Citadel Broadcasting Corporation (fka CTDBQ)

[My4ntoy]

anyone seen this?

Investors bet on equity in bankrupt US companies
5/24/2010

http://www.moneycontrol.com/news/world-news/investors-betequitybankrupt-us-companies_459768.html

Buying shares in a bankrupt company is a risky bet. But more than a handful of distressed investors are doing just that, betting the stocks will rise during the court process or that they will get a payoff from the company.

Indeed, many of these stocks — in names such as Visteon Corp, Chemtura Corp and Smurfit Stone Container Corp, among others — have soared from a few pennies to a couple of dollars in a matter of months.

The investors, including well-known names like Davidson Kempner Capital Management and Aurelius Capital, are also arguing to bankruptcy court judges that they should be paid by these companies when they exit bankruptcy, saying the companies are not nearly as broken as when they limped into Chapter 11.

"It appears to be the result of an influx of capital, coming off the drought of the last two years. For a long time there was no financing. Now there's value for lots of different companies," said Robert Stark, a lawyer at Brown Rudnick LLP, who has represented equity committees in bankruptcies such as those of Oneida Ltd and Riverstone Networks.

Timing is of the essence, though. After the equity committee in car parts maker Visteon was denied the right to form, shares — while still far from their lows -- fell more than 50%. Bankruptcy judges often deny equity committees — partly because of the cost, but also because confirmed reorganization plans with payments to stockholders are few. (The current case of General Growth Properties Inc is an exception).

But that has not stopped investors from trying to assert themselves, arguing that times are better. Shareholders have also recently asked for equity committees in the bankruptcies of Spansion Inc, Regent Communications and AbitibiBowater Inc.

Last year, the capital markets were all but closed, making it tough for companies struggling with weak sales in the down economy to make interest payments or replace maturing debt with new financing. Now, many companies are reporting stronger businesses this year and those credit markets have opened.

The equity fights are in a way an extension of the high-profile fights among debt investors this year. In the Six Flags bankruptcy, for example, the company went through several different plans, each one favoring a group further back in the priority for payouts as credit markets boomed. The company finally exited bankruptcy under the control of Stark Investments and other junior bondholders, but shareholders were beginning to jostle for a payment.

"If we were still in the depths of the recession, you wouldn't see any of this. It would just be obvious that there is no value for out-of-the-money debt holders or shareholders. In the old days we would see the bond holders doing this, and now we are seeing equity guys," said Barry Ridings, vice chairman of US investment banking at Lazard.

Visteon

Sometimes, just the mere presence of organized shareholders — depending on how loud and persuasive they are — can be enough to create a payoff in the stock price or the distribution of some warrants or equity in the company's ultimate reorganization.

"That's definitely a strategy, to buy at massively distressed levels and then fight as hard as humanly possible to be recognized and to force a recovery down into those levels of the capital structure," said Joe Stauff, an analyst with the special situations group at Susquehanna International Group. "Case in point -- Visteon."

Shares in the car parts maker took a wild ride this year as hedge funds vacuumed up shares, helping to lift its stock from around 1 cent in December to USD 2.03 earlier this month. (After a company files for bankruptcy, its shares typically trade over the counter on what are commonly called the pink sheets).

That rally provided a potential windfall to Davidson Kempner Partners, Brigade Capital, Plainfield Asset Management and Aurelius Capital Management, regulatory filings show. They started buying stock for as little as 14 cents in February.

Visteon shares rose 71.8% to USD 1.22 on Friday after Johnson Controls Inc offered USD 1.25 billion for Visteon's interiors and electronics business.

A trading tactic?

In another case, Caspian Capital Advisors, which holds the preferred stock of cardboard packaging maker Smurfit Stone Container, began agitating for a shareholder committee in that bankruptcy in December.

That set off a buying spree in the common stock by funds associated with P. Schoenfield Asset Management, Fir Tree and Venor Capital Management, which spent as little as 9 cents per share and as much as 43 cents. The stock is trading at 16.5 cents, up 22.2%, in Friday afternoon dealings.

One lawyer in that case dismissed suggestions that shareholders use committee requests as a speculative trading strategy to drive up share prices.

"It's not a tactic," said Rachel Strickland, an attorney with Willkie Farr & Gallagher LLP, which represents preferred shareholders. "The implied trading price of the bonds is almost a billion dollars higher than what the company is saying this company is worth. It is not a handful of greenmailing hedge funds saying what it thinks this is worth."