It’s going to be used, and it’s going to be used extensively in 2012.
It is a way to move assets that one party does not want, or cannot hold, into the hands of those who want the exposure.
Each of these fixes, though, has, shall we say, material negative externalities which limit their use.
With all that said, this structure is very useful in the right situation.
It’s a way to tidy up the balance sheets for financial institutions, create market velocity, move risk to investors who want it and set the table for more capital creation.
Liquidating trusts can be effective tools to wind down any business enterprise, including debtors in Chapter 11 bankruptcy cases and entities that dissolve outside of bankruptcy. To that end, in a Chapter 11 case, a debtor’s exclusive right to file a plan is limited to 120 days (subject to extensions for cause), but once a plan is confirmed, the bankruptcy estate ceases to exist and the debtor loses its status as debtor in possession, including its authority to act as a bankruptcy trustee and pursue estate claims.
The creditors become the trust beneficiaries and their claims are paid from trust assets by a waterfall established pursuant to the plan.
In conjunction with the other provisions of the Bankruptcy Code that require a disclosure statement and plan to provide “adequate information” for a claim or interest holder to make an informed judgment about the plan, Section 1123(b)(3) effectively provides notice to creditors of retention and prospective enforcement of claims that may enlarge the estate’s assets for distribution.
These structures are designed to allow an active, dynamic manager to liquidate a portfolio of loans, hence: liquidating trusts.
The manager anticipates selling and resolving all of these loans and reducing them to cash in a finite and relatively short period of time.
First, these are management intensive transactions that are dependent upon the investors’ confidence in the quality and performance capabilities of the manager.
Second, the quality of data available on seasoned non- or under-performing loans tends to be a bit dodgy, and that impacts the quality of disclosure and the difficulty of delivering high quality information to manager and investor.
Nonetheless, it is peerless, durationally matched leverage that is terrifically useful for buyers of the distressed debt inventory.