into DIP obligations |
| Total DIP facility | $77.25m | Combined financing structure |
The new-money commitments represented approximately 24.6% of the facility, while the proposed roll-up accounted for approximately 75.4%. These percentages describe the maximum financing structure rather than the amount actually borrowed or outstanding at a particular date. The distinction prevents the headline facility amount from being mistaken for an equivalent injection of operating cash.
BioXcel's arrangement did not provide for an unconditional conversion of the entire $58.25 million into DIP debt immediately. The company's SEC disclosure described a roll-up consisting of a $1.25 million prepetition bridge loan and an additional amount equal to three times the new-money loans actually funded.
If the full $19 million of new-money commitments were drawn, the three-to-one mechanism would produce $57 million of additional roll-up debt. Combined with the $1.25 million bridge loan, this would reach the disclosed $58.25 million maximum. Each additional dollar of new-money lending could therefore support the conversion of three dollars of existing obligations into the DIP structure, subject to the agreement and required court approval.
The arrangement served two financial purposes: providing additional liquidity to the company and changing the treatment of part of its pre-bankruptcy debt. Existing lenders may agree to provide fresh funding partly because the roll-up improves the contractual treatment of their earlier claims. Other creditors may scrutinise such arrangements because the conversion of existing debt into DIP obligations can affect creditor priorities and potential recoveries.
BioXcel's SEC filing confirmed that the bankruptcy court entered an interim DIP financing order on 31 August 2026. The company stated that it expected to receive an initial $9.5 million new-money draw on 1 September and to roll up $29.75 million of prepetition obligations as of that date.
The $29.75 million expected roll-up consisted of the $1.25 million bridge loan and $28.5 million linked to the proposed $9.5 million initial new-money draw. Those figures describe the financing arrangements contemplated following interim approval, rather than independently confirming that the funds were drawn and the debt converted exactly as expected.
At the time of the filing, BioXcel said it would seek final approval of the full DIP facility at a subsequent court hearing. The distinction between interim approval, final authorisation and actual borrowing is important because each stage can affect how much financing becomes available and which lender protections take effect.
DIP financing can involve substantial borrowing costs, reflecting the debtor's financial condition and the protections negotiated by lenders. Interest rates are only one component of the total expense, with agreements potentially including exit fees, default interest, professional costs and restrictions on how borrowed funds can be used.
BioXcel's disclosed agreement provides a concrete example of these financing terms.
| Financing term | Disclosed provision |
|---|---|
| Annual contractual interest rate | 13% |
| Additional default interest | 2 percentage points |
| Exit fee | 4% of the principal amount repaid or prepaid |
| Minimum liquidity covenant | $250,000 |
| Scheduled maturity | 27 January 2027 |
| Interest on new-money loans | Cash-pay |
| Interest on roll-up loans | Payment-in-kind |
The distinction between cash-pay and payment-in-kind (PIK) interest is particularly important for a company operating under bankruptcy protection. Cash-pay interest requires the borrower to make payments using available cash, while PIK interest is added to the outstanding debt balance rather than paid immediately. This preserves cash in the short term but increases the amount owed.
For example, a fully drawn $19 million new-money loan carrying a 13% annual rate would generate $2.47 million of simple interest over a full year, before fees and changes in principal. On a $58.25 million roll-up balance, the same annual rate would produce approximately $7.57 million of simple interest. If that interest were capitalised, the outstanding debt would increase, with subsequent interest potentially accruing on the higher balance according to the agreement.
These calculations are illustrative annualised amounts, not BioXcel's reported financing costs. Actual interest depends on borrowing dates, outstanding balances, compounding conventions and the duration of the facility. The scheduled maturity in January 2027 also means the agreement did not contemplate a full year of borrowing from its August 2026 execution date unless its terms were subsequently changed.
BioXcel's agreement additionally required an exit fee equal to 4% of the aggregate principal amount of loans being repaid or prepaid. For illustration, repayment of $19 million in principal would produce a $760,000 fee, while repayment of a larger outstanding balance would increase the amount. This fee was separate from the contractual interest obligations and could add materially to the overall financing cost.
A debtor seeking financing that requires judicial approval submits a motion to the bankruptcy court, generally accompanied by the proposed credit agreement and financing order. Rule 4001 of the Federal Rules of Bankruptcy Procedure governs procedures for financing motions, including disclosure of material terms and the timing of hearings. Creditors and other interested parties may examine the proposed arrangements and object to provisions affecting their rights.
