Debtor-in-Possession Financing (DIP Financing)

Question: What do Slash, Kiefer Sutherland, John McEnroe, K.T. Tunstall, J.C. Curleigh of Levi Jeans, and Michael J. Fox all have in common? They all own and play Gibson guitars. Anyone who plays the guitar will probably be familiar with Gibson guitars, one of the oldest American musical instrument brands in the USA. What they may not be aware of is that this iconic brand was forced to file for Chapter 11 Bankruptcy protection as a result of over-leveraged debt problems from a string of ill-advised electronics acquisitions.

As Chapter 11 is a reorganization rather that a dissolution, the court and all interested parties have a motivation to keep the company going to get back on its feet. One of the key tools for accomplishing this is Debtor in Possession (DIP) Financing. It is a customized plan that the court must approve, which involves an outside administrator third party new debt specifically designated for keeping a company’s vendors and suppliers sufficiently satisfied, so that they will stay in the game to work with the ailing company. This method was used in the past for Chrysler and General Motors during the FDR administration prior to World War II.

In the case of Gibson, their DIP was approved in 2018, Cortland Capital was appointed as administrator, and KKR bought a controlling interest, acquiring $375 million of the debt to take Gibson out of bankruptcy. Famous case in the world of DIPs. You could say that George Roberts is kind of the Kim Kardashian of LBOs.