How It Works
- 1
Identify distressed company with valuable assets but unsustainable debt
- 2
Purchase existing debt at discount or provide new 'rescue' financing
- 3
Structure loan with tight covenants likely to be breached
- 4
When covenant breach occurs, negotiate debt-for-equity conversion
- 5
Emerge with significant or controlling ownership at deep discount
Key Mechanics
Debt seniority determines recovery priority
Covenant design creates trigger points
Credit bidding allows using debt as currency in bankruptcy
DIP financing provides super-priority position
Regulatory Context
Bankruptcy Code Chapter 11 governs restructuring process. Fraudulent conveyance concerns if loan designed merely to seize assets.