The Hedge Fund Law Report

The definitive source of actionable intelligence on hedge fund law and regulation

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By Topic: Loan-to-Own Strategies

  • From Vol. 4 No.12 (Apr. 11, 2011)

    New York Appellate Court Requires Insurers to Indemnify Hedge Fund-Controlled Company for Attorneys’ Fee Award against Company in a Shareholder Derivative Action

    Plaintiffs in shareholder derivative actions often seek, and courts are empowered to award, a variety of remedies – including an award of attorneys’ fees to a prevailing plaintiff.  In a recent decision, the New York Appellate Division, First Department, reaffirmed insurance protection to a corporate policyholder, in which private investment funds had invested, facing the threat of paying attorneys’ fees in a derivative suit.  The Appellate Division held that – notwithstanding the fact that no other damages were awarded in the underlying derivative suit – the derivative plaintiffs’ attorneys’ fees constituted a “Loss” for which the policyholder was entitled to reimbursement from its insurers.  The decision is an important win for policyholders because it represents the first time a New York appellate court has recognized that an underlying plaintiff’s attorneys’ fees awarded in a securities or derivative action are indemnifiable under the terms of the insured defendant’s insurance policy.  In so doing, the Appellate Division placed New York law in line with decisions that are favorable to policyholders on this issue in jurisdictions across the country.  In a guest article, Jared Zola and Andrew N. Bourne, Partner and Associate, respectively, at Dickstein Shapiro LLP, describe the facts and holding of the decision and its implications for hedge funds involved on either side of a derivative suit.

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  • From Vol. 3 No.26 (Jul. 1, 2010)

    Liquidity for Post-Reorganization Securities Under Section 1145 of the Bankruptcy Code

    Are you a distressed debt creditor who has been turned into a security holder?  If so, you’re not alone.  The transformation – sometimes welcomed and sometimes not – is an increasingly common fate in the distressed community.  It happens, among other ways, when a company emerging from Chapter 11 issues new securities under its plan of reorganization in whole or partial settlement of outstanding loan or bond obligations.  If you are a creditor-cum-investor at the end of a Chapter 11 process, you face an important question: “How can I monetize the new securities that I’ve received in the claim distribution?”  In a guest article, Scott C. Budlong, a Partner at Richards Kibbe & Orbe LLP, explores a statutory provision that goes a long way toward answering that question: Section 1145 of the U.S. Bankruptcy Code.  Section 1145 offers a mechanism for unhindered public resales of securities that have been issued in exchange for creditors’ claims under a Chapter 11 plan of reorganization.  Understanding the operation and scope of §1145 is therefore crucial for a post-reorganization security holder that wishes to maximize its liquidity options.  The first part of this article provides an overview of §1145, including the ways it manipulates traditional Securities Act concepts to facilitate a debtor’s issuance of new securities in satisfaction of a class of claims against the bankruptcy estate, and to allow enhanced liquidity for creditors who receive those securities.  The second part of this article examines potential impediments to a creditor’s use of §1145 to resell post-reorganization securities, and describes how a creditor can try to preserve its access to §1145 or otherwise achieve liquidity.  This article, and a related article recently published in The Hedge Fund Law Report, provide important background and context for an upcoming breakfast discussion entitled “From Creditor to Equity Holder: How to Make Your Post-Reorganization Equity Work Harder for You.”  That breakfast discussion will be presented by Richards Kibbe & Orbe LLP, Halsey Lane Holdings, LLC and CRT Capital Group LLC, in conjunction with The Hedge Fund Law Report, and will be held on Wednesday, July 14, from 8:00 a.m. to 9:30 a.m. at The Yale Club at 50 Vanderbilt Avenue, New York, New York.  To read the related article, see “From Lender to Shareholder: How to Make Your Equity Work Harder for You,” The Hedge Fund Law Report, Vol. 3, No. 20 (May 21, 2010).  For more on Halsey Lane, see “Video Interview with Mark Dalton, Alex Sorokin and Neil Wessan of Halsey Lane Holdings: Key Considerations for Distressed Debt Hedge Funds that become ‘Unnatural Owners’ of Equity Following a Reorganization,” The Hedge Fund Law Report, Vol. 3, No. 6 (Feb. 11, 2010).

