Month: September 2020

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During the first couple of days in class we briefly discussed litigation funding, which is the advancing of funds to law firms in exchange for a portion of the proceeds from litigation or arbitration. The key feature of litigation finance is that recourse is generally limited to the proceeds of the litigation/arbitration award or settlement, meaning that, the funded party only pays the litigation funder if the party successfully wins or settles its case. This has been a growing field in the investment industry as people are looking to diversify their portfolio of stocks and bonds as it doesn’t have a strong correlation to the overall markets. I stumbled upon this deck from LexShares that I think does a great job of explaining how it works. These guys are looking for a minimum commitment of $250k which I know is steep but this deck gives you a good starting point for how to understand the space. I’m invested with a company that does Pre-settlement funding that is very similar to this but I didn’t want to be super cheesy and post that deck so take a look at this one. 

Joscelyn

Binder1[5752]

Here is the restructuring case of Scandinavian Airline System (SAS), the largest airline in the Nordics. In the end the governments of Norway and Sweden had to step with significant capital in to save the company. The presentation gives a fairly detailed description of how the restructuring will be done. It gives a European perspective on a “voluntarily” restructuring that is fairly different from Chapter 11 under US legislation.

Investor-presentation-Revised-Recapitalization-plan

The podcast below pertains to distressed investment opportunities in the lower middle market (LMM), herein defined as businesses with up to $20 million in EBITDA:

The New Normal for Distressed Investing: https://www.axial.net/forum/the-new-normal-for-distressed-investing/

Changes made to Subchapter V in the CARES Act have created an interesting opportunity in for unsecured credit investments in small businesses. 

Importantly, Subchapter V eliminates the “absolute priority rule” – this would ordinarily be a major credit negative.

Despite the recent economic downturn, we are not seeing bankruptcy filings that are in-line with the numbers associated with larger businesses. This is especially interesting because subchapter V is intended to lower the direct cost of bankruptcy proceedings for small businesses. 

So why aren’t small businesses filing and what are the investment implications regarding subchapter V?

There are significant disincentives associated with bankruptcy for small businesses, despite the stipulations in subchapter V. Subchapter V may lower direct costs of a chapter 11 proceeding, but it does not account for the indirect costs of bankruptcy, such as frictional costs associated with customer or vendor arrangements. The magnitude of these frictional costs disincentivizes LMM businesses from pursuing filing under subchapter V. 

The disincentive to file under subchapter V, which is not credit-friendly, creates an opportunity for unsecured lenders. Subchapter V protects secured lenders and allows pre-bankruptcy control parties to retain control through the proceeding, wiping out unsecured creditors; however, this risk is partially mitigated by frictional costs of bankruptcy. This dynamic gives unsecured creditors an opportunity to lend on better terms and benefit from protection provided by the incentives of  distressed small business owners.

I received an interesting quote from Bloomberg on one of the big term American Dream bonds (7% 2050) which last traded at 87 and implies a yield of 8.16.  So, the question is, what price entices you to buy this bond (if at all)?

 

While its not surprising that Century 21 which is a 13 store, off-price, brands based retailer filed for Chapter 11 bankruptcy, it is unusual that from the get-go they announced they are liquidating. 

https://nypost.com/2020/09/10/fashion-retailer-century-21-files-for-bankruptcy/

Click below to see a list of their petition and a list of their creditors.

Century21

For further information about C21’s capital structure and what led them to filing bankruptcy, read the declaration of their CFO.  See below:

Century21Declaration

On Thursday evening at the first day bankruptcy court hearings, C21’s lawyer announced that they will be selling the right to prosecute the $175MM lawsuit against the insurance companies.  A copy of that complaint is set forth below:

Century 21 – Summons and Complaint v Starr Surplus Lines Insurance Co