Loans to Chapter 11 Firms: Contract Design and Pricing

Loans to Chapter 11 Firms: Contract Design and Pricing

B. Espen Eckbo, Kai Li, Wei Wang

Series number :

Serial Number: 

Date posted :

November 01 2021

Last revised :

October 29 2023
SSRN Share


  • debtor-in-possession financing • 
  • Chapter 11 • 
  • loan spreads • 
  • loan fees • 
  • default risk • 
  • leveraged loans • 
  • relationship lending

With a hand-collected set of 545 debtor-in-possession (DIP) loan facilities, 2002-2019, we show that these short-term loans are highly over-collateralized and contain a comprehensive set of restrictive covenants, mandatory prepayments, and restructuring milestones - all of which help produce a near-zero repayment risk.

Nevertheless, the all-in spread drawn averages 658 basis points - almost five times the average spread on matched investment-grade loans, and nearly double the average spread on matched leveraged loans issued by highly risky firms outside of bankruptcy. Textual analysis of court documents shows lack of outside lender participation in the loan solicitation process but spreads are somewhat lower when outside interest is high. We discuss alternative interpretations of the high DIP-loan spreads, ranging from monitoring-cost compensation to rent extraction as DIP-loan providers with strong bargaining power share in the preservation of going-concern value helped by the `last resort' loan.

Published in

Published in: 
Journal of Law and Economics, forthcoming


Real name:
Research Member
UBC Sauder School of Business
Real name:
Wei Wang