Contra Costa Times – Hedge funds’ involvement in the bankruptcy process may depress the post-Chapter 11 values of companies that seek court protection.
Until now, companies seeking bankruptcy protection that have more bank loans relative to other types of debt have emerged in a stronger position than those carrying a smaller ratio of loans to other debt, according to research by Fitch Ratings.
This dynamic may change and recovery values may drop as distressed hedge funds become creditors during troubled times, analysts said.
“Hedge funds add a new element of uncertainty and complexity to the process,” said Mariarosa Verde, a credit market research analyst at Fitch Ratings. “They are generally more aggressive in pursuing maximum returns, and this behavior may lead to more contentious bankruptcies, which in turn may actually depress firm value.”
Companies in bankruptcy with a larger percentage of bank debt have realized greater recovery values for a couple of reasons.
