Opportunity Amidst Crisis - Buying Distressed Assets, Claims, and Securities for Fun & Profit (Series: Restructuring, Insolvency & Troubled Companies)

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Co-Produced by: DailyDAC

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DISCLAIMER
The material in this webinar is for informational purposes only. It should not be
considered legal, financial or other professional advice. You should consult with an
attorney or other appropriate professional to determine what may be best for your
individual needs. While Financial Poise™ takes reasonable steps to ensure the information
it publishes is accurate, Financial Poise™ makes no guaranty in this regard.
About this PowerPoint: if you are looking at this PowerPoint without the benefit of
listening to the conversation that surrounded it then you are doing yourself a disservice.
This PowerPoint was prepared in contemplation of being viewed in conjunction with
listening to a one hour webinar on the topic
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MEET THE FACULTY
Moderator:
Whitney Fogelberg – Kirkland & Ellis LLP
Panelists:
Michael Riela – Tannenbaum Helpern Syracuse & Hirschtritt LLP
Jonathan Friedland – Sugar Felsenthal Grais & Helsinger
David Lorry – Versa Capital Management LLC
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ABOUT THIS WEBINAR: Opportunity
Amidst Crisis- Buying Distressed Assets,
Claims, and Securities for Fun & Profit
Eddie Lampert bought Kmart out of bankruptcy. W.L. Ross made a fortune many times over buying
steel and other companies out of bankruptcy. Hedge funds and other distressed debt traders buy
and sell millions of dollars of distressed securities and bankruptcy claims every day. A number of
private equity funds focus exclusively on buying distressed businesses, fixing, and selling them. And
fortunes are made real estate crashes by those who have the dry powder to swoop in and buy when
others are forced to sell. This webinar explains how to loan to, or purchase the debt of, a company in
order to acquire it (a strategy commonly called “loan to own”); how to learn about opportunities
involving distressed companies; and tips and best practices for participating in bankruptcy, Article
9, and other sales of distressed businesses (including the concept of serving as the “stalking horse).
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ABOUT THIS SERIES: Restructuring,
Insolvency & Troubled Companies
Companies fail all the time, for all sorts of reasons. Some companies become distressed, or even
insolvent, because of mismanagement; others because of fraud; others for myriad other reasons-
some intrinsic to the company and some extrinsic.
Regardless of the cause, failing or failed companies create a unique set of issues, risks, and even
opportunities for all involved. This area of law and finance has become so specialized that no fewer
than five (American Bankruptcy Institute; Association of Insolvency & Restructuring Advisors;
Commercial Law League of America; National Association of Federal Equity Receivers; Turnaround
Management Association) national organizations exist to help those who specialize in the field to
stay up to date on the latest developments, strategies, and tactics in the area.
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EPISODES IN THIS SERIES
3/19/19 Episode #1:
Help, My Business is In Trouble!
4/16/19 Episode #2:
Opportunity Amidst Crisis- Buying Distressed Assets, Claims, and
Securities for Fun & Profit
5/14/19 Episode #3:
Bad Debtor Owes Me Money!
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Dates shown are premiere dates.
All webinars will be available
On Demand approximately 4 weeks
after they premiere.

Episode #2:
Opportunity Amidst Crisis- Buying
Distressed Assets, Claims, and
Securities for Fun & Profit
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A COMPANY’S CAPITAL STRUCTURE
Those seeking to own a company can invest in various levels of the capital structure. So-called “loan
to own” strategies involve buying the debt of, or lending directly to, a target.
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BUYERS CAN BUY IN BANKRUPTCY
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OTHER MEANS TO BUY DISTRESSED
ASSETS
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BUY-SIDE CONSIDERATIONS WHEN
SELECTING LEGAL FRAMEWORK FOR
ACQUISITION
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THE DISTRESSED M&A OPPORTUNITY
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Distressed Capital Structures: Debt trading substantially below par
Debt partially impaired, with
value running out in the “fulcrum
security.”
Equity value largely reflects
option value.
Valuation of enterprise more
complex than traditional
M&A setting.

