Best Practices for
in the New World
BY BOBBY GUY, SHAREHOLDER, & BRADLEY GARDNER AND
MEREDITH HOBEROCK, ASSOCIATES, POLSINELLI P.C.
a reorganization to swap its debt into
equity through a Chapter 11 plan
(essentially a stock purchase), becoming
the owner of the reorganized company.
If these are the typical strategies, then
the most important protections for a
loan-to-own buyer are its ability to credit
bid and its ability to vote on the plan.
Stripped of either of these, the would-be buyer faces the potential of being
“crammed down” in a bankruptcy—
stuck holding the debt for the long term
against a company that successfully
reduces the principal amount and the
interest rate in bankruptcy and then pays
the lower amount over many years.
So, what is the current status of attacks
on the loan-to-own strategy, and what
does it teach about best practices?
‘Indubitable Equivalent’ Is Dead
One of the major strategies to
circumvent credit bidding over the past
decade has been for the debtor to build
the bankruptcy sale into a Chapter 11
plan and then try to prohibit the secured
creditor from bidding by substituting a
different, valuable right in the place of
its credit bid. The substitution method
is known as giving the creditor the
“indubitable equivalent” of its claim; the
problem is that it’s often not entirely
equivalent, and the creditor would much
rather have the right to credit bid.
By 2010, courts of appeal around the
country were divided over whether this
strategy to avoid credit bidding was
The law surrounding distressed acquisitions has been evolving rapidly for the past decade. The
loan-to-own strategy, in which a would-be buyer purchases existing debt at a
discount as a tool to achieve ownership
of the target company, has been one of
the favored strategies of value investors.
During the same period, it has been
the subject of significant scrutiny.
In the past several years, a number
of issues regarding loan-to-own
strategies have been resolved by the
courts, and new decisions provide
fresh guidance for distressed buyers. 1
Accordingly, the time for an update is
at hand, and this article uses the recent
developments to define some best
practices for loan-to-own purchasers.
First, a word on the loan-to-own strategy
is in order. There are always four ways
to buy a company—( 1) a stock purchase,
( 2) a merger, ( 3) an asset purchase, and
( 4) a debt purchase (i.e., the loan-to-own
play). The debt purchase, unlike the other
methods, does not result in immediate
ownership. Instead, the debt owner
transposes the debt into ownership
through one of the first three strategies.
In a typical scenario, the loan-to-own
purchaser credit bids the secured debt
at a distress sale to become the owner
of the assets (an asset purchase), and
the loan purchaser may need to use
its vote to block a reorganization to
force the sale. In another strategy, the
loan purchaser uses its vote to control