Bankruptcy courts may approve DIP financing in two stages, beginning with an interim order that permits limited borrowing where immediate funding is necessary to avoid serious harm to the bankruptcy estate. Under Rule 4001(c), the final hearing generally cannot begin earlier than 14 days after the financing motion has been served. This process allows the debtor to seek urgent liquidity while providing an opportunity for more extensive scrutiny of the proposed terms.
The court may approve financing with restrictions or modifications, and the resulting orders determine which borrowing rights and lender protections have been authorised. Even after approval, individual advances may remain subject to borrowing conditions, financial covenants and other contractual requirements. A court-approved facility therefore does not necessarily mean that all committed funds have been drawn.
Companies may also require permission to use cash collateral, which differs from obtaining new credit. Cash collateral generally concerns cash or cash equivalents in which another party holds an interest, and its use may require consent or court authorisation. Both arrangements can be important to a debtor's immediate liquidity, but they involve different legal rights and financing mechanisms.
Chapter 11 does not always end with the debtor emerging as a reorganised operating company. DIP financing may instead support continued operations while the company conducts a court-supervised asset sale under Section 363 of the Bankruptcy Code. Maintaining payroll, supplier relationships and essential business activities during that process may help preserve the value of assets being offered to potential buyers.
BioXcel provides an example of this approach. On 28 August 2026, the company announced an asset sale agreement with Teva Pharmaceuticals, involving substantially all its assets, including its IGALMI product and related development assets. Teva Pharmaceuticals International GmbH, a subsidiary of Teva Pharmaceutical Industries, was designated as the stalking-horse bidder in the proposed court-supervised auction process.
A stalking-horse bid establishes an initial proposed transaction against which competing offers may be considered, subject to the court-approved sale procedures. BioXcel's announced DIP financing was intended to support operations during its bankruptcy proceedings, demonstrating how postpetition borrowing can provide liquidity while a debtor pursues a sale rather than a standalone reorganisation.
The announcement of a sale agreement and financing commitment does not establish that either transaction was ultimately completed on its original terms. The final outcome depends on the bankruptcy proceedings, applicable approvals and subsequent developments, which must be distinguished from the arrangements originally disclosed.
DIP financing does not eliminate the possibility of liquidation or further financial deterioration. A facility may be repaid from asset sale proceeds, refinanced through exit financing or addressed through an approved restructuring plan. If the company cannot complete its proposed transaction, the bankruptcy proceedings may continue through an alternative sale, restructuring or liquidation.
Failure to comply with the DIP agreement can create additional difficulties. Missed payments, budget breaches, insufficient liquidity or failure to meet agreed milestones may constitute events of default, potentially giving lenders contractual remedies. Those remedies remain subject to the financing agreement, bankruptcy-court orders and applicable law, so a default does not necessarily permit an immediate seizure of assets.
Although DIP lenders may enjoy stronger priority rights than other creditors, repayment still depends on available asset value and the enforceability of their claims and security interests. Shareholders generally face greater recovery risk because equity interests rank behind creditor claims in the distribution of bankruptcy value. Existing shares may be cancelled or left without recovery under a restructuring plan.
DIP financing can determine whether a financially distressed company has enough liquidity to continue operating while its bankruptcy proceedings unfold. For lenders, special priority rights, collateral and contractual controls can make financing possible despite the borrower's existing financial difficulties. For the debtor, access to cash may preserve operations and provide time to complete a restructuring or asset sale.
The consequences for existing creditors are more complicated because new borrowing may preserve business value while changing the distribution of claims against the bankruptcy estate. Debt roll-ups, priming liens, interest charges and fees can affect the assets available to satisfy earlier obligations, making the financing terms important to any assessment of creditor recoveries.
BioXcel's disclosed facility illustrates why the headline amount is only the starting point. Its maximum $77.25 million financing arrangement included up to $19 million in new-money commitments and $58.25 million in potential debt roll-ups, alongside a 13% contractual interest rate and additional lender protections. Understanding the distinction between fresh liquidity, converted debt, financing costs and creditor priority is essential to evaluating how DIP financing operates in US Chapter 11 bankruptcy.
