The Rise of Creditor-on-Creditor Violence

令人痛苦的债务机会的假期正在削强债权人的肘部。

投资者have been battling over a relatively small pool of companies in financial distress, wrestling for gains in the second-longest bull market ever in the U.S. With fewer bankruptcies, attorneys and financial advisers have more time to spend on each restructuring deal — which has given rise to an increasingly litigious environment.

“Because it’s harder to find good investment opportunities, I think investors have pushed the legal side of things further than ever before,” says David Tawil, president of hedge fund Maglan Capital. “Creditors saw a lot of low-hanging fruit in other cycles, where they wouldn’t necessarily push so hard — or they weren’t as meticulous — when it came to pressing every legal point.”

The Hovnanian Enterpriseslawsuitunderscores how contentious creditor battles can become, with hedge fund firm Solus Alternative Asset Management suing the homebuilder and Blackstone Group’s debt business, GSO Capital Partners, over a “manufactured default” involving credit-default swaps. Investors worry about the use of CDSs beyond the originally intended use as an insurance against default.

At theMilken Institute Global Conferencethat ran into early May, the rhetoric was that “this is not cool,” says Tawil. Even GSO — which benefited as a CDS holder when Hovnanian skipped an interest payment as part of its deal with the firm forfinancing— is now offering to help the market formulate rules around doing this, he says.

“We believe this transaction — which provides critical financial support to Hovnanian and its more than 1,900 employees — is fully compliant with the long-standing rules of this market,” a spokesperson for GSO said in an emailed statement. “As we have previously stated, we stand ready to work with the CFTC, ISDA, and other market participants to make appropriate changes to the standard CDS contract going forward.”

TheU.S. Commodity Futures Trading Commissionand the International Swaps and Derivatives Association issued statements in April about their concern that manufactured events could damage the CDS market, where investors bet on the ability of companies to meet their obligations to creditors.

Until the market resolves the issue of whether CDSs may be used to manufacture a default, Oaktree Capital Management won’t sell single-name CDSs, according to Rajath Shourie, co-portfolio manager of Oaktree’s distressed-debt strategy.

“It’s a sucker’s game,” he says. “There’s no way to protect yourself.”

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In its January complaint,Solus alleged that GSO stood to lose “massive sums” on its CDS investment — unless Hovnanian created an “artificial default.” Solus, on the other hand, was a bondholder that sold credit protection against default through CDS on Hovnanian debt. In other words, Solus was long the homebuilder’s prospects.

In the complaint, the firm alleged that Hovnanian became incentivized to miss an interest payment to its own subsidiary after GSO made a “bribe of below-market financing.”

A spokesperson for Hovnanian said in an emailed statement that the company is “confident that it has acted properly at all times related to its financing transactions with GSO.” The homebuilder has not participated in the CDS market, he said. Solusannounced周三晚上它已经与GSO解决了争端。在解决方案下，Hovnanian将于5月1日之前没有向其自己的子公司提出利息，在宽限期结束之前这样做。

Just as home insurance does not protect against damages caused by the owner, most creditors did not conceive of CDSs being used to trigger a company’s own default, according to Patrick Nash, a Chicago-based partner in Kirkland & Ellis’s restructuring group.

“We’ll see it happen again,” Nash predicts, as standard CDS documents don’t contemplate companies engineering their own credit events. Over the longer term, though, he expects “CDS documentation will probably evolve to protect against a purposeful default.”

With distressed-debt investors facing low and declining defaults, the brutal competition is likely to endure.

The trailing 12-month U.S. speculative-grade corporate default rate will fall to 2.5 percent by March 2019, from 3.4 percent at the end of the first quarter, Standard & Poor’s estimated in a report this month. The rate has decreased from 4.1 percent in March 2017.

Meanwhile, borrowing costs have generally been favorable for riskier companies. Speculative-grade bond spreads fell to 303 basis points at the end of March, from 328 basis points at the start of the year, according to S&P. And the ratio of high-yield bonds trading at distressed levels was at a 43-month low of 5.3 percent in April, the credit rater said in its report.

These are signs that companies aren’t under much pressure to meet their debt obligations.

“Absolute spreads and yields are tight, so it forces distressed investors to take a different approach to generate alpha,” says Angelo Rufino, co-head of Brookfield Asset Management’s credit opportunities business. “You’re seeing much more proactive efforts by distressed, legal-oriented investors to generate return.” 


