Intro: 00:02
Nalu FM Finance podcast. Insights into the financial markets.
Andrew Glantz: 00:10 When that future recovery is unknown, when the timeline to that future recovery is unknown and when many of the risks involved in getting there are unknown. That creates you know opportunities for value creation.
Advertisement: 00:24 This podcast is powered by Vestr, the engine behind Active Management. Vestr is a Switzerland-based fintech startup that provides software for issuers of actively managed certificates to automate their value chain fully. Visit Vesta, V-E-S-T-R dot com to schedule a meeting with an expert and to learn more about Vestr.
Stefan Wagner: 00:46 I'm here with Andrew Glantz, Chief Strategy Officer of Xclaim. Thank you, Andrew, for joining me. I'm very excited to speak to you today, particularly as we're going to talk about something that I consider an alternative investment. But maybe let's start with what actually is Xclaim and what inspired the founding of Xclaim.
Andrew Glantz: 01:06 Great to be here and I'm glad that we have this opportunity. Thank you very much for having me on. X. claim is a platform- and a brokerage for trading. In bankruptcy claims and other distressed debt. We operate- the first largest bankruptcy claims trading marketplace- in the United States and globally. We have both a marketplace which allows buyers and sellers to. find each other and transact very seamlessly without significant input from lawyers or other third parties- where the transaction costs- may not support a trade.
And also- we have a brokerage desk that sits on top of that. allows us to do highly bespoke and very complex deals for much larger creditors- the marketplace and brokerage was founded in order to transform an industry that has been. Largely opaque and- somewhat asymmetric for the fifty plus years that- it's been active since the enactment of the bankruptcy code in the United States in the seventies- and claims trading has been around for centuries so this is this is sort of the- next generation for this new asset class. class.
Stefan Wagner: 02:19 Now you said you're one of the largest ones, but also how large overall is actually the market of bankruptcy claims?
Andrew Glantz: 02:27 Sure, so in the US market, which the US market is important because when we talk about claims trading, we're generally talking about claims against companies that are in an insolvency proceeding or in a bankruptcy in the United States, which would be a chapter 11 or chapter 7 bankruptcy. So the market does evolve based on what companies are in bankruptcy, the extent of the claims, and the extent of the buyers. But in a robust year, you might see $40 to $50 billion worth of claims trade in Chapter 11 cases in the United States.
Stefan Wagner: 03:04 And you mentioned that you basically try to build a centralized marketplace. What challenges did you sort of had to face aggregating all that in the US?
Andrew Glantz: 03:15 The biggest challenge, I think, in the United States or globally for holders of these claims is education. Most of them find themselves in a bankruptcy situation where they weren't exactly expecting the debtor to file. They weren't expecting the person or company that owes them money to pull the trigger, end up in a court-approved process and all of a sudden they find themselves holding a claim, they're owed $100,000, $3 million, $50 million from some contract or other service or other relationship that they have, maybe it's a litigation claim against this entity in bankruptcy, and all of a sudden they've got to figure out, how am I going to get paid?
What am I going to get out of this case? What do I need to do to preserve my rights? What actions can I take now? And how long might it take? But at that point in time, at the beginning of a case, most of these people or companies, they don't even know that there's a solution out there to get liquidity. And that's the biggest challenge. It's just education.
Stefan Wagner: 04:23 Yeah. On one hand, there's the people never knew they could actually sell their claim and don't have to wait until it finally settles for whatever 20 or 30 cents on the dollar. And on the other hand, obviously, if the people are willing to buy these claims and see it as a potential investment, maybe we'll go into that, how best to approach bankruptcy investment, you know, what are some of the benefits for investors? I mean, I consider them quite uncorrelated besides maybe in the macro sense on the interest rate side, but otherwise, move with commodity prices equity prices.
Andrew Glantz: 04:56 Yeah that's a primary. Appeal of claims trading for the investor- this is an asset that. Tends to be quite pulled away from the you know S. P. five hundred or the bond markets- this is going to be characterized by various types of risk which we can get into- but the appeal of bankruptcy claim is. You're stepping into an asset that by default you're buying at a discount. The seller is going to sell it to you at a price that represents the theoretical risk-adjusted present value of an expected future recovery.
And when that future recovery is unknown, when the timeline to that future recovery is unknown, and when many of the risks involved in getting there are unknown, that creates a wide spread in potential viewpoints as to what that thing is actually worth, what that intangible right to recovery is worth, which leads to opportunities for value creation.
Stefan Wagner: 05:57 I would say some of the unknowns can be quantified, as I said, but particularly if you spend more research on it, if you're willing to put the effort into it.
