NEW YORK (Reuters) - Distressed-debt and vulture investors looking to profit from the spike in corporate bankruptcies this year are about to get unprecedented access to a previously well hidden corner of the market.
Restricted Stock Partners, a broker-dealer specializing in illiquid securities, will launch a trading platform for bankruptcy claims next week that its chief executive says should boost liquidity and efficiency in the estimated $75 billion market.
The new platform, which will feature quotes and bids and asks, will allow trade vendors, leaseholders, and other parties that hold claims against bankrupt companies to sell their interests to investors before the conclusion of a bankruptcy case.
Restricted’s CEO, Barry Silbert, said he hopes this new platform will make trading of bankruptcy claims as popular as the bonds and loans that distressed-debt investors have traditionally focused on.
“In the last bankruptcy boom, the distressed-bond trading really took off, and in this bankruptcy boom we think it’s going to be the bankruptcy-trade claims,” Silbert said.
“We know the claims holders themselves would like to get cash today and not wait two or three years until the end of the bankruptcy case.”
Investors like to buy trade claims because they are typically unsecured and the claims can help them position themselves as a major stakeholder in the company once it emerges from bankruptcy.
Also, trade vendors are typically so desperate to exchange their claim for cash to keep their businesses running that they are willing to accept steep discounts, when they could often get a full recovery if they waited until the end of the bankruptcy case.
But the market for bankruptcy claims has also tended to be inefficient, bankruptcy experts said, as investors have to dig through court documents to locate claims holders, and make their buy offers via mass mailings or calling campaigns.
The buyers often get sellers to sign confidentiality agreements about the price, and with no platform to turn to for common prices, that often left claims holders unsure if they had sold for a fair price.
“Typically a client will get a letter from somebody saying ‘We’re willing to buy bankruptcy claims, please contact us,’ but the problem with that is those deals get done on a one-off basis,” said Kenneth Rosen, a bankruptcy attorney at Lowenstein Sandler in New Jersey.
“There really hasn’t been a purely public forum that someone can go to to see what the current trading looks like.”
Restricted Stock Partners, earlier known for offering a secondary market for restricted stock, began to attract distressed-debt investors earlier this year as it also became one of the top trading venues for troubled auction rate securities.
To expand into bankruptcy-claims trading this month, the company acquired Trade Receivable Exchange Inc (T-REX), an online start-up launched a year ago to specialize in bankruptcy trade-claims auctions.
As an auction site T-REX has attracted more than 650 members who will be given access to the Restricted Securities Trading Network, and T-REX co-founder David Williams will lead the bankruptcy-claims trading group at Restricted.
While trading in bankruptcy claims is largely unregulated, Restricted Stock Partners is a registered broker-dealer and has set up procedures to handle the settlement and paperwork, including necessary court filings, for buyers and sellers in its system.
As trade vendors and leaseholders are increasingly under pressure from the weak economy, Silbert says he expects more transparent trading of bankruptcy claims could even help keep some vendors out of bankruptcy themselves as it provides quicker access to desperately needed cash.
“We’re trying to create transparency in a market where buyers probably don’t want to see it, but we’re providing access to many more claims,” Silbert said. “With more trading of bankruptcy claims, it will be interesting to see how big that discount buyers get on these claims will be.”
Editing by Steve Orlofsky