Category Archives: International Trade and Investments


“Loan to own” is a term used in both the USA and Canada as a way to secure a position for a potential investor to ensure that its post commencement finance (“PCF”) or DIP Finance places that investor in a strong enough position to eventually take control of either the assets or the equity in the company.

In the USA “loan to own”, or “offensive” DIP lending, underwent a significant change in the late 1990s and early 2000s as new sources of funding. Distressed investment funds entered the market. There are substantial differences in the approach by commercial banks as opposed to that of distressed investment funds in the USA.

First, commercial banks will look at financing economics and the possibility of future lending opportunities. Distressed investment funds frequently focus on the opportunity to acquire the debtor’s business at a deep discount.

Second, unlike commercial banks, most distressed investment funds do not originate loans to healthy companies. Their funds rather focus on the economic advantages available by investing in distressed companies, including the high short-term fees available via DIP loans.

Third, distressed funds also seek to take advantage of various “loan-to-own” strategies that involve acquiring a dominant or, in some cases, a “fulcrum” position in the capital structure of a distressed company and converting that debt position into equity through a bankruptcy proceeding. For example, under one common approach, the fund simply buys the debt of a distressed company from its existing lenders (normally commercial banks) at a deep discount.

Four, the fund may also acquire the debtor’s equity and, with it, some amount of management control. In addition to the acquisition of discounted debt, a fund can attempt to take ownership by providing DIP finance to the company with the goal of converting the DIP finance claim into equity in the reorganized company through a reorganization plan or, more commonly, with the intention of credit-bidding the acquired debt to then acquire assets of the debtor at auction.

Then, in the USA, like in SA, commercial banks are not in the business of owning and operating their borrowers. It is therefore distressed investment funds, which more frequently employ loan-to-own post-petition financing strategies.

Lastly, in the USA DIP funders profit through fees and interest earned in the deployment of capital. As a result, commercial banks are attracted are to the DIP financing market by the high fees and interest rates and the relative likelihood of repayment typical of DIP loans.

It is also necessary to look at how a DIP financier or for that matter PCF lender, being the distressed investment fund, control the process.

First, in order to assure that it will have an opportunity to credit-bid its PCF obligations and, if applicable, its acquired pre-commencement debt, the offensive PCF lender will typically include milestones in the credit agreement requiring the BRP to undertake a sale process. By doing this the PCF lender can therefore use the PCF agreement to exert significant control over the business rescue proceedings.

Second, a PCF lender could closely examine the company’s business operations. Information obtained from both the initial diligence before the PCF facility is secured and from the reporting requirements in the PCF credit agreements will provide the lender with a head start over other potential bidders in terms of diligence.

Thirdly, although the PCF lender must contend with other potential bidders at auction, the lender should be a step ahead of those bidders.

Then, typical reporting requirements contained in the PCF loan agreement will provide the lender with access to key information regarding the debtor’s business operations. This increases the likelihood that the distressed investment fund may be selected as the “stalking horse” bidder.

Furthermore, the reorganized debtor may then be significantly de-levered because of the conversion of secured debt to equity.

This then leads one to the question as to whether there any chances of distressed investment funds being developed in SA. Because it is would appear to be clear that banks are unlikely to develop such a “products’ may be viewed differently by a specific banking group. In other words, other funders are looking at the possibilities. It is however so that, in a high profile rescue matter, the desire to maintain or strengthen the bank’s relationship with the company can be just as important as the PCF financing loan economics.

Lastly we look at the miscellaneous issues contained in DIP Finance agreements and which potential PCF lenders in South Africa may look at.

Firstly, the agreement will provide for the loan structure and amount. The structure of a DIP loan is frequently determined by the working-capital needs of the debtor and whether it will be structured as a term loan, revolving loan, or some combination of the two, the loan structure itself is likely to have little impact on the outcome of a debtor’s case. The amount of the loan and the perception of liquidity that it can provide can demonstrate an important affirmation of a debtor’s prospects of a successful reorganization.

