| |||||||||||||||||||||||||
| |||||||||||||||||||||||||
Hedge funds have changed Chapter 11 restructurings because they have "created or added to a multiplicity of agendas" in bankruptcies by investing in ways that traditional banks never thought to years ago, said Stephen F. Cooper, the chairman at Kroll Zolfo Cooper LLC, at a session Monday on hedge funds at the American Bankruptcy Institute's New York City Bankruptcy Conference. "I think that they have certainly changed the dynamics of the [restructuring] business," Cooper said. "A few years ago, banks and vendors were the only third parties involved, and bankruptcies were more predictable."
Because hedge funds are traditionally concerned only with maximizing the returns on their investments, not the value of the estate, "it can lead to a lot of collisions" in bankruptcy court, Cooper added. If, for example, a hedge fund's investment in a debtor company was quite expensive, then it isn't likely to negotiate like other creditors, according to Richard M. Cieri, chairman of restructuring at Kirkland & Ellis LLP. "The problem is, there actually hasn't been made an honest appraisal of what the company's worth is because the hedge fund refuses to be restricted," he noted. "There have been secondary investors in Chapter 11 for decades. It's not a new phenomenon. What is new is that it's starting to become institutionalized. Everyone in Greenwich [Conn., where many hedge funds are headquartered] is trying to buy distressed securities. As a result, you have some investors who just don't get it." Cieri noted that hedge funds further complicate things by arguing that they shouldn't be required to disclose information, because that's tantamount to revealing their intellectual property, namely their investment techniques. "But it's important for the court to understand what the lenders' motivations are," Cieri asserted. "Once you get in court, you're never quite sure who to deal with because of so many lending syndicates on each loan." "There aren't any traditional bank lenders left," noted Jeffrey H. Aronson, managing principal at Centerbridge Partners LLP. "With few exceptions, very few lenders these days are banks. Getting people in a room to resolve differences doesn't happen anymore." And in the real world, the ability to exclude hedge funds from syndicates doesn't fit the nature of capital markets, Aronson continued. So for private equity firms looking for financing for their deals, they now have a list of 200 hedge funds to choose from and not just four or five banks. The result? "You just can't control at the end of the day whose going to control the economic interest," said Mary Ellen Egbert, managing director at J.P. Morgan Chase Bank. When is the best time to enlist a hedge fund's help? At the end of the year, when bonuses are being set, Cieri said. But be careful, he advised. Hedge funds are more litigious than traditional lenders, and more lawyering is likely with the rise of second-, third- and fourth-lien financing. —John Blakeley Categories Deal Video
    Community
 Elsewhere on The Deal.comDealwatchThe Deal MagazineCorporate Dealmaker
The Deal VideoCategories
Blog roll
Archives
| |||||||||||||||||||||||||
|
|
|
|
|
