A priming DIP and a 1:1 roll-up run through the waterfall at five enterprise values, with the transfer between first lien lenders priced.
A DIP loan is repaid before every prepetition claim, so its principal and costs come straight off the value the old creditors share. A roll-up goes further: it converts part of the participating lenders' prepetition debt into DIP debt, lifting it above lenders of the same class who stayed out. With an $80M priming DIP and a 1:1 roll-up, first lien lenders inside the DIP recover 98.0 cents at $420M of enterprise value against 96.4 outside, and 77.8 against 60.0 at $340M.
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 →
Debtor-in-possession financing is what keeps a company running through Chapter 11, and it is usually offered by the existing first lien group. The headline terms are a margin and a fee. The economics that matter to a distressed investor sit in the waterfall: who absorbs the DIP, and how far the roll-up separates lenders who hold the same paper.
| Item | Amount |
|---|---|
| Enterprise value at emergence | 420.0 |
| Administrative and professional fees | 40.0 |
| DIP new money | 80.0 |
| DIP interest and fees through the case | 8.0 |
| Roll-up, 1:1 on new money | 80.0 |
| First lien term loan | 300.0 |
| held by lenders in the DIP (60%) | 180.0 |
| held by lenders outside it (40%) | 120.0 |
| Second lien notes | 150.0 |
| Senior unsecured notes | 100.0 |
Value for prepetition claims = EV − admin − (DIP new money + DIP costs)
= 420.0 − 40.0 − 88.0 = 292.0
Without a roll-up, the whole first lien shares $292.0M on its $300.0M claim, 97.3 cents each, and the second lien gets nothing. Had the case needed no new money at the same enterprise value, the first lien would be paid in full and the second lien would recover $80.0M, or 53.3 cents. The DIP has moved the cost of the case onto the fulcrum. That is fair only if the new money preserved at least $88.0M of enterprise value that would otherwise have been lost, which is the test every junior creditor should run before it decides whether to object.
With a 1:1 roll-up, $80.0M of the participants' prepetition claims becomes DIP debt. It is paid before the remaining first lien, and the first lien class shrinks to $220.0M.
Roll-up paid in full: 80.0, leaving 292.0 − 80.0 = 212.0
Remaining first lien recovery = 212.0 ÷ 220.0 = 96.4%
Participants: 80.0 + 100.0 × 96.4% = 176.4 on 180.0, or 98.0%
Non-participants: 120.0 × 96.4% = 115.6 on 120.0, or 96.4%
In Excel: =MIN(Value-Rollup, Remaining1L)/Remaining1L for the residual rate.
At $420M the difference is small: $1.16M moves from the lenders outside the DIP to those inside, against the 97.3 cents everyone would have had without the roll-up. The size of the transfer depends entirely on how much value is left after the DIP.
| EV | Value after admin and DIP | 1L, no roll-up | 1L in the DIP | 1L outside | Gap, points | Transfer | 2L |
|---|---|---|---|---|---|---|---|
| 340 | 212.0 | 70.7 | 77.8 | 60.0 | 17.8 | 12.8 | 0.0 |
| 380 | 252.0 | 84.0 | 87.9 | 78.2 | 9.7 | 7.0 | 0.0 |
| 420 | 292.0 | 97.3 | 98.0 | 96.4 | 1.6 | 1.2 | 0.0 |
| 460 | 332.0 | 100.0 | 100.0 | 100.0 | 0.0 | 0.0 | 21.3 |
| 500 | 372.0 | 100.0 | 100.0 | 100.0 | 0.0 | 0.0 | 48.0 |
The roll-up is worth nothing when the first lien is covered and a great deal when it is not. At $340M the lenders outside lose 10.7 points against a pro rata split and the lenders inside gain the same $12.8M. That asymmetry is why roll-ups are offered to the whole class in theory and taken up fastest by the lenders who fear the low case most. With the DIP in place the first lien needs $428.0M of enterprise value to be paid in full; without any new money it would have needed $340.0M.
The participants also lend new money. The lenders inside the DIP put up $80.0M, 44.4 per cent of their first lien holding, at a senior position earning $8.0M. Their better recovery is partly payment for providing liquidity when no one else would. The transfer from the non-participants is the part that is not.
The common mistake is to model the DIP as a single senior claim and stop there. That gets the second lien right, at zero, and the first lien wrong for everyone: 97.3 cents for all holders at $420M, when the class actually splits into 98.0 and 96.4, and 70.7 at $340M when it splits into 77.8 and 60.0. Anyone pricing first lien paper during a case must know which side of the roll-up the paper sits on, because two pieces of the same loan now trade on different recoveries.
In practice, ask for the DIP participation schedule before pricing any first lien position during the case, and check whether the roll-up is fixed at the interim order or grows with each later draw. A roll-up that steps up with the final order can move the split materially between the first day hearing and confirmation, without a change in the business.
The fulcrum finder and the recovery model, including a priming DIP run through the same waterfall, are in the free workbooks for this case. The related transfer outside court is worked in how much an uptier costs the excluded lenders.
A roll-up lets lenders who provide new DIP money convert some of their prepetition debt into DIP debt, which ranks ahead of everything else and must be paid in cash on emergence. With a 1:1 roll-up on an $80M DIP, $80M of the participants' $180M first lien claim moves to the top of the waterfall, leaving $100M behind with the lenders who did not participate.
Whoever holds the fulcrum. The DIP and its $8M of costs come off the top, so every dollar lands on the first class that is not paid in full. In the worked case at $420M of enterprise value the second lien would have recovered 53.3 cents had the case needed no new money; with the DIP it recovers nothing, which leaves it no worse off only if the financing preserved at least $88M of value that would otherwise have been lost.
Because staying out is costly when value is low. At $340M of enterprise value a participant recovers 77.8 cents on its first lien and a non-participant 60.0, a gap of 17.8 points. At $460M both are paid in full and the roll-up is worth nothing. The decision is a bet on where enterprise value lands.
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 453 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.