Distressed Stocks And Bonds Can Wind Up Anywhere
Inside today’s Daily Journal…
Essay: Bankruptcy Hide And Seek
With no gas, the world turns to coal
The rich get richer
Major crypto announcement
Chart Of The Day… Viper Energy
Today’s Mailbag
Distressed Stocks And Bonds Can Wind Up Anywhere
Editor’s note: Porter is traveling today and has turned the Journal over to Marty Fridson, lead analyst for Porter & Co.’s Distressed Investing. For nine consecutive years, Marty was ranked No. 1 in high yield strategy. He has written seven books, the most recent of which is The Little Book Of Picking Top Stocks… and Marty is such a legend that there is a recently published book about corporate finance that devotes an entire chapter to him. We excerpted last year in the Daily Journal.
Marty takes over from here…
You can run, but you can’t hide when filing for bankruptcy…
FAT Brands filed for bankruptcy on January 26. The company, which operates the Fatburger and Johnny Rockets restaurant chains, is based in Beverly Hills, California, yet it filed more than 1,500 miles away, in Houston, Texas.
And that’s OK…
According to federal law, a bankrupt company can choose to file in a number of locations: the district of its domicile, its residence, its principal place of business, or where its principal assets have been located during the 180 days immediately prior to the filing. While it primarily operates in California, FAT Brands had good reason to prefer the Texas Southern District – a court with a reputation as one of the most friendly to debtors and less friendly to their creditors, including bondholders.
Like many companies before it, FAT Brands took advantage of a looseness in the rules that allows a company to file where an affiliate files. The restaurant operator’s 95%-owned Twin Hospitality Holding Group, based in Dallas, also entered bankruptcy on January 26.
FAT Brands’s gambit wasn’t by any means the most aggressive exploitation of the maneuvering room offered by the U.S. Bankruptcy Code. In March 2024, BowFlex (BFXXQ) filed for bankruptcy in New Jersey, 3,000 miles away from its corporate headquarters in Washington State. The health-and-fitness products manufacturer’s basis for filing in that debtor-friendly jurisdiction was a prior filing by a subsidiary, BowFlex New Jersey LLC, which was formed just one month earlier.
Bankruptcy expert Stephen J. Lubben of the Seton Hall University School of Law commented,
If that works, American corporate debtors can file pretty much wherever they want.
Forum shopping is only one manifestation of the fundamental problem that Lubben sees in the present U.S. Bankruptcy Code. Ever since several big 19th-century railroad bankruptcies were controlled by robber barons such as Jay Gould and banking titans such as J. Pierpont Morgan, power has too often trumped fairness in how the company’s assets were distributed to the various claimants, for example, bank lenders, bondholders, and stockholders.
Congress revamped federal bankruptcy laws in 1898, in 1938, and again in 1978. Intended fixes in these various iterations included a filing category specifically designed for large corporations, a procedure involving appointment of an independent trustee, and injecting the U.S. Securities and Exchange Commission into the process. But each time, players with lots of financial clout figured out how to circumvent Congress’s attempts to level the playing field on behalf of less well-heeled participants.
