What Do the Initials DIP & DPO Mean in Financial Terms?
In the financial markets there are two initials you may see from time to time. One is called DIP financing and the other is DPO financing. What is the meaning of these two terms and do they have anything in common.
DIP financing, better known as Debtor In Possession financing is a special form of financing provided for companies in financial distress or under Chapter 11 bankruptcy process. Usually, this debt is considered senior to all other debt, equity, and any other securities issued by a company. It gives a troubled company a new start, albeit under strict conditions.
Chapter 11 gives the debtor a fresh start, which is, however, subject to the debtor's fulfillment of its obligations under its plan of reorganization.
A DPO loan, known as a “discount payoff” loan, is a method used by lenders to help them clear their balance sheet issues.
A discounted payoff (DPO) is the repayment of a loan for less than the outstanding principal balance. DPO’s are typically reserved for distressed assets that have declined significantly in value. Writing-off any portion of the principal is an expensive proposition for the lender. Before accepting any such loss, the lender must be confident not only that any prospective replacement/refinance loan will offer lower proceeds than the existing debt, but also that the borrower is unable or unwilling to infuse additional equity, and the prospect of foreclosing and selling the asset will not recover the principal balance either.
Lenders are incentivized to accept a DPO by the expense and effort of foreclosure, and by the threat of a borrower putting the asset into bankruptcy. The lender’s incentives may also be influenced by factors beyond the dynamics of the specific asset and borrower relationship, such as balance sheet management and regulatory requirements. The ability to close a DPO on short notice may be advantageous to the borrower.
So, the common thread is that there are times when a lender will offer a borrower that has gone into a non-performing loan status a DPO on that loan to not only stave off bankruptcy, but also clear their balance sheet. dlang
In the financial markets there are two initials you may see from time to time. One is called DIP financing and the other is DPO financing. What is the meaning of these two terms and do they have anything in common.
DIP financing, better known as Debtor In Possession financing is a special form of financing provided for companies in financial distress or under Chapter 11 bankruptcy process. Usually, this debt is considered senior to all other debt, equity, and any other securities issued by a company. It gives a troubled company a new start, albeit under strict conditions.
Chapter 11 gives the debtor a fresh start, which is, however, subject to the debtor's fulfillment of its obligations under its plan of reorganization.
A DPO loan, known as a “discount payoff” loan, is a method used by lenders to help them clear their balance sheet issues.
A discounted payoff (DPO) is the repayment of a loan for less than the outstanding principal balance. DPO’s are typically reserved for distressed assets that have declined significantly in value. Writing-off any portion of the principal is an expensive proposition for the lender. Before accepting any such loss, the lender must be confident not only that any prospective replacement/refinance loan will offer lower proceeds than the existing debt, but also that the borrower is unable or unwilling to infuse additional equity, and the prospect of foreclosing and selling the asset will not recover the principal balance either.
Lenders are incentivized to accept a DPO by the expense and effort of foreclosure, and by the threat of a borrower putting the asset into bankruptcy. The lender’s incentives may also be influenced by factors beyond the dynamics of the specific asset and borrower relationship, such as balance sheet management and regulatory requirements. The ability to close a DPO on short notice may be advantageous to the borrower.
So, the common thread is that there are times when a lender will offer a borrower that has gone into a non-performing loan status a DPO on that loan to not only stave off bankruptcy, but also clear their balance sheet. dlang