Wednesday, June 10, 2009

How to be Successful Investors in Bankruptcy Court

The Deal has an outstanding piece today discussing, in general, how hedge funds can do better at meeting their objectives when investing in distressed situations - specifically, when the debtor is in bankruptcy.

The writer, Eric B. Fisher of Butzel Long, suggests that it is important for hedge fund managers to be conscious of the bankruptcy judges' point of view. He states that they "aspire to create a forum premised upon transparency and equal access to information" and that the "bankruptcy judge's perspective is long term, focusing on the rehabilitation of ailing companies."

He discusses his thesis in relation to the Chrysler case, and identifies three basic tenets to help shape strategy:

  1. "There is strength in numbers." He discusses how the secured lenders opposing the plan in Chrysler shrunk due to the strategies of the Obama Administration, reducing the credibility of the remaining opponents, the Indiana Pensioners.

  2. "Articulate a vision larger than 'return on investment.'" He points out that the Pensioners tried to do this by pointing to the retirees who were the beneficiaries of the investment. He says, however, that "Ultimately, however, the party that the bankruptcy judge cares about the most is the debtor." He says that "committees should strive to speak meaningfully to the issues faced by the debtor and offer a competing vision of the case."

  3. "Use disclosure to enhance credibility." He says that the natural inclination of hedge funds to keep information private can work against them with the Court.
I recommend reading the article.

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2 comments:

Andrew said...

The Chrysler Case seems to be extremely unique because of the political environment surrounding it. In normal bankruptcy proceedings, in which politics are more or less absent, how important is the judge's view of the creditor's intentions versus the legal claim those same creditors have on the company?

Lawrence D. Loeb said...

Andrew:

Thank you for your comment/question.

I'd have to defer to a bankruptcy attorney, but it is my understanding that the bankruptcy judge has a fair amount of discretion in how they run a case.

There are a number of transcripts and recordings of proceedings available on line. Several of the Chrysler hearings were recorded and are available on www.chryslerrestructuring.com. Interestingly, the recordings are attached through pdf files.