Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.
1
2
Practical and entertaining education for
attorneys, accountants, business owners and
executives, and investors.
3
Thank You To Our Sponsors
Disclaimer
The material in this webinar is for informational purposes only. It should not be considered
legal, financial o...
Meet the Faculty
MODERATOR:
Thad Wilson - King & Spalding LLP
PANELISTS:
Jonathan Friedland - Sugar Felsenthal Grais & Hel...
About This Webinar – Opportunity Amidst Crisis-
Buying Distressed Assets, Claims, and Securities for
Fun & Profit
Eddie La...
About This Series – Restructuring, Insolvency &
Troubled Companies
Companies fail all the time, for all sorts of reasons. ...
Episodes in this Series
#1: Help, My Business is In Trouble!
Premiere date: 8/19/20
#2: Opportunity Amidst Crisis- Buying ...
Episode #2
Opportunity Amidst Crisis- Buying Distressed
Assets, Claims, and Securities for Fun & Profit
10
A Company’s Capital Structure
Those seeking to own a company can invest in various levels of the capital structure. So-
ca...
Additional Key Considerations Driving Strategy
 Secured debt
 Real property leases
 Contracts
 Union liabilities
 Env...
A Buyer Can Buy In Bankruptcy
13
Reorganization
Sale As Going
Concern
Asset
Liquidation
A Buyer Can Also Buy Outside of Bankruptcy
14
Workout/
Composition
Agreement
ABC Receivership Asset Sales
Buy-Side Considerations When Selecting Legal
Framework for Acquisition
15
• Do you want to cherry pick contracts?
• Which ...
The Distressed M&A Opportunity
16
Distressed Capital Structures: Debt trading substantially below par
Debt partially impai...
The Distressed M&A Opportunity
17
M&A Strategies in Distressed Situations: Many creative solutions
• Effecting change of c...
Distressed Capital Structures: Valuation of Debt
18
Book Value Price Trading Value
Senior Credit Facility $500 $90 $450
Ot...
Valuing Debt in Healthy M&A Context
19
• Debt trading at or close to par, fully covered by fundamental business value
• Ta...
Valuing Debt in Distressed M&A Context
• Some parts of debt structure trading at significant discount to par, reflecting f...
M&A Strategies in Distressed Situations:
Overview of Key Scenarios
21
Degree of Distress Low Medium High Chapter 11
Timing...
M&A Strategies in Distressed Situations:
Buy Equity & Roll-Over Debt
• Distress Level: Low
• Description/Rationale
 Acqui...
M&A Strategies in Distressed Situations:
Cross-Conditional Tender Offer
• Distress Level: Mid/High
• Description/Rationale...
M&A Strategies in Distressed Situations:
Invest in 2nd Lien/Pipe (Potential Path to Control)
• Distress Level: Mid
• Descr...
M&A Strategies in Distressed Situations:
Buy into Fulcrum Security to Achieve Control
• Distress Level: High
• Description...
M&A Strategies in Distressed Situations:
Acquire in Bankruptcy - 363 Sale or Plan Sponsor
• Distress Level: High
• Descrip...
Bankruptcy Sales Under 11 U.S.C § 363
• Section 363 of the Bankruptcy Code allows a bankruptcy court to approve sale of
de...
Section 363 Sales Issues
• “Free and clear” provision of § 363 protects buyer from the shambles of debtor-seller
company’s...
363 Sales Provide Benefits to Both Sides
29
Debtor-Seller (and secured
lenders) sees means to
maximize sale value
Buyer se...
363 Sales Figures
• Approximately 32% of bankruptcy cases filed in 2019 have resulted in a 363 sale.
[Data provided by the...
363 Sales Figures
• Approximately 32% of bankruptcy cases filed in 2019 have resulted in a 363 sale
• Compare to the cumul...
Typical § 363 Sales Process Characteristics
32
363 Sale Timeline
• Although every situation is a different, generally the total time from commencement of
preparations th...
363 Sale Timeline
Under section 363, a successful bidder acting in good faith may close at any time after a sale
order is ...
Stalking Horse
35
• Bidder starts the process
by signing a binding
purchase agreement
• Sets floor price & terms
of sale o...
Stalking Horse Bid Protections
• In exchange for acting as Stalking Horse, Stalking Horse Bidder given various “bid
protec...
Stalking Horse Advantages
37
• More time for due diligence
• Can negotiate terms less attractive to other likely bidders
•...
Stalking Horse Advantages
38
Head start on financing Dictate bidding terms Understand contracts
and regulatory issues
• Du...
Stalking Horse Disadvantages
39
• No guarantee of winning auction
• Time & resources expended
• Bound to close even if val...
The Stalking Horse Asset Purchase Agreement
40
Key Terms and Negotiation Points for APA
• Sale of assets “as is, where is”
• Detailed list of assets to be purchased
• Li...
Bid Protections and Qualifications
• Set requirement for initial overbid to open auction
 Subsequent incremental bid amou...
