The Art of the Bankruptcy Stub: Adelphia Recovery Trust

Oftentimes, after a bankruptcy plan is confirmed and becomes effective, distressed debt investors' interest wanes and less eyeballs are focused on the case. Even after the bankruptcy changes from 2005, bankruptcies take a LONG time to be 100% completed. This is because, in most cases, claims have to be sorted and sifted through, checked-out and vetted, to see what the actual payout to various stake-holders will eventually be. I have, in the past, gotten checks for bankruptcies that occurred ten years ago.

In distressed parlance, a stub generally means a piece of an escrow or hold back that will receive a distribution depending on certain outcomes in case. Simply put: Either there are more assets to be distributed (due to litigation proceeds, insurance, refunds, default interest, etc) or less claims (due to some claimants doubling up, fraudulent claims, excessive claims, etc). There are many many cases like this - some that frankly I haven't even heard of. To those on the buy side, I have found Gleacher and Imperial to have the best listing of stubs (and if you know of anyone else that does a good job, please end me an email). A lot of these are amazing illiquid and probably have not traded in years. But they are out there ready to be studied and analyzed with potential for profit (Author Note: If you transact in these securities, make sure you have good counsel reviewing the docs & possibly purchase agreement, less you get left holding a worthless piece of paper not entitled to distributions).

To be frank, stub analysis is difficult. And it is oftentimes tedious and requires some guess-work as it relates to litigation recoveries and the amount of claims that will eventually be allowed. But that creates massive profit opportunities as these securities trades for, in many cases 0.5-2 bond points.

Some of the more liquid stubs traded institutionally include GGP, SSCC, Charter, Capmark, Chrysler CarCo, and GM (MTLQU - which someone just wrote up on the DDIC) just to name a few. One of the most well known stubs to distressed debt investors are the Adelphia stubs. You'll remember Adelphia filed for bankruptcy 10 years ago this past Monday (10 years goes by way to fast...June 25, 2002).

Distressed investors know the tickers and names of the claims pools all too well: ACC, ARAHOVA CVV, OLYMPUS, Holdco CVV, etc.  This week, one June 27th, the Adelphia Recovery Trust announced a settlement with Buchanan Ingersoll & Rooney PC which was a primary outside counsel for Adelphia. The Adelphia Trust even files 10Qs and financial statements and updates which can be found here: Adelphia Recovery Trust. I will note that this is probably one of the more transparent stubs out there - I'd venture to guess very few come close to this sort of disclosure. From its financial filings:

The Adelphia Recovery Trust (the “ART”) was formed as a Delaware statutory trust pursuant to that certain First Modified Fifth Amended Joint Chapter 11 Plan of Reorganization (the “Plan”) of Adelphia Communications Corporation (“Adelphia” or “ACC”) and certain of its subsidiaries (collectively the “Debtor”). The purpose of the ART is to prosecute the various causes of action transferred to the ART pursuant to the Plan (the “Causes of Action”) and distribute to the owners (the “Holders”) of the interests in the ART (“Interests”) the net proceeds of such Causes of Action (“Distributions”), according to the relative priorities established pursuant to the Plan, subject to the retention of various amounts to fund the prosecution of those Causes of Action and operations of the ART. Pursuant to the Plan, in addition to the Causes of Action, Adelphia transferred $25 million in cash to the ART, in connection with its formation, in order to fund the initial expenses of operation.

Basically the goal of the trust is to sue third parties for damages as it holds litigation claims against these parties. In this case, these parties include FPL, Prestige, and Goldman Sachs (and others which can be found in the 10-K: Adelphia Trust 10K). You can see the actual settlement press release here: Adelphia Settlement with Buchanan Ingersoll & Rooney. The trust is set to unwind on December 31st, 2014 unless its extended by the bankruptcy court. While you may think its a positive to just have this thing run forever, there are operating expense here: $3M in 2011 for G&A expenses. It's a balance between extend and probability of winning versus the cost of maintaining the trust.

The value of each security in Adelphia is set by a formula which can be found on Page 21 of the 10K (this changes based on who has been paid out).  Take ACC-1 for instance which trades in the market as ADPAS (ACC-1 claims pool).  These were Senior Notes issued out of ACC back in the day.  There are $4,839,988,165M of interest.  Let's say, after all is aid and done, the trust ends with $100M and the formula is the same (right now they have $47M on the balance sheet + $20M coming in from Buchanan).  At that level, according to page 21, ACC-1 receives 42.73% of proceeds which equates to a price of 0.0088 cents. Right now the market is .005-.01 so fairly close to market expectations.

If you were VERY bullish on more litigation recoveries coming in faster AND less money going out the door for some nuances in this case you'd be buyers of this security. How would you get there? You'd make a lot of calls and do a lot of legal leg work reading briefs, working with outside counsel probably, etc. Not much valuation work here: It's really dialing for information and pounding the phone to get insight on the probabilities of damage awards and Adelphia Trust winning. Aggregating that is tough but you can get an edge there. And these stubs (again generally) have little to no correlation with the market which makes them enticing to the distressed debt community.

I plan on doing a lot more stub posts in the future. And my offer still stands: Stub ideas for the application for the Distressed Debt Investors Club are looked up very favorably - they require a lot of work and synthesis and knowledge of docs - the perfect candidate to add value to our community.