Distressed investors that sold off their Hawker Beechcraft loan proceeds around the time the aircraft manufacturer emerged from Chapter 11 have had a bumpy ride closing their trades in the wake of reorganized Beech’s subsequent acquisition by Textron. What’s behind the turbulence, and was it preventable?
The Big Picture
Unforeseen distribution delays when a company’s Chapter 11 case finally ends can be a sore spot for investors in the company’s distressed loans. Trading premiums on newly issued securities can be compromised, and illiquidity extended. For holders of Hawker Beechcraft’s senior loans, the acquisition of the reorganized Beech barely a year after Hawker’s Chapter 11 plan went effective compounded confusion over Beech’s initial issuance of shares. The ensuing delays – some late 2012 Hawker loan sales still have not closed – are a cautionary tale for secondary loan market investors who file an issuer’s plan away as soon as it issues new securities, or fail to anticipate how a subsequent corporate action may detour plan distributions.
Share, Share Unalike
The first surprise for Hawker holders that attempted to liquidate their loans was that, as a practical matter, despite appearances, all of their shares were not alike. The source of the problem was that Hawker’s plan treated the senior loans as undersecured. As required by Bankruptcy Code §506(a)(1), claims resulting from the loans were therefore bifurcated into classes of secured claims (entitled to receive 81.1% of the Company’s shares) and unsecured claims (entitled, along with other similarly classified general unsecured claims, to receive the balance of the shares), and the shares were legended accordingly. Because the unsecured claim class included many large claims that had not (and still have not, as of Hawker’s October 15, 2014 Post-Confirmation Status Report) been liquidated, the number of shares ultimately to be distributed in respect of the senior unsecured loan claims was not known.
Initially at least, this did not create a problem in the aftermarket for Beech shares, in which traders often did not bother to distinguish between whether sold shares arose from secured claims or unsecured claims, as there was only a single class of shares. Prospective sellers could simply sell the balance of the shares when they received them.
The plot thickened in March 2014, when Textron acquired all of Beech’s shares for approximately $1.4 billion in cash. The so-called secured claim shares, being fixed in number, were converted into $8.135 cash per share, representing 81.1% of the acquisition consideration. The “unsecured claim shares” were converted into interests in a trust into which approximately $251 million, representing the remainder of the consideration, was deposited; but how much the unsecured claim share holders would receive per share would not be known until the size of the unsecured claim class had been finally determined. Suddenly, whether particular traded shares were “secured claim” or “unsecured claim” shares had become significantly more important.
Hard Freeze
Faced with the prospect of having to track untold numbers of uncertificated interests in the trust that traded before distributions from the trust could be made, the trustee and Beech included in the governing trust agreement two significant limitations on transfer of interests in the Beech share proceeds. First, the agreement prohibited outright any transfers of interests in the trust. Second, addressing transfers of unsecured claim shares that had occurred after the Hawker plan’s distribution record date but before the execution of the trust agreement, the trust retained for pre-trust-agreement unsecured claim share transferors the amount of any excess class distributions resulting from the final size of the class exceeding the estimated size of the class. This potentially obligates transferees of the unsecured claim shares to chase their transferors to recover this portion of the benefit of the bargain they made in agreeing to purchase the relevant shares.
Takeaways
(1) Before trading plan proceeds, verify that the proposed terms of trade fully reflect all relevant plan contingencies.
(2) Consider adding a term of trade specifying, if a subsequent corporate action renders a portion of the plan proceeds untransferable, (i) that the parties still must close the unaffected portion of the trade without delay, and (ii) a valuation or other alternative closing methodology for the portion of the trade that has been affected.
Illustration by: Lisa Haney/Illustration Source.
