You’ve been thinking about selling your MF Global claim and long ago received the Trustee determination of your filed claim. Since then, you’ve gotten lots of emails from buyers stating interest, and you’ve heard everything from up to an immediate 97% payout rate to “never ever give up your rights” by selling your claim. Where is the truth in these murky waters?
MF Global Trustee James Giddens makes no comment or judgment if one should sell his or her claim or not. So why would you sell a claim? For some, it is a way of recovering as much as possible within a certain amount of time, allowing them to move on without concerns about the details and outcome of the bankruptcy. For others, who may have depended upon the secured assets held by MF Global for their livelihood and business, the ability to sell the claim offers a viable and rapid alternative for recovery in a lump sum instead of waiting possibly years for their property to trickle back.
When seeking to sell a claim, Andrew Gottesman of Second Market, a platform that brings buyers and sellers of bankruptcy claims together, says, “Be smart. Get more than one price, just as you would when selling your house. Until you sign any agreement, you should call around.”
Those following the claims market may have heard recently of prices bringing a seller’s recovery up to mid- or higher 90%. That sounds great, but when selling a claim keep in mind that the larger your claim, the more negotiating power you have. (A $5,000 claim likely will bring less than one for $5 million.) And if the offered payout seems relatively high, there may be great big strings attached. Claims trading is not a standardized industry and the terms of each contract often are negotiable. A seller, however, must understand the terms of the sale.
For example, is the payout attached to a trigger event? Or will it take longer than the standard two-day turnaround time? Will you be paying a commission? If so, how much? Do you waive all rights for possible claims not associated with the sale of your filed brokerage claim in the SIPA proceeding? When negotiating a sale, we’ve found that sometimes brokers on the other side of the phone seeking to buy your claim may not even know the answers to those questions, while at the same time putting you under time pressure to close the deal. This might be a red flag of less than favorable conditions. Most importantly, ask yourself if the buyer you are dealing with has experience in claims transactions.
Who is buying the claims?
Buyers can range from broker-dealers and investment banks such as UBS and Barclays (which then may sell them to their own hedge fund customers) to claims-focused funds, such as Bowery Investment Management, LLC, which purchases claims directly from customers.
Claims are not securities and the market for them is not regulated, but many claims buyers are and this can give the seller background and transparency on a counterparty to the sale. Claims trading is still an emerging asset, albeit one tied to a highly structured and transparent bankruptcy industry. Transparent, at least, for those with the resources to follow a bankruptcy in detail.
SecondMarket reports that “MF Global Inc. was the second most actively traded claim in August, with $445 million transferred with more than 309 trades.” September saw an increase in trading of both 4d (U.S. segregated funds) and 37.0. (funds held in secured overseas accounts).
While at the time of this writing, 4d claims currently are being traded up to a mid-90% recovery, and 30.7 claims are trading in the 80s, “The ultimate recovery is difficult to predict,” says Vladimir Jelisavcic of Bowery “The biggest controversy,” he adds, “relates to the inter-company transfers from the U.S. brokerage to the UK brokerage affiliate.” The first hearing on this question will be held only in April 2013.
Claims trading is a market like any other, and as information becomes available prices offered can and will move up or down.