Old Article about Chapter 11. Found some of it interesting..
Chapter 11 May Be A Goldmine For Some Stockholders In 2007
Big Players Poised For Big Profits
This could be the year bankruptcy reorganization, traditionally a death trap for shareholders, turns into a goldmine for stockholders in the country’s biggest bankrupt companies.
Last year, stock that had long been considered worthless paid off handsomely for shareholders of Mirant Corp., USG Corp. and Riverstone Technologies Inc. when those companies completed their Chapter 11 reorganizations.
This year, the money to be made will be even larger.By some estimates, the group of hedge fund and private equity investors that have offered to put up to $3.4 billion into Delphi Corp. could make a fat profit instantly if the deal wins court approval.
Those investors include three of Delphi’s biggest shareholders -Appaloosa Management, Harbinger Capital Partners and Cerberus Capital Management.Their immediate payoff, according to a rival bidder for the company, could amount to $1 billion.
The rival bidder, Highland Capital Management,is itself looking at a nice profit. The Texas hedge fund, which owns about 8% of Delphi’s stock, has already seen the value of its shares in the company increase by at least 50%,according to filings with the Securities and Exchange Commission. Delphi’s stock was trading at $3.78 a share late last week.
The idea that big institutions are actually buying the stock of bankrupt companies, let alone stepping up with more cash, is astounding to veteran bankruptcy practitioners. Chapter 11 usually ends with shareholders out in the cold and companies in the hands of creditors.
“It’s a gigantic change. People are a lot more interested. Ten years ago no one was touching the equity,” said Lawrence Gottlieb, a New York bankruptcy lawyer who represented shareholders in the bankruptcies of Seitel Inc. and Peregrine Systems Inc.
Perry Mandarino, a financial adviser to troubled companies, said the stock-buying is driven in part by the increasing efficiency in the debt market. Debt is traded mostly by sophisticated players skilled at handicapping the outcome of Chapter 11 cases.
Stock analysts, by contrast, give up once a company plunges into bankruptcy. That leaves the field open mainly to big investors, who have their own capacity to assess the
true value of Chapter 11 companies. Mandarino said the possibility of “phenomenal returns” on stock relative to returns on debt may be driving the surge in stock-buying
by big investors. For all the success big investors are having, Chapter 11 is still not safe territory for mom-and pop shareholders, bankruptcy professionals say. High risk is built into the business plan for the big investors -including hedge funds and private-equity firms - that are snapping up bankrupt companies’ stock.
“If you look at the people who are going in at an equity
level, by and large they are the experienced funds,” Gottlieb said. “Why are they doing that? Number one,they can buy the equity really cheap. It’s a game of ‘what the hell, maybe we can get something out of it.’”
Mandarino said the big investors in stocks also tend to be experienced risk-takers. “Some of these funds manage billions of dollars,” he said. “They don’t have the success they’ve had because they’re meek or risk-averse.
Buying stock can also be a cheap way for big debt holders to make sure that small shareholders don’t get out of line and start banging the table for more in a bankruptcy,Gottlieb said. As long as they’re not members of an
official committee, big shareholders who are also big debt holders are free to take care of their own interests, without worrying about rank-and-file shareholders.
Last year, Foamex International Inc.’s stock rose sharply - to the benefit of four big shareholders who gained a majority stake in the company during its bankruptcy reorganization. Some of the four - D.E. Shaw Laminar Portfolios LLC, Goldman Sachs & Co., Sigma Capital Associates LLC and Par IV Master Fund - bought the stock when it was trading at less than a dime. Foamex
stock now sells for nearly $6 a share.
While the stock boomed, DE Shaw, Goldman Sachs, Sigma and Par IV parlayed their cheap shares into a seat at the Chapter 11 bargaining table. There Foamex reworked a reorganization plan that had called for creditors to end up in control of the company. The reworked plan put the big shareholders in charge. That’s thanks in part to a $150 million equity rights offering that is expected to boost the majority stake held by Foamex’s big four considerably.
Two of Foamex’s biggest shareholders, DE Shaw and Goldman Sachs, are also big creditors. Some of the $150 million equity rights offering, for which they get a share of a $12 million fee, is headed right back into their pockets as payment for the debt they own.
“If you’re a fund and what you’re really in it for is to loan-to-own, having some equity so that you can control the equity and it does not become an issue for you to contend with,there’s value in that,” Gottlieb said.
Small shareholders, however, aren’t entirely powerless in the presence of big players. In the Chapter 11 case of Mirant Corp., the company’s creditors almost got away with $600 million in value in excess of what the company owed them, according to the calculations of U.S. Bankruptcy Judge D. Michael Lynn, who presided over the case.
They didn’t, thanks largely to an official committee of shareholders holders - mostly individual shareholders with a fervent belief that Mirant was worth more than creditors said it was. The shareholders met up in Web chat rooms and mounted an effort to rein in the creditors.
“They did a hell of a job for a group of people who were not funded to take that kind of job on, and not schooled in the ways of Chapter 11,” said Edward Weisfelner, the attorney who represented Mirant’s official committee of shareholders. Mirant’s shareholders went toe-to-toe with big bondholders in a prolonged court fight that ran up hundreds of millions in professional fees and ended in a negotiated settlement that left shareholders with stock worth an estimated $1.45 a share. That was up from pennies at the time of Mirant’s bankruptcy filing in 2003.
Still, no such fight is taking place in the Chapter 11 cases of Delphi and Foamex, where big investors ready to throw more money on the table have set creditors’ mindsat ease.
“People step up to do a rights offering when they believe in the future of the company, and when they have the cash available,” Weisfelner said. “That sort of distinguishes the institutional investor cases from the mom-and pop shareholders, who don’t have millions to participate in the rights offering.”
