A second lien holder in Vrishank Motors buys the whole senior loan at 70 to control the restructuring. Senior debt is Rs 500 crore, second lien Rs 300 crore, and it values the business at Rs 550 crore. Work out the loan-to-own economics.

The fund pays Rs 370 crore and, at a value of Rs 550 crore, receives Rs 250 crore of new debt plus 88.9% of the equity, worth about Rs 517 crore: a gain of about Rs 147 crore. It bought the senior because the senior class, paid largely in equity, decides the plan and takes the company. If value is only Rs 350 crore, as the price of 70 implies, it still gets its senior money back and owns 100%, losing only the Rs 20 crore second lien stake.

Picture a shop owner behind on rent, whose landlord has sold the rent arrears to a rival shopkeeper at a discount. The rival now holds the claim that decides whether the shop is evicted, and can take it over on its own terms. Loan-to-own means buying the debt that will be converted into equity, at a discount, so that you end up owning the company. The class to own is the fulcrumThe most senior class of claims that will not be repaid in full in cash or new debt, and so receives the reorganised equity.: at a price of 70 the market believes value stops inside the senior loan.

Cost first: Rs 500 crore of senior at 70 is Rs 350 crore, plus Rs 20 crore paid earlier for the second lien, Rs 370 crore. The plan leaves Rs 250 crore of new debt and Rs 300 crore of equity. The senior's Rs 500 crore claim takes all the new debt and Rs 250 crore of equity; the second lien's Rs 300 crore claim gets Rs 50 crore of equity, a third of it the fund's. The fund holds Rs 250 crore of new debt and about Rs 267 crore of equity, 88.9% of the company: Rs 517 crore on Rs 370 crore, about 1.40x.

Test the market's view. At Rs 350 crore, equity is Rs 100 crore, all of it to the senior; the second lien gets nothing. The fund receives Rs 350 crore for its senior, exactly what it paid, and loses only the Rs 20 crore second lien stake, while owning 100% of the company. At Rs 700 crore the second lien recovers more, so the fund's share falls to 70%, but its value rises to Rs 567 crore. Buying the senior at the market's fulcrum price caps the downside and keeps the upside.

Because control follows the class that votes on the plan and receives the equity. Owning all the senior class lets the fund propose and carry a plan that converts its own claim into the company, while the second lien alone, being junior, can be crammed down. In India, resolution under the insolvency code is decided by the committee of creditors voting by value, and the voting threshold and the treatment of dissenting creditors are set by the rules, so confirm the current thresholds. The risks: the fund's value may be too high, other creditors may challenge the plan, and it must run a three-wheeler maker once it owns it.