Credit Bids: A tactical tool for Lenders in distressed scenarios

The lending landscape has shifted significantly in recent years. As traditional banks tighten their lending criteria, a new wave of lenders, often with deep sector expertise has emerged. These lenders are not only more agile but also more hands-on when it comes to managing distressed situations within their loan books.

One increasingly common strategy in such scenarios is the credit bid, a powerful tool that enables lenders to take control of a business or asset while leaving behind existing shareholders. Though originally rooted in US insolvency legislation, credit bids have become an established practice in the UK, despite the absence of a statutory framework.

What is a Credit Bid?

In a typical credit bid scenario, a lender enforces its security by appointing administrators or receivers. These insolvency practitioners then sell the business or assets to a lender-controlled special purpose vehicle (SPV). Instead of paying cash, the lender “bids” its secured debt, covering principal and accrued interest, against the purchase price. From the seller’s perspective, this is treated as cash consideration, and the lender’s debt is reduced accordingly.

While largely non-cash, some cash is usually required to cover transaction costs.

When should a lender consider a Credit Bid?

Credit bids aren’t suitable for every situation. More conventional outcomes such as refinancing, consensual restructuring, or an M&A exit may be simpler and more effective. However, a credit bid may be appropriate when:

• The business or asset is undervalued, or the market is depressed, but recovery is possible
• Shareholders are unwilling to inject new equity or add strategic value
• A delayed exit could yield better returns
• Valuation and marketing processes show value breaks in the senior debt
• A “Plan B” is needed to protect lender interests
• A consensual solution isn’t achievable and an “exit on demand” trigger exists

Tactical considerations

Beyond financial logic, credit bids can serve tactical purposes:

• They can act as a defensive mechanism, allowing lenders to bid up the sale price and inject urgency into an M&A process
• They offer a fallback option when third-party sales carry execution risk
• Conversely, they may deter other bidders and dampen competitive tension

Who can Credit Bid?

Credit bids are typically executed by secured lenders and are most straightforward in bilateral or single-lender syndicated arrangements. In syndicated deals, collaboration is essential due to intercreditor protections around security releases and cash consideration.

While dissenting lenders can be cashed out at a pro-rata level, significant payouts may reduce the appeal of a credit bid. If intercreditor provisions don’t allow binding dissenters, more complex tools like Schemes of Arrangement or Restructuring Plans may be required, adding cost and complexity.

Credit bids are generally not viable for unsecured creditors, as the debt release alone rarely satisfies administrators, and cash leakage tends to be higher.

Pros and Cons of Credit Bids

 Advantages:

• Defensive mechanism for secured creditors
• Enables control and strategic direction
• Potentially better outcomes than alternative routes
• Faster execution due to lender familiarity
• Supports negotiations and stalking horse bids
• Creates urgency in M&A processes
• Allows for turnaround planning and strategic exit timing

Disadvantages:

• Complex intercreditor dynamics in syndicated deals
• Operational burdens: accounting, governance, tax, and capital implications
• May discourage third-party bidders
• Transaction costs: fees, taxes, preferential creditors
• Potential indemnities for insolvency practitioners
• Legal challenges from shareholders or other stakeholders
• Reputational risks
• Requires significant post-acquisition effort to realise value

Credit bids are not a one-size-fits-all solution, but they can be a highly effective tool in the right circumstances. For lenders with sector expertise and a long-term view, they offer a route to control, recovery, and value creation.

If you’re considering a credit bid or would like to explore whether it’s the right approach for a particular situation, please don’t hesitate to get in touch.