⚡️"Love Really Hertz Without You" - Billy Ocean⚡️

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When we last discussed Hertz Global Holdings Inc. ($HTZGQ) ten days ago, the Hertz debtors were trying to push forward with approval of their proposed (i) disclosure statement and (ii) break-up fee and expense reimbursement accommodations for their “PE Sponsors,” Centerbridge Partners LP, Warburg Pincus LLC and Dundon Capital Partners LLC. But much like the “pesky kids” in Scooby-Doo, the debtors’ initial plan sponsors, Knighthead Capital Management LLC and Certares Management LLC, just had to — with the help of Apollo Global Management Inc. and active equityholders Glenview Capital Management LLC and Hein Park Capital Management LP — step in and f*ck everything up. At the 11th hour — on April 15, 2021, the night before a hearing to consider the above-noted relief — they came forward with an alternative proposal that threw the Hertz debtors’ plans for that hearing way off the tracks. And they found a sympathetic ear.

Judge Walrath was willing to play ball. Though she never heard the details of the new proposal (in fact specifically advising all parties not to delve into them), she agreed to kick the hearing — despite opposition from the Hertz debtors’ counsel — to April 21, 2021, to allow the Hertz debtors an earnest opportunity to weigh the two proposals against one another and ascertain whether the relief requested made sense under the new circumstances.

This, ladies and gentlemen, is the funny thing about bankruptcy. There are federal rules of bankruptcy; there are local rules of bankruptcy; there are judicial guidelines; there are Office of the United States Trustee guidelines; there are case procedures orders, etc. The process is chock full of rules and procedures. Sh*t. Putting aside that old federalism thing, the highest and best use case for a “local counsel” is simply having a safeguard against tripping up local jurisdictional rules. In other words, people make a lot of money just dancing around all these frikken rules.

And, yet, despite all of that — ALL … OF … THAT — if someone marches into a bankruptcy court with a massive trunk overflowing with green paper that’s backed by the full faith and credit of the United States of America, well, sh*t, all of those rules and procedures will fly out the window quicker than you can say “capitalism!” Ultimately, a debtor has an obligation — a fiduciary duty — to maximize value for the estate. Period.

And so that’s what the Hertz debtors did. In those five days, the Knighthead-Initial-Plan-Sponsor group further revised their proposal, compelling the boards of the Hertz debtors to conclude that they were for real. Indeed, they initially concluded, in furtherance of their requisite fiduciary duties, that the new proposal, maaaaaay very well constitute a superior offer.

🤑An "Active Auction" Breaks Out for Hertz🤑

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Early Friday morning, The Wall Street Journal broke news* that the sponsors of Hertz Global Holdings Inc.’s ($HTZGQ) initial plan of reorganization — Knighthead Capital Management LLC and Certares Management LLC — had re-emerged with a fresh proposal for the company that would value the company at $6.2b, creating a dramatic delta between their valuation and the $5.3b valuation upon which the Hertz debtors had predicated their previous agreement with selected plan sponsors, Centerbridge Partners LP, Warburg Pincus LLC and Dundon Capital Partners LLC (the “PE Sponsors”). Adding credence to the proposal was the fact that it was backed by $2.5b in preferred equity financing from Apollo Global Management Inc. and joined by the ad hoc committee of equityholders led by Glenview Capital Management LLC and Hein Park Capital Management LP.

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⚡️Newsflash: PG&E Corporation⚡️

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You got cute. You invested in the equity. Now you may be up sh*t’s creek.

With each passing day and each damaged structure, a growing administrative expense claim is squeezing any hope of equity value and potentially threatening the backstop commitments received back in…wait…carry the one…FRIKKEN SEPTEMBER. We’re old enough to remember reading this somewhere:

Interestingly, Abrams & Knighthead have conditioned their support on, among other things, two key components: (1) a “wildfire claims cap” of $17.9mm and (2) no “occurrence of one or more wildfires in the Debtors’ service territory after the Petition Date and prior to January 1, 2020 that is asserted by any person to arise out of the Debtors’ activities and that destroys or damages more than 500 Structures.” Will global warming blow up this deal? Note: the Thomas Fire ripped through Ventura and Santa Barbara counties in December 2017, wrecking 281k acres, 1063 structures, and killing 23 people. 

Oh right. That was us: we wrote that. We really wish that hadn’t aged so well.

What to Make of the Credit Cycle (Part 4)

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We’ve spent a considerable amount of space discussing what to make of the credit cycle. Our intent is to give professionals a well-rounded view of what to expect now that we’re in year 8/9 of a bull market. You can read Parts one (Members’ only), two, and three (Members’ only), respectively.

Interestingly, certain investors have become impatient and apparently thrown in the towel. Is late 2019 or early 2020 too far afield to continue pretending to deploy a distressed investing strategy? Or are LPs anxious and pulling funds from underperforming or underinvested hedge funds? Is the opportunity set too small - crap retail and specialized oil and gas - for players to be active? Are asset values too high? Are high yield bonds priced too high? All valid questions (feel free to write in and let us know what we’re missing: petition@petition11.com).

In any event, The Wall Street Journal highlights:

A number of distressed-debt hedge funds are abandoning traditional loan-to-own strategies after years of low interest rates resulted in meager returns for investors. Some are even investing in equities.

PETITION Note: funny, last we checked an index fund doesn’t charge 2 and 20.

The WSJ continues,

BlueMountain Capital Management LLC and Arrowgrass Capital Partners LLP are some of the bigger funds that have shifted away from this niche-investing strategy. And lots of smaller funds have closed shop.

A number of smaller distressed-debt investors have closed down, including Panning Capital Management, Reef Road Capital and Hutchin Hill Capital.

PETITION Note: the WSJ failed to include TCW Group’s distressed asset fund. What? Too soon?

We should note, however, that there are several other platforms that are raising (or have raised) money for new distressed and/or special situations, e.g., GSO and Knighthead Capital Management.

Still is the WSJ-reported capitulation a leading indicator of increased distressed activity to come? Owl Creek Asset Management LP seems to think so. The WSJ writes,

Owl Creek founder Jeffrey Altman, however, believes that if funds are shutting down and moving away from classic loan-to-own strategies then a big wave of restructuring is around the corner. “If anything, value players leaving credit makes me feel more confident that the extended run-up credit markets have been enjoying may finally be ending,” Mr. Altman said.

One’s loss is another’s opportunity.

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Speaking of leading indicators(?) and opportunity, clearly there are some entrepreneurial (or masochistic?) investors who are prepping for increased distressed activity. In December, The Carlyle Group ($CG), via its Carlyle Strategic Partners IV L.P. fund, announced a strategic investment in Prime Clerk LLC, a claims and noticing administrator based in New York (more on Prime Clerk below). Terms were not disclosed — though sources tell us that the terms were rich. Paul Weiss Rifkind & Wharton LLP served as legal counsel and Centerview Partners as the investment banker on the transaction.

On April 19th, Omni Management Group announced that existing management had teamed up with Marc Beillinson and affiliates of the Beilinson Advisory Group (Mark Murphy and Rick Kapko) to purchase Omni Management Group from Rust Consulting. Terms were not disclosed here either. We can’t imagine the terms here were as robust as those above given the market share differential.

The point is: some opportunistic folk sure seem to think that there’s another cycle coming. And they’re putting their money where their mouth is, thinking that there will be money to be made in the (seemingly saturated) case administration business. Time will tell.