VC & PE Glossary
What Is Credit Bid?
Updated
Definition
A credit bid lets a secured lender use its outstanding loan balance as currency in a bankruptcy auction — effectively bidding the debt it is owed instead of cash.
Useful for: Founders, Investors
A credit bid allows a creditor — usually a secured lender — to use its allowed claim as payment in a bankruptcy sale, bidding the face value of debt instead of cash.
How it works
When a company files for bankruptcy, assets may be sold under Section 363 or through a plan of reorganization. Secured lenders with liens on those assets can credit bid up to the amount of their secured claim plus costs.
Example: A lender is owed $40M secured by all assets. At auction, it credit bids $40M. Unless a higher cash bidder appears, the lender takes ownership — often through a new entity — and the old equity is extinguished.
Credit bids discourage sham auctions where insiders lowball assets. Courts scrutinize whether bids are made in good faith and whether unsecured creditors receive adequate protection.
Distressed debt investors sometimes buy loans specifically to gain credit-bid rights and control the restructuring outcome.
Why it matters
- Founders: If your company faces insolvency with heavy secured debt, a credit bid is a likely endgame — plan for employee and customer communication accordingly.
- Investors: Funds underwriting distressed deals model whether a credit bid clears junior claims and whether stalking-horse cash bids could produce better recoveries.
Common mistake
Assuming a competitive auction always produces a higher cash bid. Many asset-light or customer-concentrated businesses attract only the secured lender as a credible bidder.
Related ideas
See also cramdown, distressed investor, 363 sale, and stalking horse bid.
Related terms
- Cramdown — A cramdown is when a bankruptcy court confirms a reorganization plan over the objection of dissenting creditors or equity holders, forcing them to accept less than their claimed value.
- Distressed Investor — A distressed investor is a fund or specialist that buys troubled debt, equity, or assets — often at a discount — and earns returns by restructuring companies, enforcing claims, or selling positions after recovery.
Common questions
Short answers for founders, LPs, and operators