Bankruptcy Investing - Book Review

By Lorenzo Ayres

Ben Branch and Hugh Ray

Category: Find the Deal

The lead author of Bankruptcy Investing, Ben Branch, is a finance professor at the University of Massachusetts who took a doctorate in economics at Michigan in 1970 under Frederick Scherer, which means he came to this subject from industrial organization rather than off a trading desk. He was also the Chapter 7 bankruptcy trustee of the Bank of New England estate from 1991 until 2013, and in 1998 he sued the federal government. One of his conference talks is listed on his own curriculum vitae as Ben Branch v. the United States. That’s the man who co-wrote the dry procedure manual, and once you know it, the book stops being dry.

The case is worth going into detail because it teaches the thing the book is for. Bank of New England Corporation, the holding company, issued $200 million of bonds in 1989 and pushed the cash down into its bank subsidiaries. On January 6, 1991 the regulators seized the banks. The FDIC kept the money. The holding company’s bondholders were owed something like $700 million. They had received about $40 million, roughly 15 cents on the dollar, and all of it to the senior holders; the people below them got nothing. Branch's argument as trustee was that the holding company was already insolvent when it issued those bonds, so the proceeds should never have gone down into the subsidiaries in the first place. He got a tentative settlement of $140 million in September 1998, a few weeks before a December trial date. Branch’s co-author, Hugh Ray, was a partner at Andrews and Kurth in Houston who ran that firm's national bankruptcy practice and had worked Continental Airlines, Zales, Lomas, the Denny's parent, and the Hunt brothers. Branch chaired the creditors committee in First Republic, and Ray's firm was counsel for Bank of New England, where Branch was trustee. These two weren't writing up other people's cases; they were writing up their own.

Now, what the book is, and where my knowledge of it stops.

It first came out from Dearborn in Chicago in 1992, which answers a question I’ve been asked and couldn’t previously answer. Beard Books in Washington reprinted it in 1999, put out a second edition in 2002, and a revised edition in June 2007 that runs somewhere between 328 and 344 pages depending on whose catalog you trust, at $44.95 for the paperback. It has nine or 10 chapters and a glossary of 70 to 90 pages, which is a quarter of the whole book, and the glossary is the part the publisher singles out. The chapter that makes it unusual is the First Republic case study, because Branch chaired the senior unsecured creditors committee in that bankruptcy from 1989 to 1991 and then chaired the board of the shell company until 1994, so the chapter is autobiography stripped of emotion. I couldn’t get a copy open to check any of that against the pages; the two published tables of contents disagree with each other about chapter order and page numbers, so somebody's catalog is wrong, and there's no professional review of this book anywhere. Beard's own page for it says no book reviews are available. Its whole reputation is word of mouth among people who invest in distress.

Readers who have gone through the book all say the same thing, which aligns with how I use it. The first half, the bankruptcy primer, is the good half, and it’s written plainly enough that somebody with no legal training can follow what happens in what order and who files what. The second half is unoriginal high-yield security analysis of the kind you can get in a dozen other places, and the specific examples were dated even when the 2007 edition came out. I’ve never read it cover to cover, and I’m not going to pretend otherwise. It’s on my desk strictly for reference when a situation gets complicated, and for that job procedure beats analysis, because the reason distressed situations go wrong for outsiders is almost never that somebody mispriced the asset; it’s that they didn’t know who had to vote, or when, or what the judge was allowed to do about it. The subtitle, “How to Profit from Distressed Companies,” is a 1992 mass market wrapper on a book whose lead author has a trustee's temperament, and the trustee is the better half.

The question the book keeps putting in front of you is: who is the judge, who sits in each creditor class, what does each class actually want, and how will each of them vote? Nobody who hasn’t been through one thinks about capital structure that way. I look at mine that way now, and the first time I did it, I was scared. I have about $9.3 million across seven notes, I’m quoting $13 million to refinance that amount plus anywhere between $2 and $3 million of revamp, and I’ve personally guaranteed all of it, twice. I have a fleet vendor with real money in dispute against three signed agreements. I have EB-5 investors with a hard December 2026 filing deadline, which is a class whose interests are governed by an immigration calendar rather than by the returns on a park in Jay, Oklahoma. And I have individual investors buying cabins. Those are four sets of people who are perfectly aligned while things go well and who want four different things the minute they don’t, and the first half of this book is a map of how each of them behaves in that second case.

The other thing I took, and it’s the sharpest, is the downstreaming lesson from Branch's own lawsuit. Money raised at the parent and spent at the operating company is the fault line that broke Bank of New England's bondholders, because when the operating company got seized, the people who had funded it were standing at the wrong entity holding paper against a shell. Any structure where a holding entity raises and a park spends has the same fault line running through it, and both the refinance and the EB-5 borrower entity sit on top of it. I'm not telling you I’ve solved that. I’m telling you I know where the crack is, which I didn’t before, and that a distressed situation runs on a calendar most people badly underestimate. The Bank of New England estate opened in January 1991. Ben Branch was still its trustee in 2013.

About Lorenzo Ayres

Lorenzo Ayres is a business builder, dealmaker, and founder of America's Outdoor Adventure Park in Jay, Oklahoma. Here he reviews books on investing, deal structure, and business strategy.

Follow Lorenzo on X