Presence of Hedge Funds in Chapter 11 Process & Effects on Bankruptcy Outcomes

Today we wanted to highlight a paper by Wei Jiang, Kai Li, and Wei Wang, entitled "Hedge Funds and Chapter 11" found via The American Finance Association, Publishers of the Journal of Finance.

The abstract of the paper reads as follows:

"This paper studies the presence of hedge funds in the Chapter 11 process and their effects on bankruptcy  outcomes. Hedge funds strategically choose positions in the capital structure where their actions could have a  bigger impact on value.  Their presence, especially as unsecured creditors, helps balance power between the  debtor and secured creditors. Their effect on the debtor manifests in higher probabilities of the latter’s loss of  exclusive rights to file reorganization plans, CEO turnover, and adoptions of KERP, while their effect on secured  creditors manifests in higher probabilities of emergence and payoffs to junior claims."


The paper finds that some of the biggest players in Chapter 11 are household names: Oaktree Capital, Appaloosa Management, Apollo Advisors, Cerberus Capital Management, and Silver Point Capital, among others.

And for those of you that might not have time to read an entire paper, it intriguingly concludes that:

"We find that hedge fund presence is associated with a higher probability of the debtor’s loss of  exclusive rights to file a reorganization plan, a higher probability of emergence, more favorable distributions to  the claims they invest in, greater CEO turnover, and more frequent adoptions of KERP.  We further establish the  causal effects of hedge funds, especially in their role as creditors, through instrumentation for hedge fund  participation.  Finally, we show that the favorable outcomes for claims in which hedge funds invest do not come  at the expense of other claimholders—they are more likely to result from value creation by alleviating financial  constraints and mitigating conflicts among different classes of claims."


Embedded below is the paper Hedge Funds and Chapter 11:




You can download a .pdf copy here.


For more on hedge funds and distressed investing, check out notes from Dan Loeb & Daniel Krueger's talk at a distressed investing panel as well as Marc Lasry's thoughts on distressed opportunities.

Paulson & Co Sells Some Delphi (DLPH)

John Paulson's investment firm Paulson & Co recently filed a Form 4 with the SEC disclosing that they had sold over 1.1 million shares of Delphi (DLPH) at a price of $31.96 on March 5th.

Despite these sales, Paulson still owns a lot of DLPH. Their Credit Master fund owns 19.2 million shares as the company emerged from bankruptcy and became publicly traded again.

Their Recovery Fund also owns over 3.3 million shares while their Advantage Master fund owns 877k shares and their Advantage Plus Master fund owns 1.4 million shares.

Prior to its IPO, Delphi was owned by many hedge funds we track. During the IPO process, it was reported that Paulson would be selling about 20 million shares of its stake. Delphi continues to be one of Dan Loeb's biggest holdings.

Per Google Finance, Delphi is "is a global vehicle components manufacturer and provides electrical and electronic, powertrain, safety and thermal technology solutions to the global automotive and commercial vehicle markets. It is a vehicle component manufacturer, and its customers include the 25 automotive original equipment manufacturers (OEMs) in the world."


Paulson on Their Delphi Stake

In a letter to investors, Paulson & Co talked about their Delphi stake:

"Delphi, the largest U.S.-based automotive parts supplier, emerged from bankruptcy in late 2009. We believe bankruptcy reorganization transformed this previously troubled manufacturer into one of the auto parts industry's most efficient companies. In bankruptcy, many of the firm's liabilities were eliminated and its cost structure was drastically reduced, which we believe will likely lead to higher profits and a higher valuation.

Upon emergence from bankruptcy, Delphi's defaulted secured debt was exchanged for privately traded partnership units. The partnership units initially traded at $5000 per unit, had minimal analyst coverage, and required signing a confidentiality agreement to receive financial information. As the security was unlisted, illiquid, and complicated, it was little understood by the market and traded at a wide discount to Delphi's public equity comparables.

Delphi completed its IPO on November 17th, 2011. Paulson sold ~20M shares across our funds for $22 per share, yielding total proceeds of $453 million. We remain the largest shareholder in the company and believe that Delphi is taking the correct steps to remove its valuation discount to peers, including participation at the Detroit Auto Show, and initiating discussions with sell-side research."


Check out more activity from the hedgie: Paulson's presentation on Hartford Financial Services Group (HIG) as well as the catalyst for NovaGold (NG) shares.

Companies Most Likely To Declare Bankruptcy

In addition to the updated problem bank list we posted up the other day, we saw this and thought it would be worth flagging for those interested. Audit Integrity, an independent research firm, has highlighted the top 20 companies that they believe have the highest probability of filing for bankruptcy. They limited this specific list to publicly traded firms that have over $1 billion market capitalization. In no particular order:

• Advanced Micro Devices, Inc.
• Amkor Technology, Inc.
• AMR Corporation
• Apartment Investment and Management Co.
• CBS Corporation
• Continental Airlines, Inc.
• Federal-Mogul Corporation
• Hertz Global Holdings, Inc.
• Interpublic Group of Companies, Inc.
• Las Vegas Sands Corp.
• Liberty Media Corporation (Capital)
• Macy's, Inc.
• Mylan Inc.
• Oshkosh Corporation
• Redwood Trust, Inc.
• Rite Aid Corporation
• Sirius XM Radio Inc.
• Sprint Nextel Corporation
• Textron Inc.
• The Goodyear Tire & Rubber Company

They rate over 12,000 companies so as always take these with a grain of salt and obviously do the necessary due diligence on them. One particular company on the list is intriguing though: Textron (TXT). The private jet manufacturer has been on a volatile ride over the last year (to say the least) and our friends over at Zero Hedge have done some excellent sleuthing regarding various activities Textron has conducted with Goldman Sachs as of late.



Source: Reuters

Largest Bankruptcies in History, Illustrated

Great graphic up courtesy of Good magazine where they post up the largest bankruptcies in history. They use sinking ships to illustrate their point, with Lehman Brothers by far being the largest ship of the bunch:

(click to enlarge)

Here are some of the breakdowns of the largest US bankruptcies, courtesy of CNN Money:

1. Lehman Brothers Holdings on 9/15/08 with $691 Billion in Assets.
2. Washing Mutual on 9/26/08 with $327.9 Billion in Assets.
3. WorldCom on 7/21/02 with $103.9 Billion in Assets.
4. General Motors on 6/1/09 with $91 Billion in Assets.
5. Enron on 12/02/01 with $65.5 Billion in Assets.
6. Conseco on 12/17/02 with $61 Billion in Assets.
7. Chrysler on 4/30/09 with $39 Billion in Assets.
8. Thornburg Mortgage on 5/1/09 with $36.5 Billion in Assets.
9. Pacific Gas and Electric Co. 4/6/01 with $36 Billion in Assets.
10. Texaco on 4/12/87 with $34.9 Billion in Assets.

Well, at least we all have some nice stories for the grandkids. Oh, wait, nevermind. We won't even be able to afford kids, much less grandkids. After all, the government spent tons of money (courtesy of our future) that was kindly used to keep afloat numerous other ships that are not pictured above. We didn't know US dollars could be used as a flotation device...