Loan to Own – Is Maximizing the Value of the Estate Enough?

Guest author Rachel C. Strickland is the moderator for "Loan to Own Plays - The Good, the Bad and the Ugly," an educational session that takes place Friday, January 28, 9:45 -10:45 a.m. at the 2011 TMA Distressed Investing Conference in Las Vegas.

Meeting with several of my colleagues (and future panelists) the other day, the conversation kept turning to how loan to own strategies are viewed in comparison to other bankruptcy strategies where similar factors are at play.

Control. Cash. Competition. Common enough – but when did getting the most value for your distressed company, or ensuring payback of your secured debt, require that you first past a litmus test of good faith?

Innkeepers in the Southern District of New York comes to mind as a recent example. There was a plan, and there was coordination, but the control was too great; the plan support agreement was thought to go too far. Or consider DBSD North America, also in the Southern District of New York: The timing of the investors was critiqued, motivations were questioned and “strategic” somehow became a dirty word – not only by the bankruptcy court, but by the larger media. Certainly industry and economic stressors have heightened our sense of caution in the past couple of years, but, when a distressed company needs an infusion of capital, when did we start to care about investors’ motivations, and why? Don't most applaud the efficiency of a debtor charging into bankruptcy with a pre-packaged plan or fast-tracked 363 sale with a stalking horse bidder?

What’s the difference? And why does it matter? It undoubtedly matters to certain bankruptcy courts and judges – pick up a paper and you’re likely to see some mention of a loan to own gone sour – but what distinguishes the investment opportunity, roles, strategy and timing of loan to own from other debtor-controlled situations? Should good faith be, as some have proposed, a baseline duty for investors, co-existing with fiduciary duties?

From the concrete decisions and our collective experiences to the larger theoretical issues, and back to the practical: How can one best prepare for a successful loan to own strategy? Join us January 26-28 in Las Vegas at the 2011 TMA Distressed Investing Conference to explore these issues in-depth, and take-away our rules of the road to help you best strategize—whatever side you may fall on.