THE DISTRESSED M&A OPPORTUNITY (con’t)
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M&A Strategies in Distressed Situations: Many creative
solutions

DISTRESSED CAPITAL STRUCTURES:
VALUATION OF DEBT
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Book Value Price Trading Value
Senior Credit Facility $500 $90 $450
Other Bank Debt
(e.g. international)
$100 $100 $100
Senior Unsecured
Notes
$260 $60 $150
Sub Notes $150 $30 $45
Total Debt $1,000 $745
Preferred Stock $100 $20 $20
Common Stock NM NM 15
Total Capitalization $1,100 $780
Fulcrum Securities
Distressed Capital Structure Illustration

VALUING DEBT IN HEALTHY M&A
CONTEXT
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VALUING DEBT IN DISTRESSED M&A
CONTEXT
• Some parts of debt structure trading at significant discount to par, reflecting
fundamental business value potentially lower than par value of debt.
• Value eroding in “fulcrum securities.”
• “Fulcrum securities” carrying equity-like risk, likely to be converted into equity
in restructuring scenario.
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VALUING DEBT IN DISTRESSED M&A
CONTEXT (con’t)
• Value of equity largely reflects option/hold-out value.
• Enterprise value assessment more complex, depends on value assigned to each
security.
• Discount of debt offers potential opportunity to capture value in distressed
M&A situations.
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M&A STRATEGIES IN DISTRESSED
SITUATIONS:OVERVIEW OF KEY SCENARIOS
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SITUATIONS:OVERVIEW OF KEY SCENARIOS (con’t)
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SITUATIONS: BUY EQUITY & ROLL-OVER DEBT
• Distress Level: Low
• Description/Rationale
 Acquire company but seek to retain existing capital structure
 Financing not available and/or terms of current financing more advantageous
• Considerations
 Does not explicitly capture discount
 Requires relative improvement as incentive for debt to amend terms or overcome CoC
clause
 Extension of maturity and other “money” terms require 100% vote
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M&A STRATEGIES IN DISTRESSED SITUATIONS:
CROSS-CONDITIONAL TENDER OFFER
• Distress Level: Mid/High
 Tender for debt at discount and pay “nominal” amount for equity, with both transactions
being contingent
 Finance acquisition with new debt and equity
 Provides value to equity to avoid potentially costly lengthy restructuring
• Considerations
 Transaction dependent on premium offered and success of tender
 Potential hold-up by dissident holders
 Requires new financing post acquisition
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M&A STRATEGIES IN DISTRESSED SITUATIONS:
INVEST IN 2ND LIEN/PIPE (POTENTIAL PATH TO CONTROL)
• Distress Level: Mid
 Structured investment ahead of current equity
 Enhances liquidity with providing potential path to control
 No bankruptcy; equity survives (but diluted)
• Considerations
 Does not capture discount
 No immediate acquisition of control and potentially limited corporate governance rights
 Control uncertain and investment potentially impaired; not fully covered in downside
scenario if performance further deteriorates
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M&A STRATEGIES IN DISTRESSED SITUATIONS: BUY
INTO FULCRUM SECURITY TO ACHIEVE CONTROL
• Distress Level: High
 Acquire blocking position in fulcrum security at discount to par
 Convert into new equity or bid par value in restructuring process
 Recover par value if outbid
• Considerations
 Limited ability for upfront due diligence
 May be difficult to acquire controlling position
 Price to be paid for full position uncertain
 Might be perceived as hostile
 May require active approach in lengthy restructuring process
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M&A STRATEGIES IN DISTRESSED SITUATIONS: ACQUIRE
IN BANKRUPTCY VIA 363 OR PLAN SPONSORSHIP
• Distress Level: High
 Buy company or selected assets from motivated seller “free and clear during bankruptcy
process
 Sponsor restructuring plan with cash and/or securities to fund reorganization at attractive
valuation
• Considerations
 Typically done in lengthy auction processes with court supervision
 Complex and may require negotiations with numerous parties
 Transparent, competitive process
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BANKRUPTCY SALES UNDER 11 U.S.C. § 363
• § 363 of the Bankruptcy Code Allows court to approve sale of
debtor’s assets “free and clear” of “interests” in the assets
• Assets covered:
 Real property
 Personal property
 Leased property?
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11 U.S.C. § 363
• “Free and clear” provision of § 363 protects buyer from the shambles of debtor-
seller company’s records and finances
• Debtor may not know the extent of its ownership interest
• Lessors, judgment creditors, and statutory lienholders might have claims to
assets
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11 U.S.C. § 363
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Debtor-Seller (and secured
lenders) sees means to
maximize sale value

