Many IBs have general unsecured claims in the MF Global Inc. SIPA liquidation. As demonstrated by the recent sale of a large general unsecured claim at 90% of the claim amount, institutional players believe such claims have very strong prospects for recovery. For IBs, the good news is that not only is the market consensus that IBs should recover a high amount before too long but also that IBs may be able to sell their claims for high amounts.
IB general unsecured claims in the MFGI bankruptcy stem from unpaid commission splits and float for October 2011 and also from security deposits. For commission splits and float, an IB's claim may be based on a payout report document that the IB has been able to request from the MFGI trustee. For a security deposit claim, the MFGI trustee has been willing to stipulate to the amount of the claim if the IB withdraws any objection to the trustee’s position that the claim is not entitled to a higher priority commodity customer status.
On April 3, 2013, a creditor with a $15 million stipulated and allowed general unsecured claim sold the claim via an auction for $13.5 million, or 90% of the claim amount. The winning bidder, Citigroup Financial Products, Inc., outbid 86 other auction bidders and a stalking horse bid at 65%. IB general unsecured claims should generally have the same priority level as this claim and so the price it sold at strongly reflects the market view for recovery and gives an indication of what buyers would pay for the claims. Because IB claims are usually much smaller, the claims would trade at a discount that represents the high fraction of the claim amount represented by the buyer’s administrative costs executing the transaction. Nonetheless, there appears to be a high level of buyer interest and once stipulated such IB general unsecured claims should be able to be sold at high price levels.
If the sale is structured properly, the selling IB should be able to treat the proceeds of the sale toward the IB’s regulatory net capital requirement. To do this, the sale should take place on a non-recourse basis, meaning that the sale contract provides the buyer a much lower level of remedies against the seller.
Neal R. Stevens
Schuyler, Roche & Crisham, P.C.
nstevens@SRCattorneys.com
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