What is the purpose of "debtor-in-possession loans" in distressed investing?

The purpose of "debtor-in-possession (DIP) loans" is fundamentally to help a company during reorganization. When a company files for Chapter 11 bankruptcy, it is allowed to continue operating while it restructures its debts. DIP loans are provided to ensure that the company has access to necessary funds to maintain operations and cover essential expenses during this critical period.

These loans give the company the liquidity needed for day-to-day operations while it works on a reorganization plan that will allow it to become financially viable again. Importantly, DIP loans often come with priority over existing debt, making them attractive to lenders who are willing to take on the risk. Ultimately, the availability of DIP financing can be crucial in helping a distressed company stabilize and emerge from bankruptcy proceedings successfully.