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Can a bank loan be converted into equity?

• Can a bank who is the major creditor turn to a owner or at least partial owner of a company? • Is it a good practice to have representatives of banks and other creditors among the board of directors.

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تم إضافة السؤال من قبل Subhranshu Ganguly , Quality Analyst. , WIPRO
تاريخ النشر: 2013/12/20
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In theory Yes, take the example of the Co-Operative Bank in the UK. They agreed a deal with the major bond holders to convert their notes into Equity. However, most retail and commerical Bank's just want there money back, they do not want equty type assets on their balance sheets. What is more likely is that the Bank will foreclose on the company to which it made the loan to liquidate it's assets and get a percentage of the outstanding debt recovered.

 

I don't think it's a good idea to have major creditors on the Board unless they have an equity stake. In this case both parties would need to agree to convert all or part of the equity to debt and this will dilute the other shareholders. Having independent Board members with specialist knowledge and skills is more important, like people with risk or financial market backgrounds. It is possible that a major creditor will seek Board representation to ensure the executive are delivering on their agreed strategy but it's usually a short term measure.

mukkur srinivasan varadhan
من قبل mukkur srinivasan varadhan , Chartered Accountant , Chartered Accountant in practice

It is possible through a term in the loan sanction and then the loan agreement. It is good or not when huge loans are sanctioned, they may insist for representation in the Board.

It is my view that from the angle of Good Corporate Govdernance, it can be conceded with conditions.

Rehan Qureshi
من قبل Rehan Qureshi , Financial Consultant , Self Employeed

yes it can be

 

Adnan Ameen Bakather
من قبل Adnan Ameen Bakather , Founder & Managing Director , Consult & Perform

Yes, bank loans can be converted to equity. However, these practices depend on agreements borrowers and bank/ lender otherwise it is difficult. I think such agreement is possible where the economy is growing and if there are potential higher returns from equity than the lending interest rate.

                                                                                   

Regarding the banker as board member, yes, it is possible to have banker in board room. However, the effectiveness of such practices depends on the structure of business and characteristics of corporate governance in that country. Actually, there are many countries in the world who allows bankers to be representative but this practice is in line with their business environment.

Tegegne Abrham
من قبل Tegegne Abrham , General Manager , MM BEDDING INDUSTRIES PLC

Loans can be converted into equity shares for different reasons and for various causes. The methodology and accounting concept described by Mr. Mohammed Iqbal sufficiently. I want to add what things to be considered by the issuing company finance director before making such swap decision.1. Finance manager required to conduct, financial restructuring. This will help decision makers to identify which obligations first to be met and with which asset being forclosed, how and how much shares to be offered for bond holders for their current holding this needs the finance mgr to conduct some canculation based on market price of the loan instrument.2 The Company net benefit that will be gained and fufure capacity to meet both equity holders interest satisfactorly must be forcasted in the above exercise. This will help the extent and amount of future profit and cash capacity to cover its obligation. Dilution of shares and future share price movement can also be forcasted. For the above and other reasons financial restructuring needs tobe made when ever such decision be made.

Anoop Mohan
من قبل Anoop Mohan , Finance Manager , Arafa plywoods

Its some what possible if its in a consortium model for venture cap style terms

Muhammad Osama ijaz
من قبل Muhammad Osama ijaz , Accountant , Abdullah Ali bin Haider Gen. Trading (Group)

Yes it can be converted

Secondly it is not advisable to have bank members on board.

Azharuddin Mohammed Khaja
من قبل Azharuddin Mohammed Khaja , FINANCE & ADMINISTRATION EXECUTIVE , AIN CORPORATION SECURITY SOLUTIONS INDIA PVT LTD

On seeing theoretically, it can be…

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