Loan-to-Own Distressed Investing
Buy distressed debt to gain control through a bankruptcy reorganization
- Difficulty
- Expert
- Time to result
- ~months to results
- Steps
- 5
- Confidence
- 94%
Loan-to-own investing targets the debt of a troubled company rather than its vulnerable equity. The investor buys claims—often at a discount—with the expectation that a bankruptcy or restructuring will convert creditor leverage into ownership or control. The mechanism depends on creditor priority, the amount and class of debt acquired, the debtor's reorganization needs, and court approval. Marvel demonstrates both the power and uncertainty of the approach: Carl Icahn accumulated debt, gained control after Marvel filed for bankruptcy, but did not own every important claim. Other creditors still needed repayment, allowing Toy Biz and Isaac Perlmutter to propose an alternative recapitalization that ultimately took control away from Icahn. The framework therefore requires analysis of the entire capital structure, not merely a large position in one debt class.
Origin
Extracted from The Shawn Ryan Show
Core principles
- 01Debt can become a path to ownership
- 02Creditor priority matters more than headline equity ownership
- 03Control depends on the full capital structure
- 04Bankruptcy courts determine the final reorganization
- 05A rival creditor plan can displace the apparent winner
How to run it
- 1
Identify a viable distressed business
Find a company whose operations or assets may retain value even though its existing capital structure is unsustainable.
Pro tip Distinguish a financing failure from a fundamentally obsolete business.
Watch out Cheap debt is not attractive if the underlying enterprise has no recoverable value.
- 2
Map every creditor class
Determine who holds each layer of secured and unsecured debt, its priority, and its likely recovery in different scenarios.
Pro tip Model the incentives of banks, bondholders, trade creditors, and strategic counterparties separately.
Watch out A large position may still be insufficient if another class can block or replace the plan.
- 3
Acquire influential claims
Purchase debt that can provide negotiation leverage or convert into equity during a restructuring.
Pro tip Price the claims against conservative recovery values rather than the original face value.
Watch out The expected bankruptcy may not occur, or the purchased class may be impaired.
- 4
Propose a credible reorganization
Offer a plan that recapitalizes the business, addresses creditor recoveries, and establishes a workable post-bankruptcy ownership structure.
Pro tip Pair financial claims with fresh capital or an operating partner when necessary.
Watch out Control is not assured merely because the investor accumulated debt first.
- 5
Secure creditor and court approval
Build sufficient support for the plan and demonstrate that it satisfies the applicable restructuring requirements.
Pro tip Prepare alternative terms before negotiations become contested.
Watch out Courts and creditors may select a competing proposal with better recoveries or execution prospects.
In the wild
Carl Icahn bought Marvel debt as the company approached bankruptcy and obtained control after its 1996 filing. Because banks and other creditors still held claims, Toy Biz and Isaac Perlmutter could offer a competing plan that supplied money, repaid creditors, and transferred control to their combined company.
→ The debt strategy initially delivered control, but an alternative creditor-backed recapitalization displaced Icahn.
A hypothetical restructuring fund buys secured debt in a manufacturer with valuable factories but excessive leverage. It coordinates with lenders, contributes fresh working capital, and proposes exchanging debt for equity under a court-approved plan.
→ The business exits bankruptcy with less debt while the fund becomes its controlling owner.
Common mistakes
Ignoring the rest of the capital structure
Owning substantial debt does not guarantee control when other creditors retain blocking power or can support a better plan.
Confusing asset value with recovery value
Operational assets may be valuable while legal priority, costs, and competing claims sharply reduce a particular creditor's recovery.
Assuming the first plan will prevail
Bankruptcy is an adversarial process in which strategic buyers, lenders, and other creditors can submit superior alternatives.
Is it for you?
Best for
It is best for sophisticated investors with restructuring expertise, patient capital, and the ability to tolerate legal and valuation uncertainty.
Not ideal for
It is not appropriate for ordinary investors, simple operating acquisitions, or situations where bankruptcy outcomes and creditor priorities cannot be analyzed reliably.
From the transcript
“this is a big part of their playbook, is they buy uh debt in companies that they think are troubled, and with the hopes that…”
“The um the the not so charitable term for this in in the industry is loan to own.”
“Carl Aiken didn't own all the debt.”
From the episode
Marvel