About section 364
Section 364 is built as a hierarchy of escalating remedies. Section 364(a) authorizes ordinary-course unsecured credit without court approval. Section 364(b) authorizes non-ordinary-course unsecured credit on notice and a hearing. Section 364(c) authorizes credit secured by liens on unencumbered property, junior liens on encumbered property, or super-priority administrative-claim status under section 364(c)(1) - but only if the debtor cannot obtain unsecured credit under section 364(b). Section 364(d) authorizes priming liens - senior liens on already-encumbered property - but only if the holder of the primed lien receives adequate protection.
The procedural protection at each rung is the burden on the debtor to demonstrate that financing on more favorable terms was unavailable. In practice, this burden is met through a marketing affidavit from an investment banker or financial advisor describing the unsuccessful search for alternative financing. The court must also find that the credit is necessary to preserve the estate.
DIP financing motions typically arrive at the court on an emergency basis at the case-commencement first-day hearing, with interim approval of a portion of the financing followed by a final hearing within thirty days. The DIP credit agreement is frequently a complex multi-hundred-page document with covenants, milestones, fees, and remedies that effectively control the trajectory of the case. The associated cash-collateral order (governed by section 363(c)(2) and (e)) is usually negotiated and approved in tandem.
Section 364 deep-dives
- DIP Financing Types OverviewThe four section 364 rungs (unsecured ordinary, unsecured non-ordinary, secured/super-priority, priming) and when each is used.
- Priming LiensSection 364(d) priming, the adequate-protection requirement, the equity-cushion analysis, and the typical inter-creditor dynamics when an existing senior secured lender is primed.
- Cross-CollateralizationThe controversial practice of granting pre-petition lender additional security as part of the DIP package; the Saybrook/Vanguard split; and the use of "roll-up" features to convert pre-petition exposure to post-petition status.
- Administrative PrioritySection 364(c)(1) super-priority administrative claims, the section 507(b) adequate-protection super-priority, and the ranking of competing super-priority claims.
- Financing HierarchyThe escalating-burden structure of section 364, the requirement to show alternative financing was unavailable, and the typical first-day/final hearing two-step approval process.