Hedge funds and Chapter 11

This paper studies the presence of hedge funds in the Chapter 11 process and their effects on bankruptcy outcomes. Hedge funds strategically choose positions in the capital structure where their actions could have a bigger impact on value. Their presence, especially as unsecured creditors, helps balance power between the debtor and secured creditors. Their effect on the debtor manifests in higher probabilities of the latter’s loss of exclusive rights to file reorganization plans, CEO turnover, and adoptions of key employee retention plan, while their effect on secured creditors manifests in higher probabilities of emergence and payoffs to junior claims. THIS PAPER EXAMINES THE roles of hedge funds in Chapter 11 and the effects of their presence on the nature and outcome of the bankruptcy process. Hedge funds ’ participation in the bankruptcy process takes a variety of forms, includ-ing investing in debt claims, buying equity stakes, serving on the unsecured creditors or equity committee, and pursuing a “loan-to-own ” strategy, whereby a hedge fund acquires the debt of a distressed borrower with the intention o