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Loan-to-Own

"Patience converts obligation into ownership"

Investment strategy where lender provides financing expecting (or hoping) that the borrower will default, allowing the lender to convert debt into equity ownership at a steep discount.

How It Works

  1. 1

    Identify distressed company with valuable assets but unsustainable debt

  2. 2

    Purchase existing debt at discount or provide new 'rescue' financing

  3. 3

    Structure loan with tight covenants likely to be breached

  4. 4

    When covenant breach occurs, negotiate debt-for-equity conversion

  5. 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.

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