Break-Up Fee (Stalking Horse Outbid)
43
• To compensate stalking horse for costs and risks in establishing a floor price
•...
Participating at Auction
44
Requirement of Earnest Money Deposit
• Interested Bidders must first submit a Qualified Bid
• Qualified Bidders typically ...
Seller Contracts in Bankruptcy Sales
46
• Can be assumed, assigned, or rejected under 11 U.S.C. § 365
• Contract rejection...
Seller Contracts in Bankruptcy Sales
47
Counterparty can seek performance assurances from buyer
Designation Rights Agreeme...
Additional Bankruptcy Provisions
48
• Notice period
• Court approval and closing deadlines
• Satisfactory sale order terms...
Liabilities Left Behind
49
Buyer takes only liabilities it agrees to take . . .
Possible exceptions:
 Environmental liabi...
Additional Bankruptcy Sale Process Matters
• Stalking Horse APA attached to motion to approve sale and bid procedures
 To...
Additional Bankruptcy Sale Process Matters
• Common pre-auction qualification terms
 Bids qualified at least one week bef...
Additional Bankruptcy Sale Process Matters
52
Hearing:
• Shortly after auction
• Court determines fairness and fidelity of...
Claims Trading in Bankruptcy
53
Development of the Claims Trading Market
• A multi-billion dollar industry
 Claims against bankrupt entities may be purch...
Development of the Claims Trading Market
• Claims purchased at large discounts
• Recent bankruptcies have more complex and...
Claims-Buyer Concerns
56
- Is the claim allowed?
- If so, in what amount?
- What is the expected recovery?
- What is the t...
Claims Trading Benefits
57
• Avenue to liquidity for Sellers
• Can afford buyer influence over outcome of the case
 But b...
Claims Trading Risks
• For Debtors: can delay or block plan process -- changing creditor body complicates plan
negotiation...
Claims Trading & 11 USC §§ 502(D) & 510
• Claim may be disallowed if creditor is subject to liability for unreturned prefe...
Claims Trading Risk: Equitable Subordination
• An important consideration for regular participants in the bankruptcy proce...
Claims Trading Risk: Equitable Subordination
• However, in the LightSquared bankruptcy proceedings, the judge, citing Pape...
Recent Case: In re Woodbridge Group (D. Del June
20, 2018)
• Claim trading generally favored, especially in larger cases, ...
Recent Case: In re Woodbridge Group
• Judge Carey held transfer to claim purchaser was void based on the anti-assignment
p...
Recent Case: In re Woodbridge Group
• Recent Update:
 In July of 2018, the claim purchaser filed an appeal.
 On Septembe...
Recent Case: In re Woodbridge Group
Practical Point:
 Be wary of underlying documents that restrict the power to
assign a...
About the Faculty
66
About The Faculty
Thad Wilson - ThadWilson@KSLAW.com
Thad Wilson is a Partner in the Atlanta office of King & Spalding LLP...
About The Faculty
Jonathan Friedland - jfriedland@sfgh.com
Jonathan Friedland, a senior partner with Sugar Felsenthal Grai...
About The Faculty
Navin Nagrani - nnagrani@hilcoglobal.com
Over the fifteen years Navin has been with Hilco, he has served...
About The Faculty
James Hadfield - jhadfield@configurepartners.com
Jamie has held a variety of senior positions across mid...
Questions or Comments?
If you have any questions about this webinar that you did not get to ask during the live
premiere, ...
ABOUT DailyDAC
DailyDAC.com is the leading source of
information about assignments, article 9,
bankruptcy, receiverships, ...
About Financial Poise
75
Financial Poise™ has one mission: to provide
reliable plain English business, financial, and lega...
Opportunity Amidst Crisis - Buying Distressed Assets, Claims, and Securities for Fun & Profit (Series: Restructuring, Inso...
Opportunity Amidst Crisis - Buying Distressed Assets, Claims, and Securities for Fun & Profit (Series: Restructuring, Inso...
Opportunity Amidst Crisis - Buying Distressed Assets, Claims, and Securities for Fun & Profit (Series: Restructuring, Inso...
Upcoming SlideShare
Loading in …5
×

Opportunity Amidst Crisis - Buying Distressed Assets, Claims, and Securities for Fun & Profit (Series: Restructuring, Insolvency & Troubled Companies 2020)

Eddie Lampert bought Kmart out of bankruptcy. W.L. Ross made a fortune many times over buying steel and other companies out of bankruptcy. Hedge funds and other distressed debt traders buy and sell millions of dollars of distressed securities and bankruptcy claims every day. A number of private equity funds focus exclusively on buying distressed businesses, fixing, and selling them. And fortunes are made when real estate crashes by those who have the dry powder to swoop in and buy when others are forced to sell. This webinar explains how to loan to, or purchase the debt of, a company in order to acquire it (a strategy commonly called “loan to own”); how to learn about opportunities involving distressed companies; and tips and best practices for participating in bankruptcy, Article 9, and other sales of distressed businesses (including the concept of serving as the “stalking horse).

