Everyone Loses in This Hedge Fund's Game of Chicken

(Bloomberg Opinion) -- When no one swerves in a game of chicken, everyone gets hurt.

Small investors in Britain will have U.S. hedge funds in their sights after Coltrane Asset Management LP torpedoed a restructuring plan agreed between Interserve Plc and the debt-laden government contractor’s lenders on Friday. A failed attempt to extract more than the paltry equity stake on offer to existing shareholders has left them all with nothing whatsoever.

The restructuring would have given 95 percent of the company to its creditors in return for the cancelation of 485 million pounds ($643 million) of debt and reorganization another 350 million pounds of borrowings. Coltrane, which owned 26 percent of Interserve’s shares, thought that the 5 percent stake the company’s current owners would be left with was too mean – and threatened to oppose the plan at the required shareholder vote.

Neither side blinked. Interserve reckoned it could survive a head-on impact with Coltrane and was making preparations for an orderly insolvency in case the proposal didn’t pass.

Coltrane and one other fund followed through with their threat. Interserve’s register is otherwise dominated by retail investors, so a low turnout meant the refuseniks carried the day. The stock has been suspended; administration looms.

This isn’t the best way to preserve value, the overriding goal of any restructuring. The company’s lenders will take ownership of Interserve’s business. There is an immediate cost in terms of fees, and the process could deter customers. These downsides are probably manageable and, for creditors, full ownership will provide some mitigation. Moreover, the government, a key customer, has nothing to gain from undermining the company for the benefit of its competitors.

The attempt to disrupt the restructuring was always a long shot. The government contractor needed a speedy solution to avoid a collapse like the one rival Carillion Plc suffered a year ago.

Coltrane did manage to extract a sweetener – the first proposal left shareholders with just 2.5 percent. By convention, existing investors rarely get more than a low single-digit percentage of the equity in restructurings, more often than not to preserve the company’s listing.

It’s hard to see why lenders would have gone along with Coltrane’s rival plan. True, the hedge fund would have put in 110 million pounds and so the value of Interserve's equity after the restructuring would have been greater. The creditors would also have cancelled a little less debt. But the problem was that they would also have got a much smaller stake in the company - 55 percent. The total value of the package was, for them, plainly lower.

At some point, the creditors will want to find buyers for Interserve’s assets. That could be an opportunity for rivals like Serco Group Plc and Capita Plc. Assuming the company is stabilized and customers stand by it, a recovery is plausible. Sadly, existing shareholders won’t get any of that now. When no one swerves in chicken, some casualties suffer more than others.

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

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