24 Jan What is Lien Priming in Bankruptcy?
Lien priming is a term of art in bankruptcy used to refer to a concept in debtor-in-possession financing (“DIP financing”). DIP financing is a very large topic in itself, but simply put, when a business debtor is trying to reorganize in bankruptcy, it often needs cash. A large industry exists to fund these cash requirements, but special protections for these lenders have emerged to ensure that cash will continue to flow to reorganizing debtors. Lien priming is when a DIP lender is put ahead or at the same level of a preexisting lien.
Lien priming can occur even over the preexisting lender’s objection if certain requirements are met. First, a debtor must show that a loan was unavailable without lien priming. Second, the debtor must show that the prepetition secured lender is adequately protected. This last point is where most of the battles are fought. If there is no pay-down of the prepetition secured debt as part of the DIP financing and no equity cushion in the collateral, a debtor would likely be hard pressed to prime a lender’s lien over its objection. That fact, in itself, could ultimately doom the company’s chance to reorganize in bankruptcy.
Nicholas Ortiz, Boston Bankruptcy Attorney
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