Abstract
We present strong evidence of supra-competitive pricing of debtor-in-possession (DIP) loans to large firms in Chapter 11 bankruptcy. Over-collateralized and with super-priority, strong covenants, rollups, and debtor-funded monitoring costs, these loans are almost risk-free. Nonetheless, loan spreads average 600 basis points, which is 60% higher than leveraged-loan (junk') spreads charged the same firms within three years before bankruptcy filing. While prepetition lenders have a strong bargaining position when supplying DIP loans, spreads are no lower when DIP loans are supplied by new lenders. Junior claimants often contest DIP-loan terms in court - to little avail.
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