Second, one will look at price and fees. The pricing of DIP financing agreements is largely driven by macroeconomic factors. In the aftermath of the 2008 financial crisis, commercial lending effectively halted, and the DIP financing market froze along with it. As the DIP financing market dried up, with some former participants going out of business themselves, the few remaining participants could demand extraordinary fees. Without access to reasonably priced DIP financing, many troubled companies focused on workouts and other out-of-court restructurings. As the credit crisis eased and DIP financing again became more widely available, the fees charged for post-petition financing have decreased. Nonetheless, DIP loan pricing terms continue to be favorable when compared with pre-crisis fees and interest rates.

Third, the term and maturity. Whatever the terms of the DIP loan, one of the overriding concerns of a DIP lender is always how and when the loan will be repaid. The lender’s strategy in structuring the timing elements of the loan reflect this concern. Generally, a DIP loan will have a considerably shorter term than a typical pre-petition corporate credit agreement. A DIP lender always faces the possibility that adverse events might occur that could impede the debtor’s emergence and impair the lender’s recovery. For example, many lenders found themselves in difficult positions as the economic landscape changed rapidly in 2008. In addition, most lenders have little interest in becoming embroiled in drawn-out, contentious bankruptcy proceedings.

A lender funding a restructuring therefore typically will seek to limit the period that its borrower remains in bankruptcy and impose milestones to ensure that the debtor continues to progress toward a sale or confirmation and emergence.

Debtors, on the other hand, seek to secure enough time in chapter 11 to carry out a restructuring or sale. Some commentators have expressed concern that short-term DIP loans can make it very difficult for effective reorganization.

Fourth, the security to be provided. A lender can either secure its loan with a lien on the unencumbered assets of the debtor, if any, or through a priming lien on already-encumbered assets.

Furthermore, covenants and events of default. Credit agreement covenants and events of default are lenders’ primary means to control their relationships with their borrowers. In the bankruptcy context, lenders seek to impose various covenants and events of default, among other things, to ensure that the lender receives up-to-date financial performance data. It also provides the lender with an escape route in the event that the borrower’s business falters and ensures that the debtor adheres to a restructuring or sale strategy on a timeline that is acceptable to the lender. Together, these tools can provide powerful levers for DIP lenders to exert control over the bankruptcy case. Borrowers are required to report their performance regularly with respect to financial covenants to lenders. Outside of bankruptcy, these metrics are designed as “canaries” to ensure that the lender is made aware of the borrower’s declining financial health before default becomes inevitable. Examples include debt leverage ratio covenants, fixed-charge coverage ratio covenants, maximum debt-to-equity ratio covenants, and interest-coverage ratio covenants. These metrics, which measure the health of a company in various ways, are rarely as useful in the context of a DIP financing credit agreement because, by definition, the DIP loan borrower is already in distress.

DIP financing credit agreements, therefore, frequently contain financial covenants that measure minimum performance rather than overall financial health, which can provide the lender with an early escape route-without having to wait for an actual payment default-in the event that the borrower’s business falters. Minimum EBITDA covenants are common, usually with increasing minimum levels over time.


Hans Klopper of Independent Advisory


  • Perlman F.G, Baer H.P, Kevane H, Bagby I, Corbi R.J, Farnsworth S, Krause S, Kriegel M, Lucas J.W and Maman M : “Debtor-in-Possession Financing: Funding a Chapter 11 Case” American Bankruptcy Institute
  • Salerno TJ, Kroop J.A and Hansen C : “The Executive Guide to Corporate Bankruptcy” – Second Edition (BeardBooks 2010)



Part 1 – Finding a trusted adviser

Your relationship with your financial planner is critical to your financial health. Choosing a financial adviser is often difficult and establishing a relationship takes time.

Choose wisely

There are currently over 140 000 so called “financial advisers” in South Africa, of which only approximately 6 000 have the professional designation of being a Certified Financial Planner (CFP®) and who are members of the Financial Planning Institute of South Africa. Choosing a professionally qualified financial planner to look after your financial health is as important as choosing a professionally qualified doctor to look after your physical health. A professionally qualified financial planner is easy distinguishable and has the designation “CFP®” at the end of his name.

