How to Protect Your Small Business from "Vulture" Hedge Funds Employing Loan-to-Own Strategies

It’s a fact that lender liability can be an issue for hedge funds that embrace loan-to-own strategies. But by far the most serious consequences of loan-to-own strategies is felt not by the lender, but by the “target” business.

So how do businesses protect themselves from such opportunistic plays? If your company is in default on a loan or in breach of loan covenants, what can you do to avoid falling into the hands a “vulture” hedge fund eager to take control of your business?

I recently shared my insight and advice for businesses with Jennifer Banzaca of The Hedge Fund Law Report for her article entitled “Hedge Funds Employing Loan-to-Own Strategies Face (and Resolve) Ownership Dilemmas” (Vol. 2, No. 35).

The most important actions to take are the following:

(1) proactively find a new lender to take out your existing lender

(2) open negotiations with your current lender to pay off all or part of your loan before they’re motivated to sell it at a deep discount to a loan-to-own lender. Waiting and doing nothing because you have a relatively inexpensive loan with your current lender is not only inadvisable but dangerous in this environment, because of loan-to-own debt buyers.

US Capital Partners is a specialist in small- to middle-market business finance, and is a principal lender to businesses. We know all about loan-to-own strategies and the dire ramifications for borrows in the event of default. This is why The Hedge Fund Law Report contacted me. In fact, our mission and business model is to help clients avoid loan-to-own consequences.

In most cases, loan-to-own is when a hedge fund or other lender provides senior secured debt to a “target” business, or purchases its senior secured debt, with a view to control or acquire the business. The fund often buys the debt at a deep discount. As I noted to Jennifer, stock pledges often serve as key elements in loan-to-own strategies.

Sometimes the fund may try to nudge the target company toward a bankruptcy filing where it can then turn the face value of the debt into an equity ownership in the chapter 11 process. Of course, such a strategy does carry risks. As I explained to Jennifer, “if you become a lender and then, as a lender, force an event that is detrimental to the company, there are lender liability issues.”

Loan-to-own strategies are not new. We’re just seeing more of them now because of the difficult economic climate we’re in and the lack of financing alternatives available. Businesses are often forced into loan-to-own situations because they need more working capital, but can’t get financing from conventional lending sources.

If you’re in this category, you need to know there is sound alternative financing available to you—especially through asset-based loans. And if you’re in default or in breach of loan covenants, you need to get expert counsel quickly, before it’s too late. At US Capital, we specialize in restructuring debt to avoid loan-to-own consequences. It’s imperative for borrowers to take proactive steps to recapitalize before their loan is sold to one of these “vulture” hedge funds. In this situation, the borrower can’t afford to remain passive.

If you would like to know more about how your business can secure the funding it needs, visit US Capital Partners, Inc. at or call (415) 882-7160.