Asset Sale, MFN Provision, and China's Offshore Bonds

Welcome to the fifth Pari Passu newsletter, 

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Today, we will learn more about: 

• Asset sale and its impact on leverage 

• Most-favored-nation provision

• China's offshore bonds

Asset Sale

The concept of an asset sale is fairly straightforward. The type and nature of the assets that can be sold will vary by business. In some cases, it may be a discrete business unit; otherwise a core business asset.

Occasionally, there will be non-operating assets such as underutilized land or buildings that can be sold. A key feasibility issue is whether a potential purchaser will be willing to complete a transaction with the distressed company in light of the fact that if the seller subsequently files for bankruptcy, the sale transaction could potentially be unwound as a fraudulent conveyance.

The risk of fraudulent conveyance frequently causes prospective purchasers to insist that the distressed seller file for chapter 11 protection in order that the buyer can purchase the assets in a bankruptcy court-approved transaction.

Whether the asset sale benefits the seller and the distressed investor depends on the circumstances, especially price. If the firm receives a good price, then the asset sale is potentially a value-enhancing event, depending on what happens to the cash.

For example, if the asset sale is essentially being forced by bank lenders and the cash is used to pay down bank debt, most creditors are generally better off. The holders of the secured debt are happy because they are being at least partially repaid. Holders of the unsecured debt, if any, will generally be happy because the amount of secured debt above them is being reduced, and the probability of getting a decent price on the asset sale may be higher before, rather than after, filing for chapter 11.

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