The quoted margin on a debtor-in-possession loan says little about its return. The fee stack, earned over a short and uncertain case, does most of the work.
A DIP loan's all-in yield is the internal rate of return on what the lender actually funds, after OID and the upfront fee, against the interest and the exit fee it receives over the expected life of the case. On an illustrative $200m DIP at SOFR plus 750 with 2 points of OID, a 2 per cent upfront fee and a 1 per cent exit fee, repaid after nine months, the coupon is 11.80 per cent but the all-in yield is 20.52 per cent, because 5 points of fees are earned over three quarters of a year.
Worked in full in The Distressed Debt Investor by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
That is the number to put against the risk. A DIP lender ranks ahead of almost everyone, with court-approved super-priority and often priming liens under section 364 of the Bankruptcy Code, and its loan is short. Both facts push the headline margin down and the fee stack up, which is why the quoted spread is a poor guide to what the loan pays.
| Input | Value |
|---|---|
| Commitment, fully drawn | $200m |
| SOFR, held flat | 4.30% |
| Margin | 7.50% |
| OID (issue price 98) | 2.0 points |
| Upfront fee, paid at closing | 2.0% |
| Exit fee, paid on repayment | 1.0% |
| Expected time to emergence and repayment | 9 months |
| Interest paid | Monthly, in cash |
Cash out at closing = commitment × (1 − OID) − upfront fee
Monthly cash in = commitment × (SOFR + margin) ÷ 12; final month adds par + exit fee
All-in yield = (1 + monthly IRR)12 − 1
In Excel, with the closing outflow in B1 and the nine monthly inflows in B2:B10: =(1+IRR(B1:B10))^12-1 returns 20.52%.
Step 1, what the lender funds. The loan is issued at 98, so $200m of par costs $196.00m, and the upfront fee of $4.00m comes straight back at closing. Net cash out: $192.00m.
Step 2, what it receives. The coupon is 4.30 + 7.50 = 11.80 per cent, or $1.97m a month. Over nine months that is $17.70m of interest. At repayment the lender gets $200m of par plus a $2.00m exit fee.
Step 3, the profit. $17.70m of interest plus $10.00m from OID and fees: $27.70m on $192.00m funded, 14.43 per cent in nine months, a 1.144x multiple.
Step 4, annualise. The monthly IRR compounds to an effective 20.52 per cent a year (18.81 per cent on a nominal, monthly-compounded basis). The back-of-envelope version, coupon plus fee points divided by years, gives 11.80 + 5.0 ÷ 0.75 = 18.47 per cent: close, but it ignores that the fees are collected up front on a smaller funded amount.
| Pricing | All-in yield |
|---|---|
| Coupon only, SOFR + 750 | 12.46% |
| + 2 points of OID | 15.65% |
| + 2% upfront fee | 19.01% |
| + 1% exit fee | 20.52% |
Five points of fees add about 8 points of annual yield on a nine-month loan. To match the 20.52 per cent with no fees at all, the margin would have to be about 1,451 basis points over SOFR instead of 750. The coupon-only figure, 12.46 per cent, is above 11.80 only because monthly payments compound.
The fees are fixed in dollars; the life of the case is not. The same fee stack earned over six months or over eighteen gives a very different yield, and the lender cannot control how long the case lasts.
| Months to repayment | All-in yield | Spread over SOFR, pts | Profit, $m |
|---|---|---|---|
| 6 | 24.65% | 20.35 | 21.80 |
| 9 | 20.52% | 16.22 | 27.70 |
| 12 | 18.51% | 14.21 | 33.60 |
| 18 | 16.54% | 12.24 | 45.40 |
A fast case raises the yield and lowers the dollar profit; a slow one does the reverse. Which matters depends on the lender. A fund measured on IRR prefers the six-month case. A creditor that provides the DIP to protect a larger pre-petition position, and cares mainly about control of the case and dollars earned, may be indifferent or prefer the longer one. Note also that the yield assumes the loan is repaid in full: if the plan fails, the super-priority is what stands between the DIP and the losses that the waterfall pushes down to everyone else, as in how a DIP roll-up changes recoveries.
Net the OID and upfront fee off the funded amount, add the exit fee to the final payment, and solve for the IRR over the expected life of the case: 20.52 per cent on an 11.80 per cent coupon for nine months. Then run it at six and eighteen. The Distressed Debt Investor builds the Chapter 11 structure with the DIP accruing interest ahead of everyone, and the free workbook for this case carries the waterfall and its returns.
Because the loan is short and the fees are fixed in dollars, which lets lenders earn their return quickly whatever the case length. On the illustrative $200m DIP, 5 points of OID and fees lift a 12.46 per cent coupon-only yield to 20.52 per cent over nine months; earning the same with no fees would take a margin of about 1,451 basis points over SOFR.
Less in yield, more in dollars. The illustrative DIP yields 24.65 per cent if repaid in six months and 16.54 per cent after eighteen, but its dollar profit rises from $21.80m to $45.40m because interest keeps running while the fees stay the same. A lender judged on IRR and one protecting a pre-petition position will read that differently.
Put the net cash out at closing in one cell as a negative, par less OID less the upfront fee, $192.00m in the example, then each month's interest, with par and the exit fee added in the final month. IRR of the range gives the monthly rate; (1 + IRR)^12 minus 1 annualises it, 20.52 per cent here.
This article is one calculation from The Distressed Debt Investor. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
Get the book on Amazon →Free companion files
Also on Amazon UK · Amazon Germany · Amazon France · Amazon Canada
Reading guide: credit, private credit and distressed debt → · All 1614 articles →
If this book helped, or didn’t, a few lines on Amazon are worth more than they look: they are what the next reader goes on. Write a review. The workbook stays free either way.