Andrew Glantz: 06:08 parties that invest in these claims. It's quite right wide ranging you have the large asset managers that have their own distressed desks that invest in these types of assets. You have- large investment banks that have proprietary trading operations that by claims. You have specialty claim investors, you have hedge funds you have- family offices and high net worth individuals. And depending on how long you've been in the market and you've been in these processes you start to get a sense for. What is the cost of the lawyers going to be if this case runs for X number of years? Or here are the legal issues present in the case. Do I think this is going to be a six-month timeline or an 18-month timeline or a five-year timeline?
Stefan Wagner: 06:48 What is sort of the expected length on these trades usually when investors are willing to get involved?
Andrew Glantz: 06:54 There's obviously a long tail, but the average bankruptcy takes something around two and a half years to resolve itself. So from commencement to actual payment. So that's a long time to wait, particularly if the creditor themself needs the cash. That obviously varies depending on the complexity of the case, whether there's an agreement in place among creditors at the time of filing or not. These are all factors that will impact recoveries. Okay.
Stefan Wagner: 07:24 What are some of the risks that you should consider when looking at bankruptcy claims as an investment?
Andrew Glantz: 07:31 I like to think of this as sort of the four Cs. So you have case risk, claim risk, counterparty risk, and company risk. So we can talk about each of these. So case risk, we've just talked about this, right? So what is the recovery going to be at the end of the day? If I'm owed $100,000, How long is it going to take and what am I going to get? Am I getting 20 sets, 30 sets, 40 sets? That's really just a question of what are the assets, what are the liabilities, and how long and how difficult is it going to be to monetize whatever illiquid assets are in the estate, whether it's real estate or intellectual property or other rights.
And then it also is impacted by whether there are disputes between creditor groups. I may have one type of interest, another creditor group may have another type of interest, and there may be intra-creditor fighting over how the waterfall will actually work in the bankruptcy. That's going to impact the case risk. And then the primary consideration becomes cost of capital, which is, what's my, as a creditor, if I own the claim, what's my cost of capital of sitting there and waiting to get a recovery versus the buyers? So that's case risk.
Claim risk is really about, you know, I'm asserting my claim. I'm saying I'm owed $100,000. I'm saying I'm owed $2.5 million, right? Am I right? Am I going to get the claim recognized by the debtor in that amount? Or does the debtor have a different view? Can I substantiate the claim itself? Is it based on receipts of invoices? Is it based on a litigation claim where I have a judgment from a court? Or is it not a liquidated claim yet? So there are often disputes between the debtor and the creditor over how much the claim is actually going to be allowed for. Again, that's not what you're going to recover. That's just the notional amount of the claim you know, that you're using to then calculate the recovery. So that's another sort of second part of risk.
And there can be significant litigation costs in getting to that allowed amount with the court. And sometimes that becomes really the nature of the bet. So you've got case risk, you've got claim risk, then you've got counterparty risk. So if I am the buyer and I'm purchasing a claim from you, and, you know, in most cases, I purchased the claim. After I pay you some sort of consideration for that claim, I'm going to file a notice with the court, and I'm going to tell the court, I've just purchased the claim from Stefan. Now you got to pay me. I'm the buyer. I bought the claim. You got to pay me. Here's my address. Here's my bank account. 99% of the time, I'm going to get paid. But there's that 1% of the time where the debtor makes a mistake, or the notice doesn't get docketed in time, and you end up getting the payment instead of me.
And this is one of the things that we want to fix. And then I have to hand it over to you. And you've got to hand it over to me. Now, this is one of the things that we can fix as we continue to improve the technology behind trading and make the marketplace more efficient. But a fact of trading today and fact of trading for the last, you know, 40, 50 years has been that you have to consider the risk that if Stefan gets the payment instead of Andrew, well, I've got to come and chase you. Yeah. So are you a large corporation based in, you know, same jurisdiction where the court is where I can easily go and attach your assets if I need to get the money back.
Or are you an individual in some far flung jurisdiction who has no plans of coming to the United States and if they get the payment well good luck going and getting it so that's going to impact you know some of the sort of buyers confidence about the trade as well. And then occasionally you have a situation where the actual transaction. Historically, the basic transaction is simply, I'm paying you cash today at a discount, and I get the rest of the claim. And there's other arrangements that we negotiate all the time, which could be, I'm paying you some cash today, and then depending on the extent to which your claim is allowed or the size of the recovery, I'm going to pay you some cash tomorrow.
