Debtor-in-Possession Financing, Loan-to-Loan, and Loan-to-Own

41 Pages Posted: 7 Jun 2013 Last revised: 22 Jun 2016

See all articles by Kai Li

Kai Li

University of British Columbia (UBC) - Sauder School of Business; China Academy of Financial Research (CAFR)

Wei Wang

Queen's University - Smith School of Business

Date Written: June 1, 2016

Abstract

This paper provides new evidence on the roles and strategies adopted by different types of debtor-in-possession (DIP) lenders: “loan-to-loan” (LTL) lenders — prepetition secured bank lenders providing DIP financing, and “loan-to-own” (LTO) lenders — activist investors (i.e., hedge funds or private equity funds) providing DIP financing. We find that LTL is more likely in Chapter 11 firms with better operating performance, when prepetition bank lenders’ stakes are at risk, or when they have prior lending relationships with the distressed borrower. In contrast, LTO is more likely in small firms or when prepetition bank lenders’ loans are over-collateralized. Finally, we show that much of the governance improvement at the emergence is attributed to LTO lenders. We conclude that creditors of different institutional types adopt distinct strategies to enforce their control rights under Chapter 11 reorganization and to have contrasting effects on the governance outcomes of emerged firms.

Keywords: DIP financing; activist investors; board turnover; CEO turnover; Chapter 11; creditor control; loan-to-own; loan-to-loan

JEL Classification: G23, G30, G33

Suggested Citation

Li, Kai and Wang, Wei, Debtor-in-Possession Financing, Loan-to-Loan, and Loan-to-Own (June 1, 2016). Available at SSRN: https://ssrn.com/abstract=2275635 or http://dx.doi.org/10.2139/ssrn.2275635

Kai Li

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
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HOME PAGE: http://finance.sauder.ubc.ca/~kaili

China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030
China

Wei Wang (Contact Author)

Queen's University - Smith School of Business ( email )

Queen's University-Smith School of Business
143 Union Street
Kingston, Ontario K7L 3N6
Canada

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