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  • From Vol. 3 No.20 (May 21, 2010)

    From Lender to Shareholder: How to Make Your Equity Work Harder for You

    Scenario: You hold bank debt or bonds in a company that is being restructured, whether through a Chapter 11 bankruptcy reorganization or an out-of-court restructuring.  As part of the restructuring, you (as well as the company’s other creditors) are being asked to reduce (or extinguish entirely) the principal amount of debt you hold, but as an incentive to agree to the proposal, you are being offered equity securities in the newly restructured company.  Alternatively, you are receiving a cash payout on your debt, and you are being offered the right to subscribe for new equity in the company in a rights offering.  As part of either deal, you are presented with a suite of documents setting out your various rights with respect to the company and the other shareholders, almost always prepared by the lead lender’s attorneys and similar to venture capital agreements with the lead lender taking the role of the lead investor.  Question: If you will be a minority shareholder in the newly restructured company, what rights should you expect, and what can you get?  Some lenders will approach this type of scenario with the view “I’m getting x¢ on the dollar in new debt more than I paid, and the equity is just the icing on the cake.”  Others will make the (usually incorrect) assumption that they will be able to freely trade their new equity in the same way as the debt they previously held or the new debt they are receiving.  In a guest article, Jahangier Sharifi and Catherine Rossouw, Partner and Associate, respectively, at Richards Kibbe & Orbe LLP, provide lenders who are being offered minority shareholder positions in restructured companies with a checklist of rights to look for and of pitfalls to avoid when negotiating the terms of these equity documents.  Their article has three parts.  Section 1 discusses possible restrictions on liquidity that may limit your ability to get the most value out of your new equity.  Section 2 outlines the basic protections and control rights that you should ask for in your equity documents as a minority shareholder.  Section 3 highlights the key takeaways for lenders when negotiating equity documents.

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  • From Vol. 3 No.6 (Feb. 11, 2010)

    Video Interview with Mark Dalton, Alex Sorokin and Neil Wessan of Halsey Lane Holdings: Key Considerations for Distressed Debt Hedge Funds that become “Unnatural Owners” of Equity Following a Reorganization

    When a hedge fund is set up – in terms of structure, strategy and managerial experience – to invest in secured debt, and the issuer of that debt defaults, the hedge fund and its manager often wind up in the unnatural position of owning equity or assets.  See “Hedge Funds Employing Loan-to-Own Strategies Face (and Resolve) Ownership Dilemmas,” The Hedge Fund Law Report, Vol. 2, No. 35 (Sep. 2, 2009).  How can such “unnatural owners” maximize the value of their post-reorganization investments?  In our inaugural video interview, The Hedge Fund Law Report discussed this and related questions with Mark Dalton, Alex Sorokin and Neil Wessan, founding principals of Halsey Lane Holdings.  In particular, we discussed issues including: circumstances in which hedge funds become unnatural owners; why such unnatural owners may be ill-equipped to maximize value following a restructuring; how Halsey Lane manages concerns relating to material, non-public information when advising unnatural owners; how hedge fund managers can negotiate the potential liquidity mismatch between their fund lock-ups and the time required to implement a strategic plan at a restructured company; how hedge funds with a debt strategy can remain faithful to that strategy while owning and managing post-reorganization equity; and more.

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  • From Vol. 2 No.35 (Sep. 2, 2009)

    Hedge Funds Employing Loan-to-Own Strategies Face (and Resolve) Ownership Dilemmas

    Loan-to-own strategies are becoming increasingly popular among hedge funds, especially those with a credit orientation.  Generally in such strategies, a hedge fund purchases debt of a company with the goal of converting that debt into a control equity position though a triggering event, such as a bankruptcy, other restructuring or recapitalization.  In many such circumstances, the pre-event equity is wiped out.  Not surprisingly, the popularity and prevalence of such strategies increases as economic conditions worsen – and thus as the distressed opportunity set widens.  Moreover, as a route to equity ownership, a loan-to-own strategy offers a certain degree of safety relative to an outright acquisition of the equity or assets of a company: even if the loan-to-own strategy is aborted in media res, the hedge fund investor still may sell the acquired debt at a profit.  But for credit-focused hedge funds, a loan-to-own strategy that actually ripens into ownership raises a ticklish question: what to do once you own?  That is, credit hedge funds generally are in the business of purchasing passive stakes in the debt of companies, then selling those stakes, ideally at a price above the price at which they were purchased.  But majority equity ownership is a very different ballgame from passive debt investment: majority equity ownership requires different managerial competencies, personnel, fund structures and time horizons.  It also exposes a fund and its manager to different categories of liability.  So how can traditional credit hedge funds see a loan-to-own strategy through to its conclusion?  That is, how can they own?  Or what can they do in anticipation of ownership to mitigate the legal and practical difficulties of owning equity in a fund organized to invest in debt?  We address these questions, and in the course of our analysis discuss distressed debt funds, dedicated loan-to-own funds, cross trading concerns and lender liability issues.

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