Rights Offerings: Pay To
Play?
Is the Right to Participate in the Acquisition
Of Your Obligor a Recovery on Your Claim?
Seventh Annual East Distressed Debt Investing Forum
June 29, 2004, 9:45 - 10:30 a.m.
Roosevelt Hotel
45 East 45th Street
New York, NY 10017
© 2003 Dechert LLP
Panelists
Panelists:

William Q. Derrough
Jefferies & Company, Inc.
New York, NY

James K. Schaeffer
PPM America Inc.
Chicago, IL

Glenn E. Siegel
Dechert LLP
New York, NY
Pay to Play: Are Rights Offerings A Recovery on Your Claim?
© 2003 Dechert LLP
2
Getting Out of Bankruptcy
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Management
Doesn’t Want to
Sell to Strategic
Buyers
Private Equity is
Competing With
Existing Investors
Large Potential
Upside
Pay to Play: Are Rights Offerings A Recovery on Your Claim?
© 2003 Dechert LLP
3
Existing Investors to the Rescue




Go Private
Preserve Long Term
Upside of Business
Contribute Cash
and Claims to
Acquire Debtor
Allow Other Creditors to Participate in a
Rights Offering on the Same Basis
Pay to Play: Are Rights Offerings A Recovery on Your Claim?
© 2003 Dechert LLP
4
Is This A Good Deal?



Pay to Play: Are Rights Offerings A Recovery on Your Claim?
© 2003 Dechert LLP
Chance to Preserve
Your Upside
Chance to Make A
Good Investment in
a Company You
Know
Don’t Need to
Write Off Your
Investment
5
What If You Can’t Invest?

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
Pay to Play: Are Rights Offerings A Recovery on Your Claim?
© 2003 Dechert LLP
No Available Funds
Existing Fund
Can’t Take Equity
Existing Fund
Can’t Buy Into a
Private Company
Can You Put It in
Through Another
Fund?
6
Is This Even A Recovery?




You Have to Pay
Something to Get
Anything
You Don’t Get Any
Credit for Your Existing
Investment
You Can’t Transfer
the Right to Participate
You Don’t Like the
New Investment
Anyway
Pay to Play: Are Rights Offerings A Recovery on Your Claim?
© 2003 Dechert LLP
7
Can You Find Another Bidder?



Pay to Play: Are Rights Offerings A Recovery on Your Claim?
© 2003 Dechert LLP
Sell Your Position
to Someone Who
Can Participate
Find an Equity
Sponsor With a
Better Deal
Find a Strategic
Buyer
8
Confirmation Fight
Pay to Play: Are Rights Offerings A Recovery on Your Claim?
© 2003 Dechert LLP
9
Vote Against the Plan



They Can’t Vote,
They’re an
Interested Party
You Vote No Since
You Have to Pay to
Play
Force Valuation
and Cramdown
Pay to Play: Are Rights Offerings A Recovery on Your Claim?
© 2003 Dechert LLP
10
Valuation

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Pay to Play: Are Rights Offerings A Recovery on Your Claim?
© 2003 Dechert LLP
We’re in the Money
The Bidding Was
Rigged
This Is
Undervalued
You Can’t Buy This
for Less Than What
It’s Worth, Even If
No One Else Wants
It
11
Unfair Discrimination

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Pay to Play: Are Rights Offerings A Recovery on Your Claim?
© 2003 Dechert LLP
They Are Using
Their Blocking
Position As
Debtholders to
Buy the
Company
The Deal
Actually Gives
Them Credit for
Their Claims
They Get
Something for
Their Claims
and We Don’t
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Absolute Priority

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
Pay to Play: Are Rights Offerings A Recovery on Your Claim?
© 2003 Dechert LLP
The Secured
Creditors Have
Received More
Than They Are
Owed
Management
Can’t Get
Anything If We
Don’t
Trade Can’t Get
Anything If We
Don’t
13
Best Interests

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
Pay to Play: Are Rights Offerings A Recovery on Your Claim?
© 2003 Dechert LLP
We Might As
Well Liquidate
The Company Is
Worth More in
Pieces Than As
a Going
Concern
If You
Liquidated, We
Would Get More
14
Can You Win?
The Right to
Participate is of
limited duration and
non-transferable



Pay to Play: Are Rights Offerings A Recovery on Your Claim?
© 2003 Dechert LLP
Force Valuation of
the right to buy in
and create a cash
alternative
Get Equity For
Your Existing
Investment
15
Can You Avoid the Problem?
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Pay to Play: Are Rights Offerings A Recovery on Your Claim?
© 2003 Dechert LLP
Is It the Only Way to
Do a Deal?
If You Can’t Pay,
Maybe You
Shouldn’t Get
Anything
Maybe Your
Investment Isn’t
Worth Anything
Anymore
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