This week we welcome a notice of appearance from Sean O’Neal, a Partner in the Restructuring Group in Cleary Gottlieb’s New York office.

PETITION: Sooooo…Sears. You represented ESL Investments Inc. (Eddie Lampert) in the lead up to and during the chapter 11 cases. You now represent Transform Holdco LLC, the successor entity that bought the company in bankruptcy and is operating (and closing) Sears locations today. We understand you’re probably limited in what you can say about this but, looking back, is there anything that could have been done to avoid all of the fighting that’s transpired in the case? Could the case have afforded a few more hours to iron out out the confusion surrounding the APA before seeking approval?

You are correct—I am limited in what I can say given pending disputes.  If people just agreed with us, there would be no disputes. Easy!

PETITION: Cute, Sean, cute.

PETITION: In late 2016, Key Energy Services ($KEG) emerged from bankruptcy with a de-levered balance sheet and quickly relisted on the NYSE. You represented a group of crossover holders in that case. A few days ago, the stock was delisted. The company is in trouble again. Are we setting up for another wave of oilfield services bankruptcies, including chapter 22s? And, if so (and, yes, the question presupposes an answer), WTF?!?

Without addressing Key Energy, we are all seeing increased distress in the oil and gas situations. We are involved in a few. There will be repeat players. Why stop at 22? This is America, a nation of Debtors. Sometimes you just have to keep trying until it works. There’s nothing inherently wrong with using the Bankruptcy Code to do that especially when you have the support of creditors. 

PETITION: You represented Crossmark Holdings Inc. in its out-of-court exchange transaction. Acosta filed its prepackaged case earlier this week, officially becoming the third distressed SMA to end up in a restructuring. What was it about Crossmark that enabled it to remain out of court while the others needed a filing? Is it just a function of a smaller and more concentrated capital structure?

Well, CROSSMARK had amazing lawyers and financial advisers!  But we also had a strong management team committed to preserving value through an out-of-court process. And the lenders and their advisors were smart and patient and gave us time and financing to work it out. Cross holdings between junior and senior lenders also helped, and it was very helpful that we didn’t have widely dispersed bond debt. Ultimately, everyone realized that in this industry, keeping the company out-of-court preserved value—not only allowing the company to keep and win new business but also to avoid the uncertainty and expense of a bankruptcy proceeding. 

PETITION: What are some concerns you’re hearing from clients that not enough people are talking about? What themes do you expect to prevail in 2020? Will it be more of the same, e.g., retail and energy, or will other industries be a notable trouble zone?

Aside from retail and energy, we are seeing increased activity in health care, pharma (not just opioids), real estate work-outs, and after-market auto parts. The short- and long-term impact of tariffs and political disruption across the globe remain to be seen but they could cause a lot of distress. Last year at about this time, we thought the market would turn.  It hasn’t done that just yet, at least more broadly, but things seem to be moving.  

One of the lingering issues that not enough people are talking about in the open is the high costs of bankruptcy. There’s a value transfer going on, where professionals are getting paid as suppliers and other creditors are not. It’s especially harsh in retail but it’s not limited to that sector. Another interesting development is the aggressive use of structures that reward first-moving consortiums of creditors.  Examples include more aggressive uses of rights offering backstop agreements (with related fees and direct investment rights) to generate recoveries as well as the innovative use of make wholes and other goodies in preferred instruments. 

PETITION: What is the best advice that you received that’s helped you in your career? Don’t give us any trite BS: we’re looking for some gems here!

Some of the best advice I’ve received is from one of my mentors, Tom Moloney, who has shown me that you can work hard and practice at the top of the profession, while enjoying life, being human and not losing yourself. And when things get tough as they almost always do, he likes to say, “Don’t worry, they can’t eat you.” 

PETITION: Have you read any books or listened to any podcasts that you think our community of investors, advisors, bankers, and lawyers would find interesting? What’s piquing your curiosity these days? Keep in mind: we have a lot of students who read us too.

Not really. When I read, I am usually trying to avoid work or to take a break from it.  I work long hours and my mind needs a rest. I like graphic novels because I like to draw so I’m re-reading The Watchmen and The Incal. Not the kind of stuff I can work into an oral argument.  I’m in the middle of “The Witches” (Stacy Schiff), a history of the Salem witch trials, which highlights our awful tendency to demonize groups of people through mass disinformation that caters to existing biases. That is a touching way to finish this interview!

PETITION: Thanks Sean.