A Survival Kit for Recovering Funds from Junk Bond Defaults

Investors wishing to recover losses from junk bond defaults should first implement fairly detailed financial and legal analyses of the bonds and their issuer in order to determine the intrinsic value of the bonds. The investor should then analyze the transaction that gave rise to the bonds and identify any parties against which legal claims may be pursued. Armed with this information, the investor can develop a plan of action. There are generally four courses of action open to the investor. It may sell the bonds outright. It may continue to hold the bonds and monitor the situation. It may participate actively in any debt restructuring or bankruptcy reorganization proceedings, pushing for an enhanced return to junk bond holders. Finally, it may press available legal claims. A fraudulent transfer claim may succeed if it can be shown that the transaction that gave rise to the junk bonds involved a transfer of property without "fair consideration" and left the acquired company either insolvent or undercapitalized. Targets of such claims may be the seller that received millions when it sold or redeemed shares in the transaction, the corporation that spun off a former subsidiary in an LBO, a small stockholder group that sold out, or banks that functioned as bridge lenders. Other possible legal remedies for failed junk bonds include fraud and negligence claims.