Where is Danny DeVito when you need him?
March 27, 2013 § 86 Comments
Suppose I am the manager of a large investment fund, ZipFund. I have a little of my own personal money in ZipFund; but the vast majority of it is investments from small Mom and Pop investors.
Suppose my fund had invested in Cyprus Corp a few years ago by buying interest-bearing bonds. We’ll call these Zip bonds.
Cyprus Corp has other bond investors. Many of them are small investors like the majority of investors in ZipFund: we’ll call their Cyprus bonds Mom-n-Pop bonds. There are also some larger Cyprus investors who bought FatCat bonds. Mom-n-Pop bonds are senior to FatCat bonds: they are insured by the company, so they get redeemed at face value before the uninsured FatCat bonds are entitled to any proceeds.
Cyprus Corp is in big financial trouble, and the board of directors has been replaced by a judge. The new board has a fiduciary duty to make the best possible financial choice for existing Cyprus bondholders, and complete authority to make decisions. The company is about to go belly up if it doesn’t get an infusion of cash, which will make Zip, Mom-n-Pop, and FatCat bonds all virtually worthless.
The ZipFund partnership has voted to allow a deal to provide that additional cash, buying WhiteKnight bonds from Cyprus, as long as in doing so the value of Zip bonds is preserved going forward. Our goal is not as much to make a profit as it is to minimize losses on the capital we have already invested.
I offer the Cyprus board of directors a deal, and after shopping around a bit ZipFund is the only offer of new cash they get. Our deal preserves the value of both Zip bonds and Mom-n-Pop bonds. FatCat bonds are required to take a 40% haircut.
New cash from the deal would immediately change the viability of Cyprus going forward. It might not create overall value; but the board thinks it has a good chance of preventing wholesale value destruction. If they don’t do my deal, any Cyprus bondholders will be lucky to get pennies on the dollar and the uninsured FatCats will most likely get nothing at all.
If the Cyprus board accepts the deal, has anyone done moral wrong?