Introducing our new Trade Claims Series: An Interview with Andrew Gottesman from SecondMarket

A year and half ago, contributor Josh Nahas wrote a post for us on the trade claims market. Since then, I often receive requests to spend some more time talking about the claims side of distressed debt.  With that being said, I am happy to announce that through 2012 I plan on doing a great number of posts focusing on interviews with practitioners in the market including buy side analysts, traders, lawyers specializing in the claims market, scourers, just to name a few. Given that a great majority of our readers spend a larger part of their time dealing in straight credit, I think this will be a fantastic series for those learning this business.

I met Andrew Gottesman last year.  He is head of the bankruptcy claims trading business at SecondMarket.  SecondMarket provides a valuable service to both buyers and sellers of bankruptcy claims, a market that had next to no transparency five or ten years ago.  Now, buyers and sellers of claims have a better way to transact, with more visibility and granularity, along with a reputable medium in SecondMarket.  Andrew is fantastic at what he does and I am grateful for allowing us to interview him for the site. Enjoy!

Interview with Andrew Gottesman - Directory of Bankruptcy Claims Trading at SecondMarket

Please give us a little bit about your background.  How did you end up at Second Market?

My background in the field is actually the opposite from the way most people do it.  I started my restructuring career as a bankruptcy lawyer in 1999 with Willkie Farr and Gallagher.  After some time, I moved over to Schulte Roth & Zabel where I stayed until 2006. I left Schulte to clerk for the Hon. James M. Peck at the SDNY Bankruptcy Court.  Most people clerk before they go to the big firms but I took the opposite tack.  I truly enjoyed my time clerking but the business side of the industry was always calling me.  I came to SecondMarket as an entrée to the claims trading world in 2009. 

Can you talk about how Second Market is revolutionizing/changing the trade claims business?

SecondMarket is a marketplace for all types of alternative investments, like private company stock and bankruptcy claims.  We are trying to bring technology to bear to make bankruptcy claims trading more accessible and efficient.  Claims will never be a “click and execute” product because of the unique nature of each claim.  We are trying to make it easier for buyers to do their credit and claim level diligence while giving sellers easier access to the market.

Describe who are buying claims?  Is it funds, smaller players, etc?  How are you sourcing claims?

Clams buyers mostly come in 3 buckets, but there’s plenty of overlap.  Bulge bracket broker dealers regularly buy claims and sell them from their inventory to their hedge fund  customers.  Large distressed and multi strategy hedge funds buy claims directly or through brokers like SecondMarket.  There are also smaller, claims focused funds who mainly source and purchase claims directly.  Each of these buckets may buy and sell to one another.  It’s a relatively small universe of buyers and brokers who interact regularly.

What is the most common rationale you hear for people selling their claims?

Sellers don’t always open up about their rationale but there are common threads.  Sometimes folks are looking to offload the risk of a depressed or further delayed payout in a case where they don’t believe the story.  Many creditors simply need cash before an anticipated distribution or are tired of dealing with the headache of following a case.  For others holding a claim creates an accounting issue they need to solve.  

Contrast the process of 503b9 claims purchasing versus a more general trade claim that might be at the bottom of the stack.

Everyone likes 503(b)(9) claims because they enjoy priority of payment.  Diligence involves ensuring the face value and assertions made by the claimant in the proof of claim (the documents filed with the court to assert the claim) are accurate. The process isn’t drastically different when buying those claims, although sometimes there is a mechanism set up by a debtor to review, agree and pay those claims.  Timing still needs to be factored in because, without a court approved system in place for the payment,  there’s no set time frame to pay 503(b)(9) before confirmation.  

Is Second Market transacting in the various flavors of claims?  OPEB, Reclamation, Deficiency?

We are involved in every class of claims.  It pays to be nimble.

Can you talk about the due diligence period in buying / sell trade claims?  What should investors be doing here?

As with most issues in the claims market, the diligence you need depends on the unique circumstances of each claim and each case.  On the case level - buyers need to look beyond a fundamental credit analysis.  It’s important to have a good sense of the intangibles hidden in each case to form an accurate view of a recovery.  Process, timing, and sometimes the personality of the actors can interact in unexpected ways to influence ultimate distribution and return on investment.  On top of a recovery analysis, buyers need to understand the potential for the reduction in the face amount of claims they are buying.  That claim level diligence revolves around ensuring that the face amount of the claim is as stated and that there’s nothing to inhibit or offset a full distribution.

Talk about some of the bigger risks in buying trade claims?  What are some land mines investors should watch out for?

There are many risks involved with buying claims.  Each is unique to the case and the claim.  The bankruptcy process is meant to set up a fluid negotiation.  Buyers are not privy to these negotiations, so things can change in ways you may not expect.  An investor may be able to influence outcomes if they amass a sizable position, but mostly you mare left to read the tea leaves.  This is where experience pays off.  People who have been around the block a few times can make more informed decisions on potential outcomes.  Additionally, claims sellers are understandably optimistic about the status of their claims, so the back up to their claim needs to be scrutinized carefully.  Sellers hardly ever consider things like potential preference exposure or offsetting claims the debtor may have against them.  Either one of those things can and will reduce the recovery available to that claim holder and buyers need to protect themselves accordingly.

What's the outlook for the claims business going forward?

I believe there is a bright future for this asset class as a whole.  The claims market has “grown up” a lot as a result of cases like Lehman Brothers and MF Global.  More and more market participants view claims as a legitimate, accessible and non-correlated asset class.  The major players in the space are more sophisticated a better capitalized than they once were.  These players are able to change and react to new inputs more creatively than in years past.  Sellers have gotten also gotten more sophisticated since Lehman Brothers.  Sellers are asking more questions and they are aware that there are more options in how to sell a claim and to whom they can sell it.  The outcome of all this will be more liquid markets in more cases.  An outcome that I believe benefits everyone.

Andrew, thank you for your time.  Fantastic stuff.


dudeshirt 3/27/2012  

Who are the bigger players in this market? Any fund in particular that employ this strategy?

I've heard mention of strategies whereby owning an outsized portion of trade claims can get a creditor equity in a reorg scenario.

Any color Hunter?

Anonymous,  5/01/2012  

If you're looking to find who the players are in the market, I'd suggest viewing the docket related to each bankruptcy. For example, if you look at MF Global or Lehman Brothers and you go to the docket and run a CTRL+F for 'Transfer', you will see who's buying.


hunter [at] distressed-debt-investing [dot] com

About Me

I have spent the majority of my career as a value investor. For the past 8 years, I have worked on the buy side as a distressed debt and high yield investor.