And if so, you have a whole back structure like that, then it goes the other way around. And the seller of the claim starts saying, well, what's the counterparty risk of my buyer? Are they some individual somewhere? Or is this an established hedge fund that's going to treat me right if and when I'm owed more money at the end of the day? So that's your counterparty risk. And then the last one that I think about is you can call company risk, you can call it cyclical risk, call it macroeconomic risk.
This is the risk that the actual underlying factors that dictate what the asset prices of the company are, and what the value of those assets are, may be fluctuating. know who are the individuals that are going to be leading this company during the bankruptcy coming out of the bankruptcy what happens with the largest customers of that company are they going to go away during the bankruptcy are they going to stick out and wait for the other side and continue to keep the value in the estate so. These are all sort of you know market cycle kind of questions that impact at a higher level than let's say you know the case risk what that in end of day recovery might be.
Stefan Wagner: 12:42 Now, in our prequel, when we chatted first, we talked about that X claim particularly had been involved quite a bit with cryptocurrency bankruptcy claims. Maybe you can a little bit apply what you just said to one of probably the most notable case everybody with FTX, basically. Sure, absolutely.
Andrew Glantz: 12:58 So, you know, in terms of the risk that we just talked about, the case risk of these crypto bankruptcies, and let's focus on FTX, was really around what's even there to monetize and distribute. So at the beginning of the case, the professionals that came in to manage the company didn't even know what assets existed. It took them months before they were actually able to prepare basic, basic disclosures that you see in most bankruptcy cases on day one. and provide that to the general public to say, this is actually what's in the box here that we might be able to use to monetize.
And those assets contain everything from crypto tokens, they include cash, stable coins, ownership of various businesses. Investments in venture capital positions, real estate. That's the last C that you mentioned basically. That's right. So this is all sort of, I think about this again as case risk of sort of what is the, what are you going to recover at the end of the day? And so the first question is, what are the assets? What are the liabilities? And you know from a buyer's perspective coming in and saying I'm bidding on these assets. Nobody even knew at the beginning how many customers there were- what's the total number of customer claims right how many billions of dollars are owed- you also had complexity of- you had the Alameda which is the trading unit.
And then you had FTX there was a question about well you know what funds had moved from one to the other- Do customers actually have the right to their assets or are they just going to have an unsecured claim? So if I have a claim to, if my account was full of Bitcoin and your account was full of dollars, increases does my claim go up or does my claim. Goes go up and down just like yours and so the bankruptcy code says it everything's fixed as of the petition date but- there were a lot of legal questions that created. A fair bit of uncertainty and now and this is all sort of. Part of the case risk as well.
And then there was the big question about what are the assets and can they satisfy the liabilities now. As the case went on, we saw that more and more of these assets were uncovered and located. We saw that the debtors were able to identify that they were sitting on some pretty amazing investments, investments that had exposure to SpaceX, which is one of the largest. You know A. I. chat- platforms it's out there with Claude- and they had a substantial investment in Solana. Which has just you know increased- you know tremendously- over the period from November eleven twenty twenty two all the way through to today. So those assets alone had a huge impact in delivering outsized returns relative to expectations at the beginning of the case.
Stefan Wagner: 15:48 I think originally the FTX claim, I think I saw it somewhere, maybe it was in one of your historical pricing, went originally from 10 times, 10 fold up over the time from November till today. Yeah.
Andrew Glantz: 16:01 We have buyers that purchase claims through us in the single digits back in January of 2023. those claims are now trading- a hundred and thirty four cents on the dollar hundred thirty five cents on the dollar so we see. A pretty unbelievable return profile and you know that's due you really don't see that too often in bankruptcy cases- you know there's there's other examples where you have a commodity driven case so you know oil and gas reserves for example where oil prices are going up and down and that's you know. completely changing whether one class of creditors is what we call in the money, they're going to recover something or out of the money, meaning they're getting nothing. And so that's just been a huge dynamic of this case.
Stefan Wagner: 16:47 Maybe one question as well on FTX particularly, because you said, you know, nobody knew what assets were there and where are they if they were there. Is it more difficult to track crypto versus, let's say, a ship or a house?
Andrew Glantz: 17:03 If we think about it at a very high level, all crypto transactions are going to be on a public blockchain. So that's something that anyone can look at, review, can validate. So from that perspective, crypto is certainly easier to track as an official record. The challenge of crypto is oftentimes anonymity. It's sometimes much harder to figure out whose crypto is moving and who did it move from and who did it move to. And when you have when you deal with the situation where the professionals bring being brought in to manage these cases have no experience in crypto. Yeah that creates its own complexities of maybe it's. Maybe it's on the record, but now I gotta go hire some expert to tell me how to trace this stuff, I'm a fish out of water.