363 SALES FIGURES
• Approximately 20% of bankruptcy filings in 2019 have resulted in a 363
sale.
• Data provided by the UCLA-LoPucki Bankruptcy Research Database, current as of
March 31, 2019.
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Section 363 Sales Frequency Percentage
No 363 Sale 869 76.8%
363 Sale 221 19.5%
Chapter 7 at Filing 24 2.1%
Case Pending 15 0.3%

363 SALE TIMELINE
• Although every situation is a different, generally the total time from commencement of
preparations through approval of a 363 sale may range from 75 to 150 days.
 Courts and creditors often prefer longer timelines in order to ensure sufficient time for a
debtor to market the assets to be sold.
 Shorter timelines are often approved where debtors are able to show that asset values may
deteriorate in bankruptcy, where a stalking horse bid is conditioned on a quick sale process,
and/or where the debtor can demonstrate that it engaged in sufficient marketing efforts on a
pre-bankruptcy filing basis.
• Under section 363, a successful bidder acting in good faith may close at any time after a sale
order is entered. In some cases, however, a bidder may want to wait until a sale order becomes
final (absent appeal, fourteen days after entry).
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363 SALE TIMELINE (con’t)
• Under section 363, a successful bidder acting in good faith may close at any time after a sale
order is entered. In some cases, however, a bidder may want to wait until a sale order becomes
final (absent appeal, fourteen days after entry).
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TYPICAL § 363 SALE PROCESS
CHARACTERISTICS
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STALKING HORSE
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STALKING HORSE BID PROTECTIONS
• In exchange for acting as Stalking Horse, Stalking Horse Bidder
given various “bid protections,” including:
 Break-up fee
 Expense reimbursement
 Initial overbid minimum
 Subsequent minimal increments
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STALKING HORSE ADVANTAGES
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STALKING HORSE ADVANTAGES (con’t)
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STALKING HORSE DISADVANTAGES
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THE STALKING HORSE ASSET
PURCHASE AGREEMENT
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KEY TERMS AND NEGOTIATION POINTS FOR APA
• Sale of assets “As is, where is”
• Detailed list of assets to be purchased
• Limited reps and warranties
 Due diligence usually complete already
 No customary “outs”
• No indemnification
• Holdback common
• Minimal closing conditions
 “Lights on”
 Maintain minimal DIP financing level
 Key customers/management/employees
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BID PROTECTIONS & QUALIFICATIONS
• Set requirement for initial overbid to open auction
 Subsequent incremental bid amount
• Large overbid amounts can protect stalking horse
• Common to require pre-qualification by interested bidders
 Excludes less-than-serious bidders (who may be unable to close)
 Allows stalking horse to game auction?
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BREAK-UP FEE (STALKING HORSE
OUTBID)
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PARTICIPATING AT AUCTION
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REQUIREMENT OF EARNEST MONEY
DEPOSIT
• Interested Bidders likely required to make earnest money deposit to
participate at auction
• May be required to be made in cash only (LOC may work)
• Desperation of seller and lender can affect amount required
• Larger deposit may speed auction & hearing
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SELLER CONTRACTS IN BANKRUPTCY
SALES
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SELLER CONTRACTS IN
BANKRUPTCY SALES (con’t)
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ADDITIONAL BANKRUPTCY PROVISIONS
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LIABILITIES LEFT BEHIND
• Buyer takes only liabilities it agrees to take . . .
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ADDITIONAL BANKRUPTCY SALE
PROCESS MATTERS
• Stalking Horse APA attached to motion to approve sale and bid procedures
 Together with sale notice, proposed sale order
• Rules require at least 21 days notice of sale
 Can be shortened for cause
• Rules require notice of sale to all creditors
• Virtual data room established
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PROCESS MATTERS (con’t)
• Common pre-auction qualification terms
 Bids qualified at least one week before auction
 Bidders submit set cash deposit
 Bidders agree to be bound to same terms as APA
• Auction
 Includes only pre-qualified bidders (but Courts like an open door)
 Bidding subject to bid protection amounts
 Debtor sometimes reserves right to offer in bulk or lot, depending upon bids
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PROCESS MATTERS (con’t)
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Closing, per APA, can happen immediately after
Court approval (payment usually cash or credit
bid)

