RSP Launches Continuous Market for Bankruptcy Claims
Platform extends reach to third illiquid market with T-Rex acquisition
June 23, 2008
Tackling its second illiquid market in the last four months, Restricted Stock Partners (RSP) has purchased a trading platform for bankruptcy claims, a market whose opacity often results in creditors selling their claims at steep discounts.
RSP on June 9 said it had acquired Denver-based Trade Receivable Exchange (T-Rex), which launched its automated auction for bankruptcy claims a year ago, gathering 650 clients including buyers, sellers and attorneys. Those unsecured claims rest behind senior debt and beside unsecured bonds in the capital structure of companies that file for Chapter 11 status. They can include credits provided by suppliers, money owed on leases, and even underfunded pensions funds, where fund owners may have sizable claims.
Traditionally, a list of claims appears in a company's Schedule F filing with the bankruptcy court, and a slew of vulture investors and other buyers send out mailings to potential sellers and cold-call them to provide quotes. However, because there's no central exchange to discover more accurate prices, those sellers--typically unaccustomed to the bankruptcy process--may favor immediate cash and offload their claims for a reduced price tag.
"The prices paid for claims have tended to be at a 15 percent to 20 percent discount to where the unsecured bonds are trading, but given their equal status in the credit line they should be the same," said Barry Silbert, chief executive of New York-based RSP, which relaunched the T-Rex platform last week.
Bankruptcy claims' smaller size and the cumbersome nature of processing the transactions may account in part for the discount, added Silbert. But widely varying pricing--often to the detriment of the seller--is typical of illiquid markets.
RSP in March added auction rate securities, a once highly liquid market that ground to a halt one month earlier, to its Restricted Securities Trading Network (RSTN), which rolled out in late 2005 as a platform for restricted stocks. Potential buyers and sellers can see bids and offers on RSTN and also make use of live traders to execute deals. Silbert said the network currently executes about 40 auction rate securities trades a week, with a median size of $500,000.
Full-Service Platform
Part of RSP's attraction is that it also settles transactions, and it will do so for bankruptcy claim deals as well.
"At first we'll be a bit more flexible in terms of settling transactions with non-standardized documents, and in the future it will likely become mandatory to use standard documents" that are being developed, said T-Rex co-founder David Williams, who will head RSP's foray into bankruptcy claims. The settlement process can take several days, Williams added, because a standard purchase agreement is required and the bankruptcy court must be notified of the sale.
Williams has worked with trade creditors for over a decade, most recently leading the U.S. financial solutions desk for credit insurer Atradius. Silbert is familiar with the sector from his time as a restructuring banker at Houlihan Lokey, which bankruptcy claim creditors often contacted searching for a buyer.
T-Rex internally developed a fully automated auction, said Williams, although staff often stepped in to help creditors who were not familiar with the information needed to place a listing. T-Rex also started tracking all claims on bankruptcy court dockets, enabling clients to see when activity in certain areas was picking up. However, buyers of bankruptcy claims are not required to submit prices.
