We earlier discussed why many hedge funds bought Lehman debt. Now we take a look at Delphi.
Trading of claims in bankruptcies used to be dominated by investment funds, which purchased claims filed by small claim holders asserting less than $100,000 per claim. An increase in the number of large bankruptcies in recent years, specifically billion-dollar bankruptcies, expanded the business of claims trading to include financial institutions and individual players and now involves claims asserting millions, sometimes approaching billions, in amount. Claims trading has now found a significant niche in the bankruptcy world.
One of the bankruptcy cases whose claims were actively traded was Delphi Corporation, which sought protection under Chapter 11 of the U.S. Bankruptcy Code in October 2005. The autoparts maker, a spin off from General Motors Company (NYSE:GM), reported assets of $17.1 billion and debts of $22.2 billion, most of which were composed of legacy liabilities from GM, at the time of its filing. The autoparts maker’s bankruptcy case was made challenging, messy at most, by labor union and retirees’ talks and difficulties in obtaining post-bankruptcy financing at a time when the automotive industry was at its lowest. Investors and creditors in Delphi were losing hope on the recovery of their claims and bankruptcy experts predicted a bleak future for a reorganized Delphi.
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In 2007, two years after it filed for bankruptcy, Delphi Automotive PLC (NYSE:DLPH) submitted a plan outlining its payment scheme and recovery percentage for creditors. That plan proposed a 100% recovery for general unsecured creditors, rather rare in a large bankruptcy case, where general unsecured creditors often are left to recover less than 100% of their asserted claims amount as they usually just get what’s left after distributions to secured creditors, such as pre-bankruptcy lenders, employees, and vendors. The proposed 100% recovery for general unsecured creditors provided a glimmer of hope to creditors and investors and ushered an active trading of claims. That first plan, however, was to be amended, confirmed, and amended for the third time.
Finally, in 2009, Delphi Automotive PLC (NYSE:DLPH) consummated its plan after having sold substantially all of its global core businesses to a group of private investors and its non-core steering business and certain US manufacturing plants by an affiliate of General Motors Company (NYSE:GM). What remained of Delphi were only four plants in the United States, out of 44 before bankruptcy. In order to become profitable again, Delphi decided to trim its operations, focus on core competencies, and expand to emerging markets, such as China. Despite numerous failed talks for post-bankruptcy financing, Delphi was able to obtain financial support from its former parent and several investors, enough to allow the company to emerge from bankruptcy protection, albeit on a much smaller scale.
Delphi’s successful restructuring, mostly indicated by profits from operations and successful initial public offerings of new shares of company stocks, depicted a positive picture to investors, enticing them to buy claims from the autoparts maker during its bankruptcy. Trading of claims against Delphi Automotive PLC (NYSE:DLPH) continues, albeit in trickles, despite its liquidation and its exit from bankruptcy. In mid-November this year, Bank of America Corp (NYSE:BAC), N.A., sold six claims to Highland Crusader Offshore Partners, L.P.