To view the accompanying webinar, go to: https://www.financialpoise.com/financial-poise-webinars/opportunity-amidst-crisis-buying-distressed-assets-claims-and-securities-for-fun-profit-2020/

  • Be the first to comment

  • Be the first to like this

Opportunity Amidst Crisis - Buying Distressed Assets, Claims, and Securities for Fun & Profit (Series: Restructuring, Insolvency & Troubled Companies 2020)

  1. 1. 1
  2. 2. 2 Practical and entertaining education for attorneys, accountants, business owners and executives, and investors.
  3. 3. 3 Thank You To Our Sponsors
  4. 4. Disclaimer The material in this webinar is for informational purposes only. It should not be considered legal, financial or other professional advice. You should consult with an attorney or other appropriate professional to determine what may be best for your individual needs. While Financial Poise™ takes reasonable steps to ensure that information it publishes is accurate, Financial Poise™ makes no guaranty in this regard. 5
  5. 5. Meet the Faculty MODERATOR: Thad Wilson - King & Spalding LLP PANELISTS: Jonathan Friedland - Sugar Felsenthal Grais & Helsinger LLP Navin Nagrani - Hilco Global James Hadfield - Configure Partners 6
  6. 6. About This Webinar – Opportunity Amidst Crisis- Buying Distressed Assets, Claims, and Securities for Fun & Profit Eddie Lampert bought Kmart out of bankruptcy. W.L. Ross made a fortune many times over buying steel and other companies out of bankruptcy. Hedge funds and other distressed debt traders buy and sell millions of dollars of distressed securities and bankruptcy claims every day. A number of private equity funds focus exclusively on buying distressed businesses, fixing, and selling them. And fortunes are made when real estate crashes by those who have the dry powder to swoop in and buy when others are forced to sell. This webinar explains how to loan to, or purchase the debt of, a company in order to acquire it (a strategy commonly called “loan to own”); how to learn about opportunities involving distressed companies; and tips and best practices for participating in bankruptcy, Article 9, and other sales of distressed businesses (including the concept of serving as the “stalking horse). 7
  7. 7. About This Series – Restructuring, Insolvency & Troubled Companies Companies fail all the time, for all sorts of reasons. Some companies become distressed, or even insolvent, because of mismanagement; others because of fraud; others for myriad other reasons- some intrinsic to the company and some extrinsic. Regardless of the cause, failing or failed companies create a unique set of issues, risks, and even opportunities for all involved. This area of law and finance has become so specialized that no fewer than five (American Bankruptcy Institute; Association of Insolvency & Restructuring Advisors; Commercial Law League of America; National Association of Federal Equity Receivers; Turnaround Management Association) national organizations exist to help those who specialize in the field to stay up to date on the latest developments, strategies, and tactics in the area. Each Financial Poise Webinar is delivered in Plain English, understandable to investors, business owners, and executives without much background in these areas, yet is of primary value to attorneys, accountants, and other seasoned professionals. Each episode brings you into engaging, sometimes humorous, conversations designed to entertain as it teaches. Each episode in the series is designed to be viewed independently of the other episodes so that participants will enhance their knowledge of this area whether they attend one, some, or all episodes. 8
  8. 8. Episodes in this Series #1: Help, My Business is In Trouble! Premiere date: 8/19/20 #2: Opportunity Amidst Crisis- Buying Distressed Assets, Claims, and Securities for Fun & Profit Premiere date: 9/16/20 #3: Bad Debtor Owes Me Money! Premiere date: 10/14/20 9
  9. 9. Episode #2 Opportunity Amidst Crisis- Buying Distressed Assets, Claims, and Securities for Fun & Profit 10
  10. 10. A Company’s Capital Structure Those seeking to own a company can invest in various levels of the capital structure. So- called “loan to own” strategies involve buying the debt of, or lending directly to, a target. 11
  11. 11. Additional Key Considerations Driving Strategy  Secured debt  Real property leases  Contracts  Union liabilities  Environmental liabilities  Pending litigation  Prior transactions and related limitations periods  Government bailouts and restrictions  Successor liability 12
  12. 12. A Buyer Can Buy In Bankruptcy 13 Reorganization Sale As Going Concern Asset Liquidation
  13. 13. A Buyer Can Also Buy Outside of Bankruptcy 14 Workout/ Composition Agreement ABC Receivership Asset Sales
  14. 14. Buy-Side Considerations When Selecting Legal Framework for Acquisition 15 • Do you want to cherry pick contracts? • Which liabilities are you comfortable assuming? • Which divisions or assets are you interested in acquiring? • Is there anything you wish to leave behind? • Do you have any specific successor liability concerns? • Are there any hostile shareholders or creditors? • What will harm the company the least? • Do you want to avoid an auction? • Are there potential governmental actions against, or investigations of, the Company?