CLAIMS TRADING IN BANKRUPTCY
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DEVELOPMENT OF THE CLAIMS
TRADING MARKET
• A multi-billion dollar industry
 Claims against bankrupt entities may be purchased at large discounts
 Select funds marketing via unsolicited letters
 Primarily trade debt claims
 Average face values < $100k
 Claim transfer agreements very buyer friendly – minimal negotiating of
terms
 Buy-and-hold (claims repaid in cash upon debtor’s emergence from bankruptcy)
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DEVELOPMENT OF THE CLAIMS
TRADING MARKET (con’t)
• Claims purchased at large discounts
• Recent bankruptcies have more complex and larger claim pools – bank debt,
unsecured bonds, trade claims
• Hedge funds and traditional trade claim funds active in claims trading
• Strategic and speculative motivations
• Avg. face value now in the millions
• Claim transfer agreement heavily negotiated
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CLAIMS-BUYER CONCERNS
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CLAIMS TRADING BENEFITS
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CLAIMS TRADING RISKS
• For Debtors: can delay or block plan process -- changing creditor
body complicates plan negotiations and support agreements
• Unregulated market
• Administratively burdensome (costs to the estate and court)
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CLAIMS TRADING AND 11 USC §§ 502
(D) & 510
• Claim may be disallowed if claimant subject to liability for
unreturned preferential transfers, fraudulent transfers (and more)
• Claim may be subordinated to other claims “under principles of
equitable subordination”
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CLAIMS TRADING RISK: EQUITABLE
SUBORDINATION
• An important consideration for regular participants in the bankruptcy process: the
consequences for a debtholder acquiring claims in violation of an “eligible assignee”
provision in a governing credit document.
• The Third Circuit’s Papercraft decision highlighted that an insider of a debtor that
purchases debt through a loan-to-own strategy may be at risk of equitable subordination
and other remedies as a result of the purchase. See, e.g., Citicorp Venture Capital, Ltd.
v. Comm. of Creditors Holding Unsecured Claims, 323 F.3d 228 (3d Cir. 2003).
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CLAIMS TRADING RISK: EQUITABLE
SUBORDINATION (con’t)
• However, in the LightSquared bankruptcy proceedings, the judge, citing Papercraft,
granted a request to equitably subordinate the claim of a non-insider.
 “Having acquired a controlling position in the debt by use of the special purpose
vehicle, whose special purpose was to achieve an end run around the credit
agreement and then purposefully sidelining hundreds of millions of dollars of debt
while fine-tuning its acquisition strategy, [the purchaser] has harmed the creditors
of LightSquared.”
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RECENT CASE: In re Woodbridge
Group (D. Del. June 20, 2018)
• Claim trading generally favored, especially in larger cases, but there are limits to
enforceability of claims trading
 If there is clear unambiguous language in underlying documents governing original
claim, then anti-assignment language making any assignment null and void may be
enforceable against a claim purchaser notwithstanding Uniform Commercial Code
(“UCC”) provisions, contractual arguments and a breach by debtor under
underlying debt documents
• Relying on KB Toys, Judge Carey recently sustained Debtors’ objection to a claim
purchaser’s assertion of a claim and effectively denying claim trading
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In re Woodbridge Group (con’t)
• Judge Carey held transfer to claim purchaser was void based on the anti-
assignment provision, contractual remedies including an analysis under
Restatement of Contracts were inapplicable and the UCC provisions did not
override anti-assignment provisions in underlying docs.
 Debtors had filed a notice of a moratorium on claims trading for a short
period of time
 Claims purchaser argued that breach by Debtors prevented enforcement of
anti-assignment provisions
 Delaware law permits restrictions on the power to assign a claim
 Put differently, bankruptcy law does not override non-bankruptcy law
 (here Delaware) which upholds restrictions on the power to assign claim
 Preventing claims trading in this case would not cause a disruption in the
claims trading market according to Judge Carey
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In re Woodbridge Group (con’t)
• Recent Update:
 In July of 2018, an appeal was filed by the claim purchaser.
• Practical Point:
