Dura Bondholders Lose Investing

The plan by Dura Automotive Systems to exit bankruptcy protection could give managers as much as $60 million in stock while leaving most bondholders empty-handed. Pacificor, a hedge fund that owns at least $133 million of Dura's senior debt, agreed to take control of the auto parts maker, which filed for Chapter 11 protection from creditors on Oct. 30, 2006. Pacificor teamed up with Dura's chief executive, Lawrence Denton, and managers in a restructuring that values the company's equity at about $600 million. Ten percent would be set aside for executive incentives. The arrangement provides nothing for holders of $561 million in 9 percent subordinated notes due in 2009. Those investors are finding that buying distressed debt can be a losing gamble when competing with institutions.

From International Herald Tribune

The plan by Dura Automotive Systems to exit bankruptcy protection could give managers as much as $60 million in stock while leaving most bondholders empty-handed.

Pacificor, a hedge fund that owns at least $133 million of Dura’s senior debt, agreed to take control of the auto parts maker, which filed for Chapter 11 protection from creditors on Oct. 30, 2006. Pacificor teamed up with Dura’s chief executive, Lawrence Denton, and managers in a restructuring that values the company’s equity at about $600 million. Ten percent would be set aside for executive incentives.

The arrangement provides nothing for holders of $561 million in 9 percent subordinated notes due in 2009. Those investors are finding that buying distressed debt can be a losing gamble when competing with institutions. The lesson may be reinforced in coming months, because Moody’s Investors Service predicts default rates will triple from the lowest level in more than a decade.

"Small investors are going to get raked over the coals by the big institutions and hedge funds in bankruptcy," said Martin Fridson, chief executive at Fridsonvision, a high-yield-debt research firm in New York. "Even worse, they may have to sit back and watch management cut a rosy deal of its own with another class of existing creditors."

Christina Stenson, a spokeswoman for Dura, based in Rochester Hills, MI, declined to comment. An attorney for the company, Roger Higgins, did not return a call for comment.

The individuals lost by competing against professional investors, who acquire distressed bonds and exchange them for controlling stakes in troubled companies. Backed by lawyers, accountants and bankers, investors like Wilbur Ross of W.L. Ross and Leon Black of Apollo Management became billionaires buying companies at discounted prices and turning them around.

"Buying subordinated debt in a bankrupt company is not for rookies," said Jonathan Rosenthal, a partner at Saybrook Capital, an investment bank that specializes in restructurings. Saybrook represented creditors in the bankruptcy of United Airlines. "It is a high-stakes game that is often very unforgiving."

Similar battles may begin across the United States as more companies find it harder to pay their debts and an increasing number of small investors buy distressed debt to raise their investment returns, said Charles Tatelbaum, a Florida bankruptcy attorney and former American Bankruptcy Institute official. "It’s become like the trade in penny stocks," he said.

Denton, in a statement the day the company filed for bankruptcy protection, said the decision was "the prudent course of action." He earned $800,000 in 2005 and owns 22,185 shares valued at $1,775.