Question
Dear Mike,
Inconnection with the application of 802.63 and what used to be known as the"vulture fund exception to 802.63," we have a few questions, which wewould like to discuss in the context of a somewhat stylized hypothetical:
1. Suppose that Abuys outstanding debt from B's creditors. A knows that B is in bad shape and paysa significant discount on B's debt. While B has not announced bankruptcy, bothA and B know that B will not be able to survive much longer. After A's purchaseof B's debt, B files for bankruptcy protection. In the process, A's debt in Bis converted into equity and A winds up controlling B --which is exactly what Ahad in mind when it purchased the debt.
Assuming that theconverted equity is valued such that it triggers the HSR thresholds and noother exemptions are available, it seems to us that this conversion would notbe notifiable, because A acquired B's debt prior to B announcing that it wouldfile for bankruptcy. This is because "the test applicable to so called'Vulture Funds' is based on whether debt is acquired pre-or post announcementof an intention to file for bankruptcy and not on the intent of the creditor atthe time debt is acquired. "http://www.ftc.gov/bc/hsr/informal/opinions/0805 004.htm
[1]Is our understanding correct? If so:
[2]The new bright line test seems to focus on the announcement. Pre-announcementpurchases of debt come under 802.63, post-announcement purchases don't. Butwhat qualifies as an "announcement?" Clearly, a public announcementthat bankruptcy has been filed does and, we suppose, an announcement that"on Friday, we will file for bankruptcy," would as well, but howabout these?
(a) "We may be forced to file bankruptcy in aweek unless we get relief."
(b) "We have retained [well-known bankruptcydebtor's counsel] and are exploring our options."
(c) "We are exploring our options, including arestructuring." It seems that none of the above should constitute an"announcement," as all are contingent on future events and leave roomfor the debtor to not file for bankruptcy. So, in our hypothetical, if Bcommunicates (a)-(c) and then A buys B's debt, A would still come under 802.63.
[3]In our hypothetical, does it matter for the application of 802.63 topre-announcement purchases of debt if A is:
(a) a financial institution (bank, hedge fund,private equity fund, etc.)
(b) a manufacturer that in the past has occasionallypurchased debt, some distressed, some not
(c) a manufacturer that has never before purchasedany debt
(d) a competitor of B? Thank you for your help,