 Be wary of underlying documents that restrict the power to assign a claim as
any deficiency or disability in the claim could travel with the claim to the
claim purchaser.
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ABOUT THE FACULTY
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Whitney Fogelberg – whitney.fogelberg@kirkland.com
Whitney Fogelberg is a restructuring associate in Kirkland’s Chicago office. Whitney represents both
debtor and creditor clients in complex Chapter 11 reorganizations; advises purchasers and sellers in
bankruptcy transactions and acquisitions; counsels boards of directors and senior officers regarding
fiduciary duties and restructuring strategies; and advises financially troubled companies regarding
the structure of various commercial transactions outside of bankruptcy.
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Michael Riela – Riela@thsh.com
Mike Riela is a partner in Tannenbaum Helpern’s Creditors’ Rights and Business Reorganization practice. With
more than 15 years of experience, Mike advises companies on complex restructuring, distressed M&A, loan
transactions and bankruptcy related litigation matters. Mike has in-depth experience in advising clients on
corporate and real estate bankruptcies, workouts, Chapter 11 and Chapter 7 bankruptcy cases, debtor-in-
possession (DIP) and bankruptcy exit loan facilities, secondary market trading of distressed debt and trade
claims, Section 363 sales and bankruptcy retention and fee agreements and disputes. His clients include banks,
administrative agents, indenture trustees, hedge funds, private equity firms, professional services firms, trade
creditors, contract counterparties, shareholders, debtors and investors.
Mike has represented buyers of assets in Section 363 and out-of-court sales from sellers such as Evergreen
Solar, Inc., Sonic Telecommunications International, Ltd, Urban Communicators PCS Limited Partnership, US
Aggregate, Inc., and Vectrix Corporation, as well as representing lenders, trustees and administrative agents in
major Chapter 11 cases and workouts such as Delta Air Lines, Inc., Extended Stay Inc., Buffets Inc., Legends
Gaming LLC, Nortel Networks, Premier International Holdings Inc., and many others.
To read more, go to https://www.financialpoise.com/financialpoisewebinars/faculty/michael-riela/
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Jonathan Friedland – jfriedland@sfgh.com
Jonathan Friedland, a senior partner with Sugar Felsenthal Grais & Helsinger, LLP, views his job
simply: to make money for clients whenever possible and to protect their interests at every turn.
Licensed in four states, Jonathan’s transactional work focusses on representing private funds and
other owners of private businesses, and the businesses they own. He regularly advises on M&A
activities, structuring new ventures and restructuring old ones, and on other commercial
relationships. Jonathan is rated AV® Preeminent™ by Martindale-Hubbell, 10/10 by AVVO, and
enjoys several other similar distinctions. Jonathan graduated from the State University of New York
at Albany, magna cum laude (in three years) and from the University of Pennsylvania Law School.
He clerked for a federal judge before entering private practice and served for several years as an
Adjunct Professor of Strategic Management at the University of Chicago’s Graduate School of
Business. Jonathan is lead author and editor of several significant treatises, several chapters in
other treatises, and scores of articles on law and business.
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David Lorry – dlorry@versa.com
David S. Lorry is a Managing Director & Senior Counsel at Versa Capital Management, LLC
in Philadelphia. Mr. Lorry has more than 20 years of business and legal experience
advising clients in a range of industries, helping them solve a variety of business issues and
execute business transactions. Mr. Lorry began his professional career as an attorney,
practicing corporate, insolvency and commercial law for 7 years, after which he became an
investment banker.
Mr. Lorry has experience with bankruptcy, mergers and acquisitions, capital raising,
commercial lending, general corporate transactions, and related matters. He received his
undergraduate degree in from Duke University, cum laude, and earned his law degree from
George Washington University National Law Center, with Honors.
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IMPORTANT NOTE: The material in this presentation is for general educational purposes only. It has been prepared primarily
for attorneys and accountants for use in the pursuit of their continuing legal education and continuing professional education.
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