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FRM Part II · FRM Exam Part II · Distress Symptoms and Remedies

A distressed company in Chapter 11 needs new cash to continue operations. Existing lenders refuse to lend on an unsecured basis. Which mechanism in Chapter 11 is most directly designed to encourage a new lender to provide this funding?

Debtor-in-possession financing with a super-priority or priming lien is the mechanism. The court can rank new post-petition loans ahead of other claims, sometimes ahead of existing liens, which compensates the new lender for risk and lets the firm keep operating during reorganization.

  1. AGranting debtor-in-possession financing a priming or super-priority claimCorrect
  2. BConverting the case to Chapter 7
  3. CSubordinating all prepetition secured debt to equity
  4. DLifting the automatic stay for new lenders

Explanation

DIP financing can be given super-priority administrative status or secured by liens, sometimes senior to existing liens with court approval, which makes new lending attractive. Conversion to Chapter 7 ends operations, and subordinating secured debt to equity is not a feature of the Code. Lifting the stay would not provide new funding incentives.

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