  15. 15. The Distressed M&A Opportunity 16 Distressed Capital Structures: Debt trading substantially below par Debt partially impaired, with value running out in the “fulcrum security.” Equity value largely reflects option value. Valuation of enterprise more complex than traditional M&A setting.
  16. 16. The Distressed M&A Opportunity 17 M&A Strategies in Distressed Situations: Many creative solutions • Effecting change of control while retaining attractively-priced extant capital structure • “Loan to own” strategy; purchasing debt at a discount with credit bid in foreclosure • Building position in fulcrum securities via structured investments or secondary market purchases • Acquiring assets from distressed or bankrupt sellers
  17. 17. Distressed Capital Structures: Valuation of Debt 18 Book Value Price Trading Value Senior Credit Facility $500 $90 $450 Other Bank Debt (e.g. international) $100 $100 $100 Senior Unsecured Notes $260 $60 $150 Sub Notes $140 $30 $45 Total Debt $1,000 $745 Preferred Stock $100 $20 $20 Common Stock NM NM 15 Total Capitalization $1,100 $780 Fulcrum Securities Distressed Capital Structure Illustration Fulcrum Securities
  18. 18. Valuing Debt in Healthy M&A Context 19 • Debt trading at or close to par, fully covered by fundamental business value • Tangible, material equity value • Enterprise value assumes debt valued at par • Debt generally repaid or rolled-over as part of acquisition
  19. 19. Valuing Debt in Distressed M&A Context • Some parts of debt structure trading at significant discount to par, reflecting fundamental business value potentially lower than par value of debt. • Value eroding in “fulcrum securities.” • “Fulcrum securities” carrying equity-like risk, likely to be converted into equity in restructuring scenario. • Value of equity largely reflects option/hold-out value. • Enterprise value assessment more complex, depends on value assigned to each security. • Discount of debt offers potential opportunity to capture value in distressed M&A situations. 20
  20. 20. M&A Strategies in Distressed Situations: Overview of Key Scenarios 21 Degree of Distress Low Medium High Chapter 11 Timing of Capital Structure Issues None/Long-Term Medium-Term Near-Term Imminent Potential Strategies Buy equity and roll over existing debt via change of control waiver Cross-conditional tender offer for debt and equity at market prices Invest in 2nd lien/ PIPE (potential path to control) Buy selected assets at attractive price Cross-conditional tender offer for debt and equity at market prices Acquire fulcrum security to gain control upon restructuring Buy selected assets at attractive price Participate in §363 auction for selected assets or whole company Sponsor plan of reorganization Examples BC Partners/Intelsat Sun Capital/Mark IV Fairfax/Abitibi Silverpoint/Granite Wayzata/Portola Tennenbaum/Radnor Anschutz/Regal Cinemas Oaktree/Tekni-Plex CDW/Micro Warehouse Centerbridge/Dana ESL/KMart Guggenheim/ Los Angeles Dodgers One Equity/Polaroid Brookfield & Simon/Forever 21
  21. 21. M&A Strategies in Distressed Situations: Buy Equity & Roll-Over Debt • Distress Level: Low • Description/Rationale  Acquire company but seek to retain existing capital structure  Financing not available and/or terms of current financing more advantageous • Considerations  Does not explicitly capture discount  Requires relative improvement as incentive for debt to amend terms or overcome Change of Control clause  Extension of maturity and other “money” terms require 100% vote 22
  22. 22. M&A Strategies in Distressed Situations: Cross-Conditional Tender Offer • Distress Level: Mid/High • Description/Rationale  Tender for debt at discount and pay “nominal” amount for equity, with both transactions being contingent  Finance acquisition with new debt and equity  Provides value to equity to avoid potentially costly lengthy restructuring • Considerations  Transaction dependent on premium offered and success of tender  Potential hold-up by dissident holders  Requires new financing post acquisition 23
  23. 23. M&A Strategies in Distressed Situations: Invest in 2nd Lien/Pipe (Potential Path to Control) • Distress Level: Mid • Description/Rationale  Structured investment ahead of current equity  Enhances liquidity with providing potential path to control  No bankruptcy; equity survives (but diluted) • Considerations  Does not capture discount  No immediate acquisition of control and potentially limited corporate governance rights  Control uncertain and investment potentially impaired; not fully covered in downside scenario if performance further deteriorates 24
  24. 24. M&A Strategies in Distressed Situations: Buy into Fulcrum Security to Achieve Control • Distress Level: High • Description/Rationale  Acquire blocking position in fulcrum security at discount to par  Convert into new equity or bid par value in restructuring process  Recover par value if outbid • Considerations  Limited ability for upfront due diligence  May be difficult to acquire controlling position  Price to be paid for full position uncertain  Might be perceived as hostile  May require active approach in lengthy restructuring process 25
  25. 25. M&A Strategies in Distressed Situations: Acquire in Bankruptcy - 363 Sale or Plan Sponsor • Distress Level: High • Description/Rationale  Buy company or selected assets from motivated seller “free and clear during bankruptcy process  Sponsor restructuring plan with cash and/or securities to fund reorganization at attractive valuation • Considerations  Typically done in lengthy auction processes with court supervision  Complex and may require negotiations with numerous parties  Transparent, competitive process 26
