Roll-Up & Cross-Collateralization in DIP (Debtor-In-Possession) Financing as Measures of Creditor Control

There is an increasing debate on whether creditors exert excessive power and influence through their DIP (Debtor-in-Possession) lending arrangements in the Chapter 11 bankruptcy process. DIP lenders often advance the priority of their prepetition claims as a reward for extending credit (through DIP financing) through roll-up or cross-collateralization provisions. As these provisions violate the general principle of equitable treatment among the same class in bankruptcy, they are viewed as products of excessive creditor control. Hence, the paper compares U.S. bankruptcy cases from 2009 to 2011 with roll-up or cross-collateralization provisions in their DIP arrangements to those without, focusing on the CEO turnover rate and the strictness of covenants as signals of creditor control. As companies with those provisions report higher CEO turnover rates and stricter covenants, it is concluded that DIP agreements with cross-collateralization or roll-up signal greater creditor control than those without.