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Last year was a difficult one on so many levels—from the onset of the COVID-19 pandemic, through a rancorous national election and on through the end of the year. It was an active one for distressed securities investors as many companies, particularly those already saddled with heavy debt loads, made moves to come to terms with creditors and, failing that, filing for Chapter 11 protection. A complex bankruptcy can take years to resolve, presenting many opportunities along the way to invest in distressed securities (before, during, and after distress). Events like spinoffs, mergers, and special dividends can help generate the final gains at the tail end of a distressed securities investment cycle.
Samson Resources is coming to the end of a 10-year cycle dating to shortly after it was taken private by KKR in a $7.2 billion LBO in 2011 – this was the largest oil & gas leveraged buyout at the time. Four years later, it was forced into Chapter 11 making it the largest energy company bankruptcy of its day. It emerged from reorganization in 2017 after eliminating $4 billion in debt and, since then, has paid numerous special dividends (over $13.00/share between 2017-19) to its new shareholders who were former creditors. On January 4, Samson announced the sale of all its remaining Powder River Basin oil reserve assets for $215 million. The company will use the proceeds to pay off approximately $13 million in debt and then make a final special dividend (estimated at over $8.50/share) to shareholders. The deal will close in early March with Samson then beginning its final dissolution.
The Samson Resources story shows the full evolution of a distressed company – from the leveraged buyout stage by private equity and through bankruptcy – with former creditors receiving the new post-reorganization equity. It also shows that, even in a difficult market for the energy industry, a patient distressed securities investor who buys the right asset at the right time can profit, in this case by receiving liquidating special dividends over the years.
Another new year development that can be traced back to a major bankruptcy is the closing of the merger between Fiat Chrysler Automobiles NV and PSA Group, the European automaker whose largest brand is Peugeot. This combination will create the fourth largest automaker in the world with an annual sales volume of more than 8.5 million vehicles.
Chrysler was an iconic American company which was forced into bankruptcy in 2009 during the great financial crisis. By reorganizing this way, it was able to eliminate $20 billion in balance sheet debt which allowed Fiat to acquire it at an extremely attractive price ($0)! It was also the first ever corporate bankruptcy announced by an acting U.S. president. Chrysler serves as an excellent example of how companies can come out of distress much stronger and in a better position to compete. Over the years since then, Fiat spun off to shareholders its profitable Ferrari business (ticker: RACE) and also paid over €3 billion in special dividends.