Why would a debtor with no assets in the United States seek cooperation from a U.S. bankruptcy court in cross-border insolvency proceedings?
Since debt enjoys priority of payment in insolvency proceedings, demoting a debt claim to the lower rank of an equity interest likely means a total loss for the distressed investor.
Reorganisation plans frequently include releases of non-debtor third parties, but this is one area where informed hedge fund creditors have significant power to resist the destruction of an important alternate source of recovery.
Even though U.S. law theoretically allows some municipalities (that is, cities and other political subdivisions of a state, such as water reclamation and sewer districts) to seek bankruptcy relief, such cases have been rare, and in these cases, municipal bondholders have emerged all but unscathed.
Would delaying the request until some months after their appointment affect the outcome? Two different answers emerged from two authoritative sources at precisely the same time in mid-April 2013.
Investments in mortgage-backed debts carry reduced risk in light of the special protections afforded to collateralized claims. Second-lien investing, however, is subject to enhanced risk due to the greater likelihood of collateral value insufficiency.
One of the last places a hedge fund manager or client wants to be is on the business end of a lawsuit by a US bankruptcy trustee or DIP. Suits by the trustees of fraudulent or failed investment schemes and collapsed LBO deals to recover pre-bankruptcy payments as “fraudulent conveyances” or “preferences” continue to captivate media attention.
The international reach of U.S. bankruptcy law might well be regarded as imperialistic. As to any debtor who satisfies the broad eligibility qualifications, a U.S. bankruptcy proceeding encompasses all rights in property of the debtor, “wherever located and by whomever held."
Asked how buyers can avoid known but latent risks in investments in financial products, law and business students often respond by suggesting contractual hedges of one sort or another. But they often overlook the meta-risk of insolvency.