  26. 26. Bankruptcy Sales Under 11 U.S.C § 363 • Section 363 of the Bankruptcy Code allows a bankruptcy court to approve sale of debtor’s assets “free and clear” of “interests” in the assets • Assets covered:  Real property  Personal property  Leased property? 27
  27. 27. Section 363 Sales Issues • “Free and clear” provision of § 363 protects buyer from the shambles of debtor-seller company’s records and finances • Debtor may not know the extent of its ownership interest • Lessors, judgment creditors, and statutory lienholders might have claims to assets 28
  28. 28. 363 Sales Provide Benefits to Both Sides 29 Debtor-Seller (and secured lenders) sees means to maximize sale value Buyer sees low price plus title protection
  29. 29. 363 Sales Figures • Approximately 32% of bankruptcy cases filed in 2019 have resulted in a 363 sale. [Data provided by the UCLA-LoPucki Bankruptcy Research Database, current as of September 6, 2020.] 30 Section 363 Sales Frequency Percentage No 363 Sale 14 56.0% 363 Sale 8 32.0% Chapter 7 at Filing 1 4.0% Case Pending 2 8.0%
  30. 30. 363 Sales Figures • Approximately 32% of bankruptcy cases filed in 2019 have resulted in a 363 sale • Compare to the cumulative rates across all years, where approximately 19.5% of bankruptcies have resulted in a 363 sale. [Data provided by the UCLA-LoPucki Bankruptcy Research Database, current as of September 6, 2020.] 31 Section 363 Sales Frequency Percentage No 363 Sale 894 74.9% 363 Sale 233 19.5% Chapter 7 at Filing 25 2.1% Case Pending 38 3.2%
  31. 31. Typical § 363 Sales Process Characteristics 32
  32. 32. 363 Sale Timeline • Although every situation is a different, generally the total time from commencement of preparations through approval of a 363 sale may range from 75 to 150 days.  Courts and creditors often prefer longer timelines to ensure sufficient time for a debtor to market the assets to be sold.  Shorter timelines are often approved where debtors are able to show that asset values may deteriorate in bankruptcy, where a stalking horse bid is conditioned on a quick sale process, and/or where the debtor can demonstrate that it engaged in sufficient marketing efforts on a pre-bankruptcy filing basis. • Under Section 363, a successful bidder acting in good faith may close at any time after a sale order is entered. In some cases, however, a bidder may want to wait until a sale order becomes final (absent appeal, fourteen days after entry). 33
  33. 33. 363 Sale Timeline Under section 363, a successful bidder acting in good faith may close at any time after a sale order is entered. In some cases, however, a bidder may want to wait until a sale order becomes final (absent appeal, fourteen days after entry). 34
  34. 34. Stalking Horse 35 • Bidder starts the process by signing a binding purchase agreement • Sets floor price & terms of sale of assets at auction • Bidder receives bid protections • Notice to all creditors and publication notice plus marketing • Competitive bidding at auction • Court approval after auction Subject to:
  35. 35. Stalking Horse Bid Protections • In exchange for acting as Stalking Horse, Stalking Horse Bidder given various “bid protections,” including:  Break-up fee  Expense reimbursement  Initial overbid minimum  Subsequent bid increments  (Potentially) lender agreement not to credit bid 36
  36. 36. Stalking Horse Advantages 37 • More time for due diligence • Can negotiate terms less attractive to other likely bidders • Build relationship with management • Learn about key employees • Learn about and meet vendors and customers (and take temperatures during due diligence)
  37. 37. Stalking Horse Advantages 38 Head start on financing Dictate bidding terms Understand contracts and regulatory issues • Duration of pre- auction period • Amount of deposit (if any) • Bid and bid increment amounts • Break-up fee • Contract sorting toward assumption and rejection scheme • Hart-Scott-Rodino • Environmental • Longer time to discuss with potential lenders • May provide more diligence to potential lenders • Financing usually not a contingency
  38. 38. Stalking Horse Disadvantages 39 • No guarantee of winning auction • Time & resources expended • Bound to close even if value disappoints • Potentially expensive withdrawal (litigation) • Potentially obligated to close as “back up” bidder if auction winner cannot close (exposed in value decline scenario)
  39. 39. The Stalking Horse Asset Purchase Agreement 40
  40. 40. Key Terms and Negotiation Points for APA • Sale of assets “as is, where is” • Detailed list of assets to be purchased • Limited reps and warranties  Due diligence usually complete already  No customary “outs” (e.g., diligence, finance, etc.) • No indemnification • Holdback/Earnout common • Minimal closing conditions  “Lights on”  Maintain minimal DIP financing level  Key customers/management/employees 41
  41. 41. Bid Protections and Qualifications • Set requirement for initial overbid to open auction  Subsequent incremental bid amount • Large overbid amounts can protect stalking horse  Combination of break-up fee/expense reimbursement and incremental bid amount for first overbid • Bidders must provide adequate assurance of future performance • Common to require pre-qualification by interested bidders  Excludes less-than-serious bidders (who may be unable to close)  Allows stalking horse to game auction? 42
