Washington Mutual Debt

[Enterprising Investor]

Rule Seeks Data on Bankruptcy Creditors

By MIKE SPECTOR
Distressed-debt investors forming creditor committees in bankruptcy courts will have to disclose details of their holdings under a new rule making its way through the federal judiciary.

The new rule would make hedge funds and other investors in debt of troubled companies reveal their identities and holdings whenever they band together on committees to influence the outcome of bankruptcy-court cases.

Current disclosure is spotty, with many investors arguing they aren't subject to existing rules that demand information on their holdings.

But, in a victory for hedge funds and other investors, the rule won't require disclosures of purchase dates or prices paid for bankruptcy claims.

The new rule's language, drafted by a panel of judges and other bankruptcy professionals, made the rounds in the email in-boxes of lawyers, restructuring bankers and judges Wednesday.

The official proposed rule now makes its way to another federal judiciary committee before eventually heading to the Supreme Court for review. If the Supreme Court adopts the rule, Congress can overturn it.

The rule attempts to get a handle on the changing corporate-restructuring landscape. For years, companies negotiated with banks holding their loans to restructure. Now, hedge funds and other traders buy loans and bonds of companies at discounts, then work to influence restructurings to make money on their bets.

These investors often form unofficial committees to litigate in court and maximize their returns. Efforts to change the disclosure rule—known as bankruptcy rule 2019—have intensified in recent months after a series of conflicting court decisions over whether investors on informal creditor or equity committees must disclose their holdings.

Hedge funds and their allies had fought against provisions requiring disclosure of when claims were purchased and at what price, arguing the information would reveal proprietary trading strategies. Hedge funds had hinted they might take their money out of bankruptcy cases if forced to reveal too much.

"It chills participation if you have to make the exhaustive disclosure," said Martin Bienenstock, a lawyer at Dewey & LeBoeuf who counts hedge funds among his clients.

Still, the new rule would make investors disclose their "economic interest" in bankruptcy cases, including debt, equity or short positions such as credit-default swaps, which act as insurance against debt when it defaults. Judges have expressed concern that investors banding together on court committees have at times revealed their underlying debt holdings but failed to disclose their CDS positions.

Investors on committees will have to disclose the quarter and the year in which their positions were acquired. Disclosures are waived for positions acquired more than a year before the company's bankruptcy filing. If hedge funds make arguments in court or solicit votes for confirmation of a bankruptcy plan, additional disclosures will be required if investment positions have changed since a previously filed statement.

Many of these investors argued they weren't subject to the current rule, based on technical legal language related to whether their efforts amounted to acting as an official "committee." The new rule makes clear that any investor banding together on a court-sanctioned committee will have to make disclosures.

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