Loan to own strategies gain traction in an evolving debt market

Due to ongoing liquidity constraints and an explosion of activity in the secondary debt market, financial investors are considering a number of consensual – and where necessary, non-consensual – restructuring options to manage their distressed and non-performing credits.

One such structure is the “loan to own”. Loan to own strategies are used by financial investors seeking to take control of a target by converting debt obligations into an equity stake in the post-restructured entity. The intention is ordinarily to de-lever the company in question, returning it to a position of financial health, then realising value in a subsequent sale of its equity.

If all relevant parties consent, the loan to own strategy may be implemented through a series of contracts between the company, its secured lenders and its key stakeholders. However, in a non-consensual context, secured lenders will generally appoint an insolvency practitioner to control the transaction, or instigate a scheme of arrangement to force dissenting lenders into the proposed transaction.

Michael Sheng is a partner at Ashurst in Shanghai, and Timothy Sackar is a partner at Ashurst in Sydney. Ashleigh Kable, a lawyer at Ashurst in Sydney, co-authored this article