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

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 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-2019/

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

  1. 1. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe Insert the cover image for this webinar on this slide entirely 1 Co-Produced by: DailyDAC
  2. 2. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe Practical and entertaining education for attorneys, accountants, business owners and executives, and investors. 2
  3. 3. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe Thank You To Our Sponsor 3
  4. 4. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe 4
  5. 5. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe 5
  6. 6. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe 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 the information it publishes is accurate, Financial Poise™ makes no guaranty in this regard. About this PowerPoint: if you are looking at this PowerPoint without the benefit of listening to the conversation that surrounded it then you are doing yourself a disservice. This PowerPoint was prepared in contemplation of being viewed in conjunction with listening to a one hour webinar on the topic 6
  7. 7. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe MEET THE FACULTY Moderator: Whitney Fogelberg – Kirkland & Ellis LLP Panelists: Michael Riela – Tannenbaum Helpern Syracuse & Hirschtritt LLP Jonathan Friedland – Sugar Felsenthal Grais & Helsinger David Lorry – Versa Capital Management LLC 7
  8. 8. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe 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 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). 8
  9. 9. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe 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. 9
  10. 10. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe EPISODES IN THIS SERIES 3/19/19 Episode #1: Help, My Business is In Trouble! 4/16/19 Episode #2: Opportunity Amidst Crisis- Buying Distressed Assets, Claims, and Securities for Fun & Profit 5/14/19 Episode #3: Bad Debtor Owes Me Money! 1 0 Dates shown are premiere dates. All webinars will be available On Demand approximately 4 weeks after they premiere.
  11. 11. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe Episode #2: Opportunity Amidst Crisis- Buying Distressed Assets, Claims, and Securities for Fun & Profit 1 1
  12. 12. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe 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. 1 2
  13. 13. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe BUYERS CAN BUY IN BANKRUPTCY 1 3
  14. 14. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe OTHER MEANS TO BUY DISTRESSED ASSETS 1 4
  15. 15. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe BUY-SIDE CONSIDERATIONS WHEN SELECTING LEGAL FRAMEWORK FOR ACQUISITION 1 5
  16. 16. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe THE DISTRESSED M&A OPPORTUNITY 1 6 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.
  17. 17. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe THE DISTRESSED M&A OPPORTUNITY (con’t) 1 7 M&A Strategies in Distressed Situations: Many creative solutions
  18. 18. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe DISTRESSED CAPITAL STRUCTURES: VALUATION OF DEBT 1 8 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 $150 $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
  19. 19. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe VALUING DEBT IN HEALTHY M&A CONTEXT 1 9
  20. 20. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe 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. 2 0
  21. 21. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe VALUING DEBT IN DISTRESSED M&A CONTEXT (con’t) • 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. 2 1
  22. 22. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe M&A STRATEGIES IN DISTRESSED SITUATIONS:OVERVIEW OF KEY SCENARIOS 2 2
  23. 23. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe M&A STRATEGIES IN DISTRESSED SITUATIONS:OVERVIEW OF KEY SCENARIOS (con’t) 2 3
  24. 24. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe 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 CoC clause  Extension of maturity and other “money” terms require 100% vote 2 4
  25. 25. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe 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 2 5
  26. 26. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe 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 2 6
  27. 27. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe 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 2 7
  28. 28. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe M&A STRATEGIES IN DISTRESSED SITUATIONS: ACQUIRE IN BANKRUPTCY VIA 363 OR PLAN SPONSORSHIP • 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 2 8
  29. 29. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe BANKRUPTCY SALES UNDER 11 U.S.C. § 363 • § 363 of the Bankruptcy Code Allows court to approve sale of debtor’s assets “free and clear” of “interests” in the assets • Assets covered:  Real property  Personal property  Leased property? 2 9
  30. 30. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe 11 U.S.C. § 363 • “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 3 0
  31. 31. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe 11 U.S.C. § 363 3 1 Debtor-Seller (and secured lenders) sees means to maximize sale value
  32. 32. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe 363 SALES FIGURES • Approximately 20% of bankruptcy filings in 2019 have resulted in a 363 sale. • Data provided by the UCLA-LoPucki Bankruptcy Research Database, current as of March 31, 2019. 3 2 Section 363 Sales Frequency Percentage No 363 Sale 869 76.8% 363 Sale 221 19.5% Chapter 7 at Filing 24 2.1% Case Pending 15 0.3%
  33. 33. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe 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 in order 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). 3 3
  34. 34. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe 363 SALE TIMELINE (con’t) • 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). 3 4
  35. 35. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe TYPICAL § 363 SALE PROCESS CHARACTERISTICS 3 5
  36. 36. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe STALKING HORSE 3 6
  37. 37. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe 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 minimal increments 3 7
  38. 38. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe STALKING HORSE ADVANTAGES 3 8
  39. 39. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe STALKING HORSE ADVANTAGES (con’t) 3 9
  40. 40. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe STALKING HORSE DISADVANTAGES 4 0
  41. 41. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe THE STALKING HORSE ASSET PURCHASE AGREEMENT 4 1
  42. 42. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe 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” • No indemnification • Holdback common • Minimal closing conditions  “Lights on”  Maintain minimal DIP financing level  Key customers/management/employees 4 2
  43. 43. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe BID PROTECTIONS & QUALIFICATIONS • Set requirement for initial overbid to open auction  Subsequent incremental bid amount • Large overbid amounts can protect stalking horse • 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? 4 3
  44. 44. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe BREAK-UP FEE (STALKING HORSE OUTBID) 4 4
  45. 45. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe PARTICIPATING AT AUCTION 4 5
