Bondholders and owners of other corporate debt securities are the next recipients to be paid.Only after these debts are paid can shareholders lay claim to liquidated assets.
Our analysis of Enron – and it is currently our biggest position, it has been bigger but they’ve been mailing back a bunch of money – is it’s our favorite kind of investment. In a bankruptcy the assets are fairly straightforward. But our bottom line was the company was lowballing the recoveries because they were highballing – overestimating – the claims.Which is one of the issues I have with private market value as a concept is it’s a nice concept but there’s a circularity to it. So the market had suddenly gone from saying, “We love telecom. They had a utility that at times they thought they were going to sell, at times they decided they couldn’t sell. Some subsidiaries had guaranteed the debt of others.It only works when there’s optimism, financing available, etc. We love energy,” to every telecom and every energy company, “I don’t trust the numbers. Let’s get out of all of them.” So summer of 2002, we are buying Enron debt at 15 and 10 cents on the dollar… As is the case of Enron, a lot of the assets got sold or where trading claims like a brokerage firm might have and they collected a lot of it. And ultimately, over several years of liquidating assets, they ended up with $16 to $18 billion of assets – I don’t know the exact number – of which most was in cash and a bunch was also in the Portland, Oregon utility and some international energy assets. That all had to be unravelled in court – very very complicated, hard to know.Shareholders also seldom win such cases, making lawsuits a less-desirable means to gain their share of corporate assets.When a corporation liquidates its assets, the company's creditors are the first in line to receive funds from the liquidation.It’s probably more useful to someone interested in the field, but I found it interesting nonetheless.
That said, there are a few general takeaways for everyone about these types of events: We went from probably owning 5% of our assets in distressed debt in 2001, to 55% in the summer or fall in 2002.
The Enron scandal was one of the worst falls from grace for a Wall Street darling in recent history (aside from the financial crisis). That is, until a year later when Worldcom filed and more recently with the financial crisis.
The scandal destroyed the accounting firm Arthur Andersen, it led to new regulations with Sarbanes-Oxley Act, a book was written about it called Lately, I’ve been going over a lecture Seth Klarman gave several years ago. Oaktree had one of the biggest positions at the time.
Who can trust these lying bastards running these companies. There was self-fulfilling prophecy at work as the capital markets closed to these people.
How many other companies in this space have these problems? As the “private market” type buyers that used to love paying ten times cash flow for these assets, all of a sudden weren’t there at five times. The complication in Enron was there were, like, over 1,000 subsidiaries and you had to sort out which assets belonged to which subsidiary.
If you have $25 billion of liabilities, you get 64 cents on the dollar. That our feeling was, based on detailed analysis and corroboration from various things along the way, that the company was overestimating. …When the people liquidating Enron wanted to tell the world how it turned out, they said, “Oh my god! Over time, we’ve actually gotten more optimistic and now think eventually the recoveries will be well over 50.