  42. 42. Break-Up Fee (Stalking Horse Outbid) 43 • To compensate stalking horse for costs and risks in establishing a floor price • Works in conjunction with bid protection to protect stalking horse (and therefore a target of cost-conscious creditors) • At discretion of court  Often about 3% of sale price  Advance agreement by secured lender and creditors’ committee will help  Rare to get break-up fee and expense reimbursement
  43. 43. Participating at Auction 44
  44. 44. Requirement of Earnest Money Deposit • Interested Bidders must first submit a Qualified Bid • Qualified Bidders typically required to make earnest money deposit to participate at auction • May be required to be made in cash only (LOC may work) • Desperation of seller and lender can affect amount required • Larger deposit may speed auction & hearing 45
  45. 45. Seller Contracts in Bankruptcy Sales 46 • Can be assumed, assigned, or rejected under 11 U.S.C. § 365 • Contract rejection generally leaves counter-party with only a claim against debtor; assumption and assignment, Debtor conveys its interests to a third party, such as Buyer • To assume or (assume and then) assign contracts, Debtor must cure pre-petition monetary defaults (often with purchase price funds) • Under the APA, contracts valuable to Buyer are assumed and assigned, while others are rejected or excluded
  46. 46. Seller Contracts in Bankruptcy Sales 47 Counterparty can seek performance assurances from buyer Designation Rights Agreement (Debtor transfers right to decide what to assume or reject) Buyer might agree to assume unsecured liabilities to maintain relationships
  47. 47. Additional Bankruptcy Provisions 48 • Notice period • Court approval and closing deadlines • Satisfactory sale order terms • Waiver of appellate deadline
  48. 48. Liabilities Left Behind 49 Buyer takes only liabilities it agrees to take . . . Possible exceptions:  Environmental liabilities  Product liabilities
  49. 49. Additional Bankruptcy Sale Process Matters • Stalking Horse APA attached to motion to approve sale and bid procedures  Together with sale notice, proposed sale order • Rules require at least 21 days notice of sale  Can be shortened for cause • Rules require notice of sale to all creditors • Virtual data room established 50
  50. 50. Additional Bankruptcy Sale Process Matters • Common pre-auction qualification terms  Bids qualified at least one week before auction  Bidders submit set cash deposit  Bidders demonstrate adequate assurance of future performance  Bidders agree to be bound to same terms as APA • Auction  Includes only pre-qualified bidders (but Courts like an open door)  Bidding subject to bid protection amounts  Debtor sometimes reserves right to offer in bulk or lot, depending upon bids 51
  51. 51. Additional Bankruptcy Sale Process Matters 52 Hearing: • Shortly after auction • Court determines fairness and fidelity of process and notice  Hears objections  Evidence technically required; usually short hearing Closing, per APA, can happen immediately after Court approval (payment is usually cash or credit bid).
  52. 52. Claims Trading in Bankruptcy 53
  53. 53. Development of the Claims Trading Market • A multi-billion dollar industry  Claims against bankrupt entities may be purchased at large discounts  Select funds marketing via unsolicited letters  Primarily trade debt claims  Average face values < $100k  Claim transfer agreements very buyer friendly – minimal negotiating of terms  Buy-and-hold (claims repaid in cash upon debtor’s emergence from bankruptcy) 54
  54. 54. Development of the Claims Trading Market • Claims purchased at large discounts • Recent bankruptcies have more complex and larger claim pools – bank debt, unsecured bonds, trade claims • Hedge funds and traditional trade claim funds active in claims trading • Strategic and speculative motivations • Avg. face value now in the millions • Claim transfer agreement heavily negotiated 55
  55. 55. Claims-Buyer Concerns 56 - Is the claim allowed? - If so, in what amount? - What is the expected recovery? - What is the timing of distribution? - What is the form of consideration? - Will the counterparty be around if buyer needs to rely on recourse provisions in claim transfer agreement? - What is the amount of holdings? - What are the timing deadlines? Claim Counterparty Notice Credit
  56. 56. Claims Trading Benefits 57 • Avenue to liquidity for Sellers • Can afford buyer influence over outcome of the case  But beware of exerting inappropriate influence (e.g., Neiman Marcus)  Role on Creditors’ Committee in addition to individual holder • Illiquid and opaque market (abnormal returns for buyers)
  57. 57. Claims Trading Risks • For Debtors: can delay or block plan process -- changing creditor body complicates plan negotiations and support agreements • Unregulated market • Put-back option by claim purchaser • Cooperation agreement with claim purchaser • Administratively burdensome (costs to the estate and court) • Risk of Debtor administrative insolvency (e.g., Toys R Us) 58