For instance, litigious creditors are scrutinizing companies’ bond indentures to find potential covenant breaches, says Rufino.

One example: A disagreement between New York-based hedge fund Aurelius Capital Management and Windstream Holdings over a bond contract will be tried in court this summer.

据Windstream的第一季度，9月份据称，Aurelius于9月份致电9月发给了这封信给风流。收益报告. In November, Aurelius说the company’s distressed-debt exchange, in which it was seeking to swap the bonds in question with new notes with the same coupon, was prohibited because of the claims made in its September notification.

A trial date is set for July 23, according to a spokesperson for Aurelius, who declined further comment about the litigation. “We’re glad to get that trial date,” Windstream’s chief financial officer, Bob Gunderman, said in评论made May 23 at the Barclays High-Yield Bond and Syndicated Loan Conference in Colorado Springs, Colorado. “We remain very confident in our position.”

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投资投资机会有been drying up over the past couple years, resulting in more aggressive behavior among fund managers seeking gains in that part of market, according to Andrew Brady, head of the distressed group at research firm CreditSights.

The firm counted just 31 bonds trading at 80 cents or less on the dollar at the start of this year, down from 162 securities at those levels at the beginning of 2016.

“There are a lot of people picking over a few names,” says Brady. “There are just too few opportunities.”

Energy, retail, and health care have been the most distressed sectors — though energy companies have been faring better lately with the recovery of crude, according to Brady. “If oil prices keep going up, there won’t be much more to do,” he says.

Exacerbating the problem of few restructurings is that industries such as retail are in a secular decline, making a turnaround more difficult, according to Maglan Capital's Tawil. That’s pushing distressed investors to the point where a lot of the “value” they see is predicated on litigation, he says.

Last year’s bankruptcy filing by Toys “R” Us — the retailer owned by Bain Capital, KKR & Co., and Vornado Realty Trust — will likely result in legal battles among creditors, Tawil predicts.

As capital structures have become increasingly complex, creditors are generally finding more gray areas to dispute — or exploit, given the nine-year bull market doesn’t lend itself easily to credit events.

“There are bondholders who are trying to create their own catalyst,” says Robert Paine, co-head of Brookfield’s credit opportunities business. “They’re trying to take advantage of the actual letter” of the law. 


根据KIRKLAND＆ELLIS ATTORNEY NASH的说法，在重组中，债权人担心被剥夺的剥夺失败，并且当留下毫无价值的初级债务时，可能会变得有争议。“资本结构的不同成员之间存在相互共同的怀疑，”他说。“当他们发现自己在一个有机会赚钱的情况下，”增加了纳什，他们在试图挤出最大的返回时变得更加积极。

Rufino表示，在破产中，陷入困境的投资者正在形成越来越多地给自己“比同样的债权人更有利的新资金条款”的临时转向委员会。“你可以获得真正多汁的增强经济学，”他说。“如果您不参与其中一些”指导委员会，则变得几乎令人衰弱。


In the restructuring ofClaire’s Stores, Paul Singer’s Elliott Management Corp. is sponsoring a plan with significant preferential economics for a group of creditors, according to a person with knowledge of the effort. A spokesperson for Elliott declined to comment.

Claire于3月11日在2007年后提起破产保护的年轻妇女和女孩的专业零售商leveraged buyoutby private equity firm Apollo Global Management.

近年来的强大信贷市场有助于私募股权公司获得融资筹资的有利条件，包括在允许投资，股息支付和资产销售等领域的更多灵活性。

“作为债务投资者,或陷入困境的投资者,你just constantly need to be on the lookout for loopholes in credit documents, credit agreements, indentures that could ultimately have value leak out of your collateral pool,” says Rufino. 


法律覆盖可能是充足的，投资机会很少，但令人痛苦的债务经理仍然看到了去年强有力的筹款，根据Preqin. The data tracker says distressed-debt funds raised $9.5 billion this year through April, including the $7.4 billion GSO Capital Solutions Fund III.

投资者may be anticipating that a market correction will soon benefit distressed funds. In the meantime, the competition for alpha remains fierce.

“国际米兰-creditor battles are definitely intensifying,” says Oaktree’s Shourie.

“There are not as many bankruptcy cases and there are, frankly, a lot of bankruptcy professionals,” he says. “When they do get a case, the case becomes litigious,” he adds. “They are going to fight every issue to the death.”