Heritage Highgate, Inc.: Second Liens, Valuation & Strategy

October 25, 2012Articles Bloomberg BNA

In the mid 2000s, the presence of second lien debt in companies’ capital structures became more prevalent than ever before. Companies with over-leveraged balance sheets and second liens in their capital structure became unlikely to have any value that flows to unsecured creditors. Thus, unsecured creditors became increasingly displaced in reorganizations and their normal impact on Chapter 11 became minimized, while second lien creditors captured residual values. This shift has continued in reorganizations where second lien debt is present since the global financial crisis beginning in 2007.

This is the backdrop against which the Highgate reorganization played out. This reorganization is cited as an example of an instance in which strategy for stakeholders participating in Chapter 11 proved key to the reorganization. The decisions made, or not made, by stakeholders throughout the case impacted the outcome for such stakeholders.

Ultimately, the decision in the Highgate example stressed the importance for second lien creditors to retain counsel, get active during the pendency of a bankruptcy case, determine a strategy for the reorganization and pay close attention to any and all valuations that may be presented by parties in interest.