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• 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.
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.
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.
yes it can be
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.
Yes it can be converted
Secondly it is not advisable to have bank members on board.
On seeing theoretically, it can be…