The price of Le-Nature's bank debt fluctuated wildly last week as hedge funds jumped into the name in force with the intention of suing agent bank Wachovia Corp. One distressed trader working the name said he had never before seen the debt of a distressed company bounce around so much. As first reported on CIN's Web site, the debt has moved from the lows 30s to the mid-50s, before dropping to the high 40s. At press time Friday it was trading in the 42-44 context. A Wachovia spokeswoman did not return calls.
"It is a virtual certainty Wachovia will get sued," one trader said. "[Investors] will figure out some way to get into their pockets." He added investors' intentions to sue are what has the debt trading in the low 40s. Investors can't be buying into the debt solely for the value on the assets because they are virtually worthless, he said. Le-Nature's produces flavored bottled waters, iced teas and fruit juices. Its debt tanked two weeks ago after a court forced three senior executives to leave the company on evidence of fraud and potentially criminal conduct by one or more of its management team (CIN, 11/3). Control of the company, which is operating under bankruptcy protection, was turned over to turnaround firm Kroll Zolfo Cooper. A spokeswoman at Kroll did not return a call.
Buyers of distressed debt have the right to litigation claims and to take legal action against the borrower, according to the Loan Syndications and Trading Association. They can also take legal action against its affiliates, attorneys, accountants, financial advisors and other entities. Although traders were certain buyers of the debt intend to sue, they added it is uncertain how much the litigation claims would be worth. Elliot Ganz, general counsel for the LSTA, did not return a call seeking comment.
Another trader said investors will need to prove Wachovia and Le-Nature's accounting firm is liable for the company's downfall and will need to figure out how much they are liable for. Which accounting firm Le-Nature's had been using could not be determined. In a lawsuit, plaintiffs would also need to prove investors did enough to protect their investments.
The trader cited several other bankrupt companies where investors have sought to buy litigation claims, including Enron Corp., Safety-Kleen Systems, Winstar Communications and Teleglobe. He said litigation claims can be substantial, citing Enron as an example of a company that has generated billions of dollars in claims. Raniero D'Aversa, a partner at Mayer, Brown, Rowe & Maw, said that in large fraud cases, such as Enron and Adelphia, investors factor in the potential recoveries they can make from litigation claims when trying to determine the value of bank debt.