So there was a little bit of that in the beginning of these cases. Others, you mentioned the ship, there's famous examples of hedge funds going and seizing ships that were maybe collateral or assets owned by various countries to satisfy sovereign debt. There are shit manifests and there's a lot more legwork required to physically go around and find some of these physical assets to then go and seize them. That's just a different kind of work, but they're equally difficult sometimes to go and track down crypto assets if they've been put through mixers and other ways to obfuscate the actual direction where they've been.
Stefan Wagner: 18:28 And going forward, where do you sort of think is bankruptcy claims? Where's this business going, particularly with a view how you want to position X claim?
Andrew Glantz: 18:37 Great question. Crypto bankruptcies and crypto bankruptcy claims has created this amazing opportunity for the bankruptcy claims trading industry because we improved our business and sharpened our tools such that we can serve creditors in non-crypto cases more efficiently today than we could two and a half years ago. entire market has evolved I would say probably fast forwarded about a decade in terms of how we think about claims trading from a technology perspective the documentation perspective.
On negotiating dynamic we're seeing that already as our involvement has really increased not only you know across other bankruptcy cases but but. we've been able to expand our influence not only among small, tiny claims that may not have traded at all before, but now we're also competing head to head with the larger Wall Street firms on trading of $50 million plus, $60 million plus, $100 million plus claims, because those claims also see the value of coming through a platform like ours, where we have transparent pricing, where we have the most buyers, where we have internal knowledge about how the trading works. And so that's been a huge dynamic. where the whole market has shifted in favor of creditors, where you now have more creditor empowerment.
Stefan Wagner: 19:54 Now, maybe some personal questions for you. Thank you, Andrew, for the insight here. So what actually drives you? I mean, you sound very passionate about what you're doing here, but maybe also you can tell us something about yourself that most people don't know.
Andrew Glantz: 20:11 So my background prior to coming to XCLAIM, I was a management consultant for a number of years. I worked in sustainable energy for a number of years. I trained as a bankruptcy attorney, and I practiced bankruptcy law for about eight years at two different global law firms, and also on a distressed desk at a large asset manager. So one of the things that really gets me gets me going is the ability to bring together all these disparate parts of my career and my different experiences to help solve problems so really marrying the business and the legal background to do we do explain both in terms of growing the business. but also helping our buyers and sellers think really strategically about crafting creative deals and structuring.
And so that's just been, that's something that really excites me. And my role at xClaim has been great because as the chief strategy officer, I have the ability to influence trading, marketing, business development, product development, overall strategic direction for the firm. And so you've been able to kind of have my hands in a bit of everything. I like it. Next question is, what is your definition of success? I think my definition of success is only doing the things that you want to be doing.
And I joke around with my wife that I'm already semi-retired because even though I'm pretty young, most days I wake up in the morning and I'm just focused on the things that I find interesting and that I find exciting and that give me the opportunity to help other people, whether it's our buyers or our sellers. For me, that's just, it's mostly enjoyment. Every job has its pain points, but I consider success to be exactly that.
Stefan Wagner: 21:50 Last question personally about you. What is on the top of your current music playlist?
Andrew Glantz: 21:55 Lately, I've been listening to a lot of Busty and the Bass, which is a group out of Canada that I just saw recently in Brooklyn with a very close childhood friend of mine. So that's been one. It's one of these genre-less groups that plays with funk and jazz and hip hop and kind of brings everything together. So that's on my repeat playlist lately.
Stefan Wagner: 22:17 Now, if anybody liked what they heard and they would like to find out a bit more or get in contact with you, what is the best way to reach you?
Andrew Glantz: 22:24 Well, you can certainly explore xClaims' website, where we list trading prices, active trading prices of markets, where you can really easily, whether you're a high net worth individual or a family office, you can really easily register to trade claims with the click of a button. It's a very, very simple process, and that's at www.x-claim.com. If you have a claim, you can certainly come and check us out there as well. For me personally, you can find me on LinkedIn, Andrew Glantz, and you can also just contact me directly at my Exclaim email, which is andrewx-claim.com.
Stefan Wagner: 22:59 Fantastic. Thank you, Andrew. Much appreciated.
Andrew Glantz: 23:03 Thanks so much. It's been a pleasure to be on.
Outro: 23:06 Nalu FM Finance Podcast. Insights into the financial markets.
Advertisement: 23:19 This podcast is powered by Vestr, the engine behind Active Management. Vestr is a Switzerland-based fintech startup that provides software for issuers of actively managed certificates to automate their value chain fully. Visit Vestr, V-E-S-T-R dot com to schedule a meeting with an expert and to learn more about Vestr.