Ask penetrating questions

You are entitled to ask penetrating questions pertaining to a financial planner’s tertiary qualifications, experience, contracts and licenses. A client should ask penetrating questions with regards to the advice given and financial products presented. A professional financial planner ought to be able to answer any direct question clearly and coherently. Fuzzy, vague answers to clear questions should be a warning to a client that the experience and/or knowledge level of an adviser is not up to standard.

Your financial health should be the main topic and focus

An experienced financial planner will always keep his focus on his client’s financial needs. It goes without saying that a thorough discussion of a client’s needs is the starting point of a professional relationship with a financial planner. Your needs ought to be understood and addressed by your financial planner in a clear and direct manner. A financial planner functions in the same way as a doctor making a diagnoses and then formulates a medical solution and prescribing medication and/or rehabilitating conduct.

Regular check-ups

Monitoring your financial plan and financial progress should be done at least annually. You are assisting your financial planner to focus on your needs if you make an appointment with him in the same way you see your dentist or doctor for a check-up.

Be a transparent client

It is easier to help a client when the client is transparent and not secretive. It is a matter of trust. One should be able to trust one’s financial planner with sensitive information as. It is very difficult to advise a client accurately when such a client is secretive. An experienced financial planner who has your best interests at heart will want to know about the details in your will, your monthly cash flow, previous marriages, children from a previous marriage, surities that you signed, elderly parents that are or will become part of your financial concerns, etc. The more your financial planner knows, the more he will be able to be of value to you.

An experienced, knowledgeable financial planner and a transparent, involved client can build a mutually beneficial relationship over time. Trust is earned and forms the basis of all relationships – choose your trusted adviser wisely! 

Louw Venter CFP®
For enquiries please email:

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice.


By Hillary Plaatjies

Due to the increase in International Trade and Investments into the worldwide markets, trade and movement of assets across borders are more frequent and as a result thereof cross-border Insolvencies are becoming more frequent.   Cross-border Insolvency law primarily deals with situations where an insolvency procedure is initiated in one jurisdiction, in relation the property of a debtor who is situated in another jurisdiction.[1]   The law of insolvency on the one hand, and conflict of laws (Private International law) must be considered

A question which is increasingly imposed are whether an order made by a foreign court, appointing a foreign representative, will be recognized by a South Africa court and what steps must be taken by the foreign representative to deal with assets of the debtor in South Africa.

In South Africa, the common law system dealing with Private International Law and precedent must be applied in cross-border insolvency matters.  The statutory position will come into effect, once the cross-border Act[2], comes into full effect.  The Cross-border Insolvency Act was assented to on 28 November 2003.[3]  This Act is based on the UNCITRAL Model Law on cross-border Insolvency.  The purpose of this UNICITRAL Model Law on Cross-border Insolvency is to provide effective mechanism and to create modern legal framework to effectively address cross-border insolvency proceedings and to regulate co-operation between foreign courts.  South Africa build the element of reciprocity into the cross-border provisions.  No countries have been designated whose insolvency court orders would be reciprocally recognized in South Africa and the Act[4]cannot be implemented until the Minister of Justice has designated the foreign states to which the Act will apply.

Cross-border insolvency is approached by States using either a territoriality approach or the universality approach.  The territoriality approach seeks to protect local assets for the benefit of local creditors.   It confines the Insolvency proceedings to the jurisdictional limits of the country in which the assets and debts are located[5].  Universality approach supports co-operation between states when dealing with multinational corporations.  Universality approach treat cross-border insolvency as a single matter to ensure equal treatment to creditors from different jurisdictions and to which the courts of other countries would give their assistance.

South Africa is not a party to any international convention or treaty on Cross-border insolvency.  Unless the situation is governed by a treaty or legislation, the common law principles and precedent regarding recognition of a foreign representative in South Africa is applicable.  The common law regulates recognition of foreign representatives by South African courts.