  58. 58. Claims Trading & 11 USC §§ 502(D) & 510 • Claim may be disallowed if creditor is subject to liability for unreturned preferential transfers, fraudulent transfers (and more) • Claim may be subject to “vote designation” in plan confirmation fight or not permitted to vote as an insider claim • Claim may be subordinated to other claims “under principles of equitable subordination” 59
  59. 59. Claims Trading Risk: Equitable Subordination • An important consideration for regular participants in the bankruptcy process: the consequences for a debtholder acquiring claims in violation of an “eligible assignee” provision in a governing credit document. • The Third Circuit’s Papercraft decision highlighted that an insider of a debtor that purchases debt through a loan-to-own strategy may be at risk of equitable subordination and other remedies as a result of the purchase. See, e.g., Citicorp Venture Capital, Ltd. v. Comm. of Creditors Holding Unsecured Claims, 323 F.3d 228 (3d Cir. 2003). 60
  60. 60. Claims Trading Risk: Equitable Subordination • However, in the LightSquared bankruptcy proceedings, the judge, citing Papercraft, granted a request to equitably subordinate the claim of a non-insider.  “Having acquired a controlling position in the debt by use of the special purpose vehicle, whose special purpose was to achieve an end run around the credit agreement and then purposefully sidelining hundreds of millions of dollars of debt while fine-tuning its acquisition strategy, [the purchaser] has harmed the creditors of LightSquared.” 61
  61. 61. Recent Case: In re Woodbridge Group (D. Del June 20, 2018) • Claim trading generally favored, especially in larger cases, but there are limits to enforceability of claims trading  If there is clear unambiguous language in underlying documents governing original claim, then anti-assignment language making any assignment null and void may be enforceable against a claim purchaser notwithstanding Uniform Commercial Code (“UCC”) provisions, contractual arguments and a breach by debtor under underlying debt documents • Relying on KB Toys, Judge Carey recently sustained Debtors’ objection to a claim purchaser’s assertion of a claim and effectively denying claim trading 62
  62. 62. Recent Case: In re Woodbridge Group • Judge Carey held transfer to claim purchaser was void based on the anti-assignment provision, contractual remedies including an analysis under Restatement of Contracts were inapplicable and the UCC provisions did not override anti-assignment provisions in underlying docs.  Debtors had filed a notice of a moratorium on claims trading for a short period of time  Claims purchaser argued that breach by Debtors prevented enforcement of anti- assignment provisions  Delaware law permits restrictions on the power to assign a claim  Put differently, bankruptcy law does not override non-bankruptcy law (here Delaware) that upholds restrictions on the power to assign claim  Preventing claims trading in this case would not cause a disruption in the claims trading market according to Judge Carey 63
  63. 63. Recent Case: In re Woodbridge Group • Recent Update:  In July of 2018, the claim purchaser filed an appeal.  On September 11, 2019, the Delaware district court affirmed the bankruptcy court’s decision.  The court held: (1) the anti-assignment provisions in the underlying loan agreements and promissory notes rendered the transfer void under Delaware law; (2) the debtors’ prior pre-petition breach of the loan agreements did not bar the debtors from relying on the anti-assignment provisions; and (3) the UCC did not render the anti- assignment provisions unenforceable because it only prohibited restrictions on assignments of security interests in promissory notes, not restrictions on assignment of the notes themselves. 64
  64. 64. Recent Case: In re Woodbridge Group Practical Point:  Be wary of underlying documents that restrict the power to assign a claim as any deficiency or disability in the claim could travel with the claim to the claim purchaser. 65
  65. 65. About the Faculty 66
  66. 66. About The Faculty Thad Wilson - ThadWilson@KSLAW.com Thad Wilson is a Partner in the Atlanta office of King & Spalding LLP and a member of its Financial Restructuring Practice Group. Ranked by Chambers USA 2020 as a “Rising Star” in Bankruptcy, Thad represents a broad spectrum of clients in financial restructuring, corporate and insolvency matters, including debtors, secured and unsecured creditors, and other parties in interest in major Chapter 11 bankruptcy cases. He has extensive experience representing clients in insolvency-related litigation and disputes. Thad is a member of the American Bankruptcy Institute, the Turnaround Management Association (currently a board member of its Atlanta chapter), and the State Bar of Georgia. In 2014, Thad was elected to the initial class of Barristers of the W. Homer Drake, Jr. Georgia Bankruptcy American Inn of Court, of which he is currently a member. 67
  67. 67. About The Faculty Jonathan Friedland - jfriedland@sfgh.com Jonathan Friedland, a senior partner with Sugar Felsenthal Grais & Helsinger, LLP, views his job simply: to make money for clients whenever possible and to protect their interests at every turn. Licensed in four states, Jonathan’s transactional work focuses on representing private funds and other owners of private businesses, and the businesses they own. He regularly advises on M&A activities, structuring new ventures and restructuring old ones, and on other commercial relationships. Jonathan is rated AV® Preeminent™ by Martindale-Hubbell, 10/10 by AVVO, and enjoys several other similar distinctions. Jonathan graduated from the State University of New York at Albany, magna cum laude (in three years) and from the University of Pennsylvania Law School. He clerked for a federal judge before entering private practice and served for several years as an Adjunct Professor of Strategic Management at the University of Chicago’s Graduate School of Business. Jonathan is lead author and editor of several significant treatises, several chapters in other treatises, and scores of articles on law and business. 68
