Bankruptcy filings in the United States are nearing all-time highs, and the dollar is currently trading poorly against foreign currencies. In the first half of 2009, there were more than 30,000 commercial bankruptcy filings across the United States, which outpaced the first six months of any year since the early 1990s. Additionally, the corporate speculative grade default rate hit 10.2 per cent in August 2009, and Standard & Poor’s (S&P) stated that it expects the rate to be as high as 13.9 per cent by mid-2010. Thus, while an economic recovery may be on the horizon, there are still ample restructuring and distress acquisition opportunities ahead. Indeed, in August 2009, S&P stated that “relevant credit metrics in the United States show continued deterioration of credit quality and restricted lending conditions.” Accordingly, the number of bankruptcy filings likely will continue to rise through 2010.
As a result, there are many opportunities for savvy investors (especially foreign investors) to acquire corporate assets in the United States out of bankruptcy at favourable prices. Currently, the most common method for restructuring a business in the United States is a bankruptcy filing followed by a sale of assets to a preferred buyer within a short period of time (called a 363 sale). The most notable examples of such 363 sales are the recent bankruptcy sales of General Motors and Chrysler. While purchase prices in 363 sales may be as low as “liquidation values”, because of the competitive auction process, the purchase prices are often closer to “fair market value”. The true benefit for a purchaser in a 363 sale is its acquisition of the assets sanitized of liens and claims and findings by the bankruptcy court that the sale was not a fraudulent conveyance. In addition, favourable exchange rates may give foreign acquirers an advantage over U.S. competitors. In fact, some foreign investors are already exploiting the exchange-rate gap. Some examples include the following:
Debtor |
Industry |
Buyer’s Country of Origin |
|---|---|---|
| Asarco |
Copper Mining
|
India or Mexico (proposed) |
| Pilgrim’s Pride | Meat Production | Brazil (proposed) |
| Eclipse Aviation | Light Jet Manufacturing | Russia (failed to close) |
However, real “bargains” are rarely found in high-profile sale opportunities. In many instances, the best opportunities are not widely publicised but are made known to active participants in the restructuring market. Thus, it may be difficult for foreign investors, who are not entrenched in the U.S. restructuring market, to react quickly and efficiently to discreet sale or acquisition opportunities. One possible solution for foreign investors is to partner with existing U.S. distressed market players (such as private equity, hedge and other types of investment funds) who are aware of the opportunities presented.
In the United States, lending conditions remain difficult. As a result, the majority of US in-court restructurings are quick asset sales to third parties. Restructurings of this type are not limited to any particular industry. Indeed, 363 sales have been successfully implemented in every major distressed industry, including automobiles, oil and gas, minerals, energy, aviation, finance and real estate. The purchase prices for these assets vary. However, in some instances there can be real bargains. For example, in Eclipse Aviation, the ultimate purchaser paid $40 million (in cash and notes) for all the assets where the company was saddled with nearly $1 billion of pre-petition secured and unsecured debt. In this case, the initial proposed acquirer was a foreign entity that attempted to seize upon an opportunity for expansion and favourable exchange rates.
Although it is a requirement that proposed purchase prices be market tested, it is often difficult to upset the debtor’s first choice for a buyer (often called the stalking horse) because of the significant protections that are usually granted to such potential buyer. Conversely, the competitive bidding process may result in driving the stalking horse’s purchase price higher than desired because of the involvement of other bidders. While foreign investors may still realize a savings as a result of the exchange rate, the competitive bidding process attempts to ensure that the “highest and best” price is paid for the assets. The highest and best price is defined by the circumstances in each specific case, and if the price for the assets is too low, the debtor always has a right not to sell its assets.
Some market participants attempt to acquire assets either through a 363 sale or through providing funding to a debtor under a plan of reorganization. In either scenario, the acquirer seeks to take control of the bankruptcy process by providing financing to the debtor during its bankruptcy case. For example, recently in In re Vectrix Corp., a maker and global distributor of electric scooters, a group of private equity investors (who owned stock in the company) created a special acquisition vehicle (New Vectrix LLC) to provide $300,000 in debtor-in-possession financing (the DIP Financing) to fund the company’s operations until its assets could be sold. New Vectrix LLC was also the stalking-horse bidder for the company’s assets. New Vectrix’s bid for the assets was approximately $5 million, composed of $1.75 million in cash, a “credit bid” for the amount of the DIP financing and the assumption of $3.3 million of liabilities. If the sale is consummated, New Vectrix will acquire the company’s assets (which have been valued at approximately $29 million) for $5 million. The $5 million purchase price will be used to settle $2 million of liabilities. If the sale was not consummated and the assets sold to a different purchaser, New Vectrix would be entitled to payment of a “break-up fee” of $125,000 and $325,000 for the reimbursement of its expenses (e.g., legal and advisory fees and costs). The 363 sale is scheduled to close by 9 November 2009 (i.e., approximately 45 days after commencement of the case).
In In re Lisbon Valley Mining Co., a private equity fund provided $16 million of debtor-in-possession financing to a company that operated a copper mine in the western United States and agreed to make payments to creditors under a plan of reorganization. In contrast to a 363 sale, under this structure, confirmation of the plan resulted in the private equity investor owning 100 per cent of the stock of the reorganised copper mine while the interests of the prior equity owners were extinguished. Although the process of funding a plan takes longer than a 363 sale (in the Lisbon case, the process took four months) because of the need to comply with certain notice and voting requirements, certain legal considerations counselled in favor of this structure.
In both examples, the funds were able to avail themselves of the opportunities by acting quickly based on their keen insight into the distress market. It would appear that the combination of foreign companies (which possess strong existing businesses, adequate capital and a desire to make strategic acquisitions abroad) and investment funds (which possess proven market insights and success) can be a powerful force in the US distress market. With conditions being currently favorable (such as the exchange rates, the need for cash and the wealth of opportunities for distressed acquisitions), the time has never been better to build a strategic bridge across the Pacific Ocean.
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