Bankruptcy cases can, like most contested litigation, become highly contentious things. But the thing which bothers me about the [Wall Street Journal] article is that it seems to assume that if hedge funds profit by trading in and out of debt over the course of these cases, then the company itself is likely to be the loser. And that doesn’t ring true to me: the aim here is generally to maximize the recovery for the class of creditors which ends up with control of the company. And that, in turn, means maximizing the value of the company. To a first approximation, control of the company will pass to a certain class of creditors, and that class, along with everybody senior to that class, can normally be considered winners. Meanwhile, everybody junior to that class is likely to come out a loser.
Salmon: Are hedge funds abusing bankruptcy?
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