Authors: Michelle M. Harner, Jamie Marincic Griffin, and Jennifer Ivey-Crickenberger
Hedge funds and other private investment funds often play a key role in chapter 11 cases. They may hold the debtor’s prepetition secured debt or provide postpetition financing to the debtor. They also may buy and trade the debtor’s secured and unsecured debt both before and after a chapter 11 filing. These activities can provide much-needed liquidity to a debtor and foster a robust secondary market for creditors looking to exit the credit. A fund’s participation in a case, however, sometimes generates litigation and, arguably, both delays the resolution and increases the cost of the case. Consequently, many commentators and practitioners debate the utility of funds in restructurings.
In our most recent article on funds in chapter 11, we conduct an original empirical study of funds as purchasers of chapter 11 debtors. Specifically, the study analyzes cases where a fund (individually or as part of a group) acquires control of a debtor through the chapter 11 process by purchasing either substantially all of the debtor’s assets or a majority interest in the reorganized stock. In the stock acquisition context, we were concerned only with the investment of new capital.
Overall, the data suggest that funds have the potential to provide value in chapter 11. But neither the participation of funds nor the chapter 11 process itself is a panacea, and more empirical and traditional case studies are needed to understand fully the impact of funds on corporate restructurings. We hope our study encourages further research.
The full-length article can be found here.