< meta name="DC.Date.Valid.End" content="20050825"> Amendment Nine: W.R. Grace

Friday, January 28, 2005

W.R. Grace

A bankruptcy judge in in Delaware approved restricting equity trades of W.R. Grace & Co. yesterday according to the Daily Deal (subscription). In Chapter 11, debt trades are effectively equity trades, so the order really protects the debtor's control and neutralizes unsecured creditor attempts to leverage the negotiation. The rationale is to protect the NOL carry-forwards that money losing businesses accrue, prior to filing 11, as a tax credit. Protecting these NOLs, which are quite sizable in some instances (MCI doesn't need to pay taxes for a long, long time because it carried its NOL through reorg), is supposed to increase the value of the reorganized business, thereby lifting all boats.

The problem though is that it artificially increases the cost of trading into a position in a bankrupt company. This increase in cost means a decrease in return for hedges, like mine, which invest in distressed entities; and it also means that the liquidity of the distressed market is dampened. While a small return pinch is no problem, the NOL strategy is being used more aggressively, and is being abused as well. DIPs who want to preserve as much control of the company they bankrupted are attacking the ability for vultures to move in quickly to a strong negotiating position by employing this legal strategy whenever they file 11.

I'd like to see this corrected, its a rather artificial and ultimately counter-productive display of paternalism by the court. If trading will cause the the company to lose its NOL, then that should be a price borne by the market, not restricted by the court. Sen. Specter, I hope you're listening. If this NOL trend continues, I promise you inflows to the restrucuturing market will subside and chase better return overseas.