The year 2009 set a record for defaults and restructurings. Ownership of companies changed rapidly and, given the freeze up in capital markets, most of the new capital structures were significantly deleveraged, leaving little role for pre-existing sponsors and other equity holders of troubled companies. Halfway through 2010, even though actual bankruptcies have declined, restructuring continues through an amendment and forbearance process that is driven by the potential consequences to stakeholders in a court supervised restructuring.
In a highly anticipated decision, the U.S. Court of Appeals for the Fifth Circuit recently affirmed a bankruptcy court order dismissing a chapter 11 case filed by a corporation without obtaining—as required by its corporate charter—the consent of a preferred shareholder that was also controlled by a creditor of the corporation. In Franchise Services of North America, Inc. v. Macquarie Capital (USA), Inc. (In re Franchise Services of North America, Inc.), 891 F.3d 198 (5th Cir.
There is a lot of chatter around the water cooler about how falling energy prices puts energy companies and service companies into distress, and—importantly for private equity investors with liquidity—provides an opportunity to acquire energy assets at distressed prices. In part one of this posting, I provided a very basic hypothetical to help la
As the economy continues to emerge from the global recession in the late 2000s, one of the prevailing trends we have seen is the continuation of challenges to distressed investors that have employed a “loan-to-own” strategy. Boiled to its basics, the loan to own strategy is a method of investing by a distressed investor — frequently a private equity or hedge fund — that acquires the secured debt of a borrower at a discount (often deep) with the hope of either being paid at par or using the par value of the secured debt to acquire the company.
In the world of private equity, vast sums of money are raised by private investors who pool their money into collective funds in order to acquire companies, i.e., a “portfolio company”, with the goal of eventually flipping the portfolio company at a significant profit. Sometimes, however, that bet goes wrong, and the portfolio company is sold at a loss or, worse, liquidated in bankruptcy.
On July 24, 2013 the First Circuit Court of Appeals, applying an “investment plus” test, concluded that a Sun Capital private equity investment fund was engaged in a “trade or business” for purposes of determining whether the fund could be jointly and severally liable under ERISA for the unfunded pension withdrawal liability of the portfolio company.1 Two Sun Capital investment funds, conveniently named Sun Capital Partners III, LP (“Fund III”) and Sun Capital Partners IV, LP, (“Fund IV”) (the “Sun Funds”) collectively owned 100 percent of Scott Brass, Inc.
On May 10, 2013, Judge Brendan Linehan Shannon of the United States Bankruptcy Court for the District of Delaware rejected an attempt to hold a private equity sponsor liable for its portfolio company’s alleged violations of the federal Worker Adjustment and Retraining Notification Act (the “WARN Act”) under the “single employer” theory of liability.
On October 18, 2012, the U.S. District Court for the District of Massachusetts ruled that two private equity investment funds managed by Sun Capital Partners, Inc. were not liable for their bankrupt portfolio company's multiemployer pension plan withdrawal liability (Sun Capital Partners III, LP v. New England Teamsters and Trucking Industry Pension Fund, Civ. Action No. 10-10921-DPW (D. Mass. Oct. 18, 2012)).
The arrival of private equity and hedge funds into the US restructuring and insolvency markets is last year’s news. How these funds are transforming the restructuring markets in the United States and exporting these transformations to Europe is what’s of interest now. Keen on making higher and higher profits in a low interest rate environment, funds are directing vast amounts of their liquidity into purchasing and trading distressed bond debt, bank debt and trade debt in restructurings and in insolvency proceedings in the United States.
The aggregate value of private-equity acquisitions worldwide in 2006 exceeded $660 billion. If this number seems mind-boggling, consider that this record-breaking volume of transactions appears well on the way to being eclipsed in 2007. Even with corporate financing for leveraged buyouts harder to come by as a consequence of the sub-prime mortgage fallout, there is, by some estimates, $300 billion sitting globally in private-equity funds. Already on tap or completed in 2007: a $32 billion takeover of energy company TXU Corp.