“Creditor Governance through Loan-to-Loan and Loan-to-Own” by Kai Li
University of British Columbia
This paper provides new evidence on the different strategies adopted by activist creditors in distressed firms. Loan-to-loan occurs when existing creditors continue to provide lending after a borrower files for Chapter 11, while loan-to-own occurs when creditors become equity holders after reorganization. We show that activist creditors strategically choose distressed firms to enforce power and exert influence. We find that maintaining lending relationships is a major consideration for loan-to-loan creditors. Loan-toloan weakens the liquidation bias of secured creditors and allows them to influence management hiring and enforce power against other junior claimants. In contrast, loan-to-own creditors seek board representation and improve corporate governance and the operating performance of emerged firms. Our paper highlights the importance of differentiating activist creditors by their motives and strategies when studying creditor governance.