  46. 46. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe REQUIREMENT OF EARNEST MONEY DEPOSIT • Interested Bidders likely 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 4 6
  47. 47. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe SELLER CONTRACTS IN BANKRUPTCY SALES 4 7
  48. 48. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe SELLER CONTRACTS IN BANKRUPTCY SALES (con’t) 4 8
  49. 49. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe ADDITIONAL BANKRUPTCY PROVISIONS 4 9
  50. 50. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe LIABILITIES LEFT BEHIND • Buyer takes only liabilities it agrees to take . . . 5 0
  51. 51. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe 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 5 1
  52. 52. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe ADDITIONAL BANKRUPTCY SALE PROCESS MATTERS (con’t) • Common pre-auction qualification terms  Bids qualified at least one week before auction  Bidders submit set cash deposit  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 5 2
  53. 53. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe ADDITIONAL BANKRUPTCY SALE PROCESS MATTERS (con’t) 5 3 Closing, per APA, can happen immediately after Court approval (payment usually cash or credit bid)
  54. 54. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe CLAIMS TRADING IN BANKRUPTCY 5 4
  55. 55. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe 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) 5 5
  56. 56. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe DEVELOPMENT OF THE CLAIMS TRADING MARKET (con’t) • 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 5 6
  57. 57. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe CLAIMS-BUYER CONCERNS 5 7
  58. 58. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe CLAIMS TRADING BENEFITS 5 8
  59. 59. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe CLAIMS TRADING RISKS • For Debtors: can delay or block plan process -- changing creditor body complicates plan negotiations and support agreements • Unregulated market • Administratively burdensome (costs to the estate and court) 5 9
  60. 60. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe CLAIMS TRADING AND 11 USC §§ 502 (D) & 510 • Claim may be disallowed if claimant subject to liability for unreturned preferential transfers, fraudulent transfers (and more) • Claim may be subordinated to other claims “under principles of equitable subordination” 6 0
  61. 61. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe 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). 6 1
  62. 62. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe CLAIMS TRADING RISK: EQUITABLE SUBORDINATION (con’t) • 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.” 6 2
  63. 63. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe 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 6 3
  64. 64. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe In re Woodbridge Group (con’t) • 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) which 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 6 4
  65. 65. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe In re Woodbridge Group (con’t) • Recent Update:  In July of 2018, an appeal was filed by the claim purchaser. • 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. 6 5
  66. 66. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe ABOUT THE FACULTY 6 6
  67. 67. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe Whitney Fogelberg – whitney.fogelberg@kirkland.com Whitney Fogelberg is a restructuring associate in Kirkland’s Chicago office. Whitney represents both debtor and creditor clients in complex Chapter 11 reorganizations; advises purchasers and sellers in bankruptcy transactions and acquisitions; counsels boards of directors and senior officers regarding fiduciary duties and restructuring strategies; and advises financially troubled companies regarding the structure of various commercial transactions outside of bankruptcy. 6 7
  68. 68. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe Michael Riela – Riela@thsh.com Mike Riela is a partner in Tannenbaum Helpern’s Creditors’ Rights and Business Reorganization practice. With more than 15 years of experience, Mike advises companies on complex restructuring, distressed M&A, loan transactions and bankruptcy related litigation matters. Mike has in-depth experience in advising clients on corporate and real estate bankruptcies, workouts, Chapter 11 and Chapter 7 bankruptcy cases, debtor-in- possession (DIP) and bankruptcy exit loan facilities, secondary market trading of distressed debt and trade claims, Section 363 sales and bankruptcy retention and fee agreements and disputes. His clients include banks, administrative agents, indenture trustees, hedge funds, private equity firms, professional services firms, trade creditors, contract counterparties, shareholders, debtors and investors. Mike has represented buyers of assets in Section 363 and out-of-court sales from sellers such as Evergreen Solar, Inc., Sonic Telecommunications International, Ltd, Urban Communicators PCS Limited Partnership, US Aggregate, Inc., and Vectrix Corporation, as well as representing lenders, trustees and administrative agents in major Chapter 11 cases and workouts such as Delta Air Lines, Inc., Extended Stay Inc., Buffets Inc., Legends Gaming LLC, Nortel Networks, Premier International Holdings Inc., and many others. To read more, go to https://www.financialpoise.com/financialpoisewebinars/faculty/michael-riela/ 6 8
  69. 69. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe 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 focusses 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. 6 9
  70. 70. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe David Lorry – dlorry@versa.com David S. Lorry is a Managing Director & Senior Counsel at Versa Capital Management, LLC in Philadelphia. Mr. Lorry has more than 20 years of business and legal experience advising clients in a range of industries, helping them solve a variety of business issues and execute business transactions. Mr. Lorry began his professional career as an attorney, practicing corporate, insolvency and commercial law for 7 years, after which he became an investment banker. Mr. Lorry has experience with bankruptcy, mergers and acquisitions, capital raising, commercial lending, general corporate transactions, and related matters. He received his undergraduate degree in from Duke University, cum laude, and earned his law degree from George Washington University National Law Center, with Honors. 7 0
  71. 71. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe 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. 7 1
  72. 72. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe 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. 7 2 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/
  73. 73. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe ABOUT FINANCIAL POISE DailyDAC LLC, d/b/a Financial Poise™ provides continuing education to attorneys, accountants, business owners and executives, and investors. Its websites, webinars, and books provide Plain English, entertaining, explanations about legal, financial, and other subjects of interest to these audiences. Visit us at www.financialpoise.com. 7 3 Our free weekly newsletter, Financial Poise Weekly, educates readers about business, business law, finance, and investing. To receive it simply add yourself by going to: https://www.financialpoise.com/newsletter/ Email addresses are never sold to or shared with third parties.

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