The Puzzle of Ex Post Asset Partitions

Abstract

This paper will look at the recent bankruptcy trend of ex post asset partitioning. There are various new legal maneuvers by which firms transfer assets and liabilities from one legal entity to another within their economic firm. The traditional story is that firms do this ex ante in order to reduce monitoring costs by separating assets to which certain credits will look for recovery in the event of default. But the last few years have seen an increase in "ex post" asset partitions. For example, on the eve of bankruptcy some firms have engaged in liability management techniques such as the "drop down," "uptier," or "double dip." The transactions have the effect of separating assets from liabilities. Perhaps most notorious (and most clean) separation is the "Texas-Two Step," where a new entity is created to assume liabilities without assets and then immediately files for bankruptcy. While these transactions have been looked upon with great suspicion, there are value enhancing reasons for some of them, which become apparent when the details of the transaction are examined. This paper presents a framework for assessing and evaluating the costs and benefits of such partitions.