Creditors of Distressed Companies Seek Disclosures

Creditors of Distressed Companies Seek Disclosures

EMILY GLAZER

Jan. 5, 2014 6:42 p.m. ET

Creditors of distressed companies have taken on a new role: transparency advocates. Bondholders and other creditors of companies close to bankruptcy are pushing the firms to disclose heaps of information after confidential talks with the distressed outfits stall or end. Their goal: to be able to trade free from accusations that they are using inside information not accessible to others.Such document dumps have become standard practice following confidential creditor talks, when hedge funds and others that deal in distressed debt often learn otherwise private financial information. While they are talking, they can’t trade.

But once talks end, creditors want the companies to disclose what was shared so the creditors can get back to trading in the company’s debt.

About 36 hours before it filed for Latin America’s biggest bankruptcy at the end of October, Oleo e Gas Participacoes SA,OGXP3.BR +4.35% then known as OGX, released a roughly 90-page stack of company arcana that had been shared with some bondholders during restructuring negotiations.

Similar disclosures have happened three other times in the past year with Energy Future Holdings Corp. One of them went through more than 20 drafts, according to people involved in the discussions around the Texas utility that has been contemplating bankruptcy and counts many Wall Street stalwarts among its creditors.

“The nondisclosure agreements are now much more heavily negotiated than they were in the past in order to cover the waterfront…so that the investment firms can be certain that they’re able to trade at the end of the periods,” said Damian Schaible, a lawyer in Davis Polk & Wardwell LLP’s insolvency and restructuring group. “That’s the new world but that is so radically different from the way it used to be.”

These efforts have taken on more urgency since 2011, when a Delaware-based federal bankruptcy judge criticized four investment firms alleged by other creditors to have used confidential information to trade Washington Mutual Inc. WMIH +2.44% debt after the funds met with the bank. The decision was later vacated, partially to allow Washington Mutual to exit from bankruptcy after extensive litigation, according to court records.

Still, the message got out. Since then, creditors have pushed the corporate borrowers to share extensive details of the negotiations right after confidentiality agreements that apply during the talks expire, say lawyers and bankers involved in such discussions. The companies often agree to make these disclosures to help bring creditors to the table for discussions that could stave off or smooth a bankruptcy filing.

In the U.S., public companies typically use 8-K securities filings to disclose unscheduled material information. In prebankruptcy situations, the 8-K filings more closely resemble an S-4 that is released by a publicly traded company to register any material information related to a merger or acquisition. It typically details discussions held behind closed doors.

There were 47,705 8-Ks filed by companies with annual revenue of at least $10 million between Dec. 1, 2012, and Nov. 30, 2013, according to data from investment research firm Morningstar Inc. Of those, the average filing was 20.7 pages and the median was eight pages.

Corporate borrowers and hedge funds don’t always see eye to eye on what should be disclosed, bankers and lawyers say. The borrowing companies like to keep information close to the vest, while hedge funds want to let it air so they can begin trading again without having to worry about being accused of acting on material, nonpublic information.

The filings, disclosed in different formats depending on factors such as the company’s structure or location, can include details about business plans as well as financial figures beyond those presented in quarterly filings.

In Energy Future’s case, one set of talks with creditors fell apart in mid-October. The company, creditors and their advisers went back and forth for about four days over a filing to disclose their discussions, people familiar with the matter said. One of the sticking points concerned how to present details of the company’s financial and liquidity projections, which were lower than some creditors expected, the people said. Energy Future has heightened attention on disclosures in general in the last roughly three years, a person familiar with the company said. In the last year, its average 8-K filing was nearly 58 pages.

The knowledge that disclosures will be forthcoming can affect confidential discussions, say people who have been involved with them. The companies try to be more careful about what they reveal in negotiations and often stick to PowerPoint presentations that will ultimately become the template for the disclosures, bankruptcy experts say.

That was the case for textbook publisher Cengage Learning Inc., which filed for bankruptcy protection last July after reaching a deal with creditors who had signed confidentiality agreements to view nonpublic company information. The company was careful from the start to limit the competitive information available, a person familiar with the discussions said. Even so, there were a few days of debate around the granularity of detail that needed to be included in the disclosures according to people familiar with both sides of the discussion.

In the end, Cengage released a three-part disclosure, including a 76-slide PowerPoint presentation specifying its market performance, historic financials and business plan. In other Cengage announcements over the last year, the average disclosure was about 39 pages and the median was three pages.

A Cengage spokesman declined to comment.

Sometimes creditors don’t think enough information has been released, and they will make their own disclosures if they negotiated for that ability in their confidentiality agreements.