Property as defined in the Insolvency Act[6] includes all types of property, movable and immovable situated in South Africa.  In South African Insolvency Law, the property vests in the trustee in a sequestration as provided for in section 20 of the Insolvency Act[7].   In a liquidation, the company remains owner of its property and the liquidator obtains control of that property.[8]  The common law draws a distinction between immovable and movable assets.In the case of movable assets, the principle is that the foreign representative may claim any movable property without first having to obtain recognition.  The movable assets are deemed to be vested in the foreign trustee and recognition is deemed to be a formality.

A foreign representative who wants do deal with immovable property, must first obtain recognition by the courts.  The law of location of the property (lex rei sitae) principle applies in respect of immovable property and recognition must be obtained by the court where the property is situated.

In Ward v Smit: In re Gurr V Zambia Airways Corp Ltd[9]the court held that a foreign representative of a juristic person who wants to deal with movable property, immovable property or incorporeal property in South Africa, must apply for recognition to the High Court of South Africa.   The court held that a recognition of a foreign liquidator is in the discretion of the court but dependent on considerations of comity, convenience and equity.  The South African courts exercise their discretion when hearing such an application based on comity, convenience and equity.  If recognition is refused by a South African court, a foreign creditor may apply for a sequestration or winding-up of the estate in the jurisdiction.


Foreign representatives have no locus standi to deal with any property in South Africa belonging to a debtor or sue or defend actions for the company under provisional or final liquidation unless the foreign representative applied to the South African court for recognition.

It has been submitted that a foreign representative, who seeks recognition from a court, must satisfy the court of his appointment, but this will not be submitting a letter of request as required by previous legislation.  Application must be made by the foreign representative to a division of the High Court in South Africa with necessary jurisdiction, where the assets are situated.

The discretion of the court as to whether it should grant recognition of a foreign representatives is absolute.  However, in practice, the discretion is granted in the interest of comity, convenience and equity.  In Ward v Smit: in re: Gurr v Zambia Airways Corporation Ltd[10] it is stated that the court has wide discretion to recognise or not and would strive to protect local creditors if desirable to do so.

In practise, application for formal recognition has been put into a principle.  The recognition order in these instances is a declaratory order regarding the foreign representative entitlement to administer the assets as if they were in the relevant jurisdiction where his authority derives from.   It is also submitted that a foreign provisional representative should not be recognized where it is uncertain if his appointment will become final but the court has a discretion in these instances. In some instances, the court will be reluctant to grant recognition of foreign representative if he is a provisional trustee and not sure if he is going to be the final trustee.  South African courts lean towards the territoriality approach and will protect the interest of local creditors.

The court may impose conditions for example a notice to interested parties to be published in the Government Gazette and local newspapers.  It has been submitted that a foreign representative, who seeks recognition from a South African court, must satisfy the court of his appointment, but this will not be submitting a letter of request as required by previous legislation.   The court may request the foreign representative to provide appropriate security to the Master of the High Court.


The Cross-border Insolvency Act 42 of 2000 cannot come into effect because of the Minister of Justice’s failure to designate certain states.   This act does not provide assistance to a SA insolvency representative or agent who institute insolvency proceedings against a debtor who also has assets or business in a foreign jurisdiction.   To achieve such reciprocity, the foreign state would need a similar act in which SA is a designated state.

The Cross-border Insolvency Act, when implemented, will only be applicable to designated countries.  Due to this system of designation, the South African law will in future follow a dual approach to recognition of foreign bankruptcy orders[11] in that the foreign representatives of designated countries will follow the procedure of the Cross-border Insolvency Act, whilst those representatives from non-designated countries will still have to follow the general route that is based on common law and precedent.

[1] Meskin Insolvency Law 17.1

[2] Cross-Border Insolvency Act 42 of 2000

[3] By proclamation no R73 of 2003 published in GG 25768 of 27 November 2003

[4] Cross-Border Insolvency Act 42 of 2000

[5] Smith & Ailolo (1999) 11SA Merc LJ192

[6] Section 2 of Insolvency Act, Act 24 of 1936

[7] Act 24 of 1936

[8] Section 361 of the Companies Act

[9] 1998 (3) 175 (SCA)

[10] 1998 (3) SA 175

[11] Michele Oliver and Andre Boraine, University of Pretoria

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice.