This week we welcome a notice of appearance from Damian Schaible, co-head of the Restructuring Group at Davis Polk & Wardwell LLP. Typically we ask our participants between four and six questions but we were particularly interested in Damian’s views on two critical topics:

PETITION: What are some themes in distressed/restructuring that deserve intensified focus in 2020?

The importance of being “at the table.” As a wise man once said, when there is no yield in the market, investors eat each other.  In the past couple of years, non-pro rata transactions have become more and more frequent in restructurings. RSAs, rights offerings, DIPs, exit financings, preferred stock raises, private exchanges, open market repurchases, layering transactions, direct investments, the list goes on and on, and both the technology and the terms have continued to develop over the past few years. There are examples, of course, of courts and/or minority holders pushing back successfully, but the trend line has largely been in one direction, and the loose documents put in place over the past five years permit and encourage the transactions. Of course, the key to making sure you are “at the table” is size – a real premium is being put on larger check sizes and more sophisticated, early organization among holders.

And early organization among holders is increasingly required, as the sponsor community more broadly gets more and more comfortable taking aggressive reads and actions under their portfolio company debt documents. Historically, there was a belief that only a few sponsors would be willing to make the really aggressive moves to buy runway and get cheaper deleveraging, but that is changing.  Lenders are now increasingly forced to not only underwrite a business and a collateral package but also whether that business and/or collateral package would still be there in a restructuring scenario. So you might say that while investors may be eating each other, sponsors are eating their lenders….? 

PETITION: What else?

CLOs playing an increasingly important role in restructurings. CLOs raised and deployed never-before-seen amounts of capital in recent years; and because the CLOs are no longer just selling early, as debt comes under pressure, terms of restructurings are being molded by the fund requirements of many CLOs. Equitizing is not always the preferred option, and there is more and more pushback on rights offerings and other equity raises. Governance is also getting more complicated. However, significant risk remains for CLOs that end up in restructurings driven by larger hedge fund holders: disfavored transactions and capital raises can lead to real value destruction for, and forced selling by, CLO holders. And while CLOs are sticking with troubled names longer, they still have fund limitations that may well start to kick in en masse in 2020.  As CLOs push up against their basket capacity for B3/CCC-rated debt, they will start trapping cash, cutting distributions and be forced to start selling. Given the huge numbers of distressed issues dominated by CLO holders, forced selling could potentially cause real volatility in the market with little warning.

PETITION: We noted this theme in an October Members’-only deep dive entitled,💥CLO NO!?!?💥, with a short follow-up in “😬We Have Our Answer😬.” We’re 100% sure that CLO dynamics will continue to be a huge factor in restructurings going forward.

PETITION: Anyway, is that all Damian? Sheesh: have some thoughts on something, will you?? Any other topics?

Increasingly complicated post-reorg governance. Given the trends above, and the bloodbath that has been post-reorg equity over the past couple of years, governance negotiations have become increasingly complicated and at times adversarial. Minority holders seek information rights, liquidity and general protection from larger holders. Larger holders generally seek the opposite in order to limit post-reorg volatility as smaller holders buy and sell. Also, more frequent voting constructs to address regulatory and foreign holder issues skew governance and require twists and turns and heavy negotiation. When you put all of this together, it makes corporate lawyers’ heads spin!

PETITION: Thanks for that. Now, more critically: you’re always good for some crazy holiday gift recommendations. What are your top picks this year?

As you might expect from a guy who has spent most of the last five years representing creditors in oil & gas and coal restructurings, I am a big fan of electric vehicles.  I drive an electric car, and I have a fleet of electric scooters and go karts, you know, for my kids….

The Razor Crazy Cart XL – super fun, skidding and sliding go kart. One key design flaw makes it even more adventurous – believe it or not, there are no brakes….

Segway Ninebot Go Kart – my personal favorite, it’s fast, it handles very well and it runs forever on a charge.

Ninebot Kickscooter Max – new this year, this thing is really fast, very maneuverable and a lot of fun.

And to mix it up for those who don’t live in the suburbs with copious garage space, I love this smoking box for cocktails.  Adds a terrific smoky flavor to bourbon cocktails and also adds an air of sophistication for otherwise low brow restructuring professionals…. 

PETITION: Ha. And low brow newsletter authors!! Cheers!