  68. 68. About The Faculty Navin Nagrani - nnagrani@hilcoglobal.com Over the fifteen years Navin has been with Hilco, he has served as a central deal maker in many of Hilco’s largest principal and advisory-related transactions. His primary responsibilities include leading several key strategic initiatives for the firm, including shaping the real estate business development strategy and execution as well as overseeing deal origination, deal qualification and transaction structuring. Navin is on the Executive Board of Directors for the Real Estate Investment Association (REIA) where he previously served a term as President. He is Director of Strategy for the Young Real Estate Professionals Association and sits on the National Board of Trustees for the Turnaround Management Association (TMA). Navin is also an active member of the Restaurant Leadership Advisory Council. He is sought after in the real estate industry, having been named to the prestigious “40 Under 40” list of top executive leaders by both M&A Advisors and, more recently, the Commercial Finance Association. Navin is also an award-winning member of the Turnaround Management Association (TMA). Prior to joining Hilco, Navin was a strategic consultant for Hewitt Associates where he worked on merger & acquisition assignments covering the financial services industry. Before Hewitt Associates, Navin was a Junior Economist for the Federal Reserve Bank. Navin is a graduate of Loyola University in Chicago and is a licensed Real Estate Broker in the State of Illinois. 69
  69. 69. About The Faculty James Hadfield - jhadfield@configurepartners.com Jamie has held a variety of senior positions across middle market credit and investing platforms. His experience includes roles within leading lending, private equity, banking and advisory institutions. Prior to co-founding Configure, he was a Managing Director at Guggenheim Securities, where he joined in 2013 to expand Guggenheim’s reach in the middle market. Before joining Guggenheim, Jamie occupied a similar position within Morgan Joseph TriArtisan LLC’s Recapitalization & Restructuring Group. In 2005, Jamie established the Atlanta office for Cerberus Capital Management with a focus on direct lending and equity investment activities. While at Cerberus his responsibilities were extensive, including sourcing of new debt and equity investment opportunities, underwriting transactions and portfolio management. Prior to joining Cerberus, Jamie spent three years in Houlihan Lokey’s Corporate Finance and Restructuring practices after beginning his career at IBM and Standard & Poor’s. Jamie holds a bachelor’s degree in Finance, from the Terry School of Business. He is a FINRA General Securities Registered Representative (Series 24, 7, 63). 70
  70. 70. Questions or Comments? If you have any questions about this webinar that you did not get to ask during the live premiere, or if you are watching this webinar On Demand, please do not hesitate to email us at info@financialpoise.com with any questions or comments you may have. Please include the name of the webinar in your email and we will do our best to provide a timely response. IMPORTANT NOTE: The material in this presentation is for general educational purposes only. It has been prepared primarily for attorneys and accountants for use in the pursuit of their continuing legal education and continuing professional education. 71
  71. 71. ABOUT DailyDAC DailyDAC.com is the leading source of information about assignments, article 9, bankruptcy, receiverships, out-of-court workouts and vulture investing, designed for business owners and vulture investors. Visit us at www.dailydac.com. Premium Public Notice Service DailyDAC’s Premium Public Notice Service helps market asset sales on behalf of fiduciaries (e.g., Chapter 11 debtors- in-possession and committees, trustees, receivers, assignees), secured lenders selling collateral under UCC Article 9, and auctioneers to a very large and self-selected group of potential bidders and their advisors. The Service also assists with noticing other events, deadlines, and milestones – including tombstones and other press releases. Our free weekly newsletter, DailyDAC contains our latest bankruptcy article, current Public Notices and all opportunistic deals added to our proprietary database that week. Sign up at: https://www.dailydac.com/dacyak-weekly-newsletter-signup/
  72. 72. About Financial Poise 75 Financial Poise™ has one mission: to provide reliable plain English business, financial, and legal education to individual investors, entrepreneurs, business owners and executives. Visit us at www.financialpoise.com Our free weekly newsletter, Financial Poise Weekly, updates you on new articles published on our website and Upcoming Webinars you may be interested in. To join our email list, please visit: https://www.financialpoise.com/subscribe/

×