DealLawyers.com Blog

We’ve previously blogged about the “net short debt activism” phenomenon. Now, the folks who tipped us off to that say there’s a new variation on that theme. According to this Wachtell memo, activists have found a new potential profit opportunity – scouring public company indentures for defaults on outstanding debt, & then diving in. Here’s the intro:

We have recently seen an increase in contentious disputes, some public and many not, between companies and their debt investors. Clashes between borrowers and their lenders are as old as debt itself, but what we are seeing now is something different.

In these situations, debt investors are not merely seeking to enforce their contractual entitlement to payment, or to challenge transactions that will impair the borrower’s ability to pay. Rather, they are purchasing debt on the theory that the borrower is already in default and then actively seeking to enforce that default in a manner by which they stand to profit. Call it Default Activism: default as opportunity rather than risk.

The memo says that with debt funds growing in size and number, competition for above-market returns is making this alternative investment strategy increasingly attractive – along with increasingly complex financing terms. The bottom line is that in today’s environment, there’s no part of a company’s balance sheet that’s immune from activism.

– John Jenkins