U.S. Bankruptcies Increasingly Catching Eye Of Foreign Buyers

Companies with headquarters in such far-flung locales as Dubai, Mumbai and Shanghai are increasingly turning to the same place when hunting for new acquisitions: U.S. bankruptcy courts, Dow Jones Daily Bankruptcy Review reported. Whether it's ritzy resorts or a furniture retail chain, bankruptcy attorneys say the promise of quality assets available at cheap prices and cleansed of burdensome liabilities is luring more foreign companies to courtrooms in places like Manhattan and Wilmington, Del. "You have a process in the U.S. that is very favorable to someone who wants to come in and buy assets through a Chapter 11," said George A. Davis, a partner in Cadwalader, Wickersham & Taft's restructuring practice. "You know exactly what you're getting, and you leave behind whatever you want to leave behind....It is an extremely precise and clean process." Many buyers hail from emerging markets such as Brazil, China, India and nations in the Middle East. "They have the ability to do it and the need, frankly, in order to continue to grow," Davis said. How do foreign buyers find out about these opportunities? While some are actively searching for deals and therefore are plugged into the domestic distress scene, others get their foot in the door, thanks to existing relationships with the struggling company. They're the investors, lenders, suppliers, customers or other creditors impacted when a company files for bankruptcy. That was the case for furniture supplier Haining Mengnu Group Co. of China, the biggest creditor of sofabed and leather furniture retailer Jennifer Convertibles Inc. Jennifer sought Chapter 11 protection last July after a striking a deal securing Mengnu's support for its restructuring. Under the deal, Mengnu swapped its unsecured claim of more than $16 million for 90.1% of the new common stock the retailer issued when it emerged from bankruptcy last month as well as new notes and proceeds of a litigation trust. The deal not only ensures Mengnu has an outlet for its sofas and leather upholstery, but it also positions the Chinese company to profit from Jennifer's sale of those products here in the U.S. But in other cases, it's about more than turning lemons into lemonade. Craig Rasile, the co-chair of Hunton & Williams' bankruptcy practice, said foreign hedge funds, private equity firms and other financiers are prowling for deals that will help them achieve some strategic objective. "They're looking for opportunities to acquire distressed assets that might help facilitate or support an infrastructure that they have here, give them more market share or give them a new platform," he said. Several factors have given these strategic foreign buyers a competitive edge, Rasile said. First, the weak dollar means their money goes further than it would back home. Second, they're facing limited, if any, competition. Martin Bienenstock, chair of Dewey & LeBoeuf's business solutions and governance practice, said other foreign investors aren't interested in chasing down deals themselves. Rather, he said they invest in the U.S. hedge funds and private equity firms that are "frequent purchasers" in bankruptcy court. Complicating foreign companies' entrances into U.S. bankruptcy proceedings, in part, is the speed at which bankruptcies move here. Companies can seek Chapter 11 protection, market their assets, go to auction and seek court approval of a winning bidder within a matter of weeks. The schedule doesn't bode well for companies located far away or are from cultures that call for more deliberation. "If you're not quick and nimble on your feet...it's going to sail right by you," Rasile said. "You don't have the luxury of six months to kick the tires to ascertain whether or not this is a good investment for you." Another complication is the "dizzying level of intricacy" of the U.S. export laws that govern the sales of certain assets, like munitions, Davis said. Then there's the concern about where to seek legal relief if the foreign buyer breaches a deal; a company may have to complete the arduous task of convincing both a U.S. and foreign court that it's been wronged. "It adds a layer of risk both on the front end and on the back end," Davis said. "Even if you do get it all approved and they're ready to close, you still have to get all the regulatory approval." "There's a growing body of lawyers, private equity guys [and] investment bankers who would be interested in this and know the right people who could make the connections," said Lenny Goldberger, a member of Stevens & Lee's restructuring and China practices. "It's sort of a slow process of educating everybody to the possibilities in the U.S." The turmoil plaguing other parts of the world will also ensure that the U.S. is the go-to spot for investors. The risks of the bankruptcy court don't hold a candle to, say, the risks associated with investing in a country plagued by civil war. "It looks like there's going to be at least a short-term opportunity in the marketplace because of political unrest," Bienenstock said. "With all of the trillions of dollars or at least billions lined up on the sidelines, a lot of it's going to be kicking the tires and looking around in the next couple months."