This week we welcome Alexa Kranzley, Special Counsel at Sullivan & Cromwell LLP. Alexa worked on some of the highest profile chapter 11 restructurings in ‘20 and ‘21 and so we’re excited to dive into those situations, tap into her first-hand knowledge of the deal dynamics involved, and learn a thing or two. We hope you enjoy her insights.

PETITION: Welcome and happy new year. Thanks for doing this. We’d like to ask about a matter that we embarrassingly ignored over the course of its development: Garrett Motion Inc. We almost don’t even know where to start, frankly, so we’ll start at the beginning. Was the thinking that the bankruptcy could be an efficient way to get that Honeywell Inc. ($HON) Indemnity Agreement albatross off the company’s back? Was there the expectation, in the early stages, that there’d be so much interest in the assets?

Alexa: Thanks for having me.  Hope the new year is off to a good start.

I’m glad we are starting with Garrett Motion.  We at S&C were starting to think that we had offended you or that Garrett Motion wasn’t meme worthy enough.

Garrett Motion was about more than just Honeywell.  It really was the classic story of a good company saddled with an extensive capital structure.  As a first tier auto supplier, it needed to make substantial investments to keep up with industry electrification.  But it was too highly leveraged in its spin-off to raise capital.  It had both the albatross of the Honeywell Indemnity Agreement – $5 billion over 30 years – as well as excessive funded debt. 

Prior to the chapter 11 filing in September 2020, we actually had been working with the company  for over a year looking at different M&A and capital markets options.  But investors and deal partners could not get their mind around the capital structure and declined to transact unless we could clean up the capital structure in chapter 11. 

Garrett Motion was an interesting case for many reasons, but perhaps the most unusual fact about the case was that the company drove timing – not short-term debt maturities or liquidity needs.  The company still had “runway” as a financing matter, but concluded that it needed to be proactive if it was going to preserve equity value.  In this respect, Garrett Motion was a rare example of a truly solvent debtor – not a debtor that started the case in crisis and became solvent during the case, but a debtor that started and ended the case solvent and in control of its destiny. 

As for the assets, absolutely!  We expected that there would be a lot of interest in the company’s assets including from strategic third parties and parties in the existing capital structure.  The company always viewed chapter 11 as a way to have a competitive M&A process (free of undue influence by Honeywell) and to find the highest bidder among what we knew was going to be a number of very interested suitors. 

PETITION: Let’s hit on the sale. It looks like there was a robust sale process. KPS served as the stalking horse after the debtors got them to up their original $2.1b proposed price to $2.765b and then $2.9b. Some shareholders proposed a bid around $2.75b. And then there was the private equity + Honeywell group, which included Centerbridge Partners and Oaktree Capital Management. Their bid topped $3b TEV and the overall offer settled Honeywell’s beef. Tell us about how this all unfolded, what role you, as counsel played while the parties ping-ponged, and ultimately what the overall benefit was to the company. Seems to us that the bankruptcy process really worked here: the debtors got a much better than anticipated deal, Honeywell effectively ‘credit bid’ and got taken care of rather than getting completely screwed, and shareholders even got a rare recovery. What are we missing?

Alexa: The robust sale process was key.   

We knew that KPS had dry powder to increase their purchase price and that other third parties were very interested in the assets when we filed.  Shareholder groups started to form after we filed, and in our discussions with them, we solicited their interest in standalone plan alternatives.  One of these groups was the Centerbridge and Oaktree led private equity group.  Rather than working with the company, they worked together with Honeywell and sent the company what was effectively a public bear hug letter!  So we did what a public company outside of chapter 11 would do in that circumstance:  drummed up other bids, kept the auction going and tried to increase the price. 

One of the most exciting parts of the case was the initial bidding procedures hearing.  To maintain competitiveness and keep KPS as our stalking horse, we needed Court approval of KPS’s breakup fee and our bidding procedures.  The Centerbridge, Oaktree, Honeywell consortium objected strongly, which led to a hotly contested trial at the outset of the chapter 11 cases (they objected so strongly that they even tried to terminate our exclusivity!).  We were faced with four other heavy-hitting bankruptcy litigation firms teaming up against us and seeking to kill the entire auction so that the company would be forced to hand the business over to them as stakeholders.  After several weeks of discovery, depositions, hearings and board meetings, we won!  Judge Wiles granted the break fee and our bidding procedures. 

Morgan Stanley and Perella ran a six week auction that spanned through the 2020 holidays with three bidders and multiple rounds of bids.  The enterprise value increased from $2.1B to $3B+, more than justifying the break-up fee.   A great result all around – the company and board accomplishing their goals of fixing the capital structure while maintaining the business, creditors were paid in full, and shareholders had the option to exit and cash out or continue to stay in and further invest.  Today the company, with a new capital structure and no Honeywell Indemnity, appears to be doing great. 

PETITION: Turning to LSC Communications Inc. You represented the old school print and digital media solutions provider in its chapter 11 bankruptcy. This one is right in our wheelhouse because it exemplifies disruption: the company filed, in part, because of an unprecedented drop in demand for print magazines and catalogs which, in turn, rendered the capital structure untenable. In bankruptcy, a private equity firm with other paper/packaging assets acquired the company in what looks like a push towards much needed industry consolidation. With several sale cases under your belt, you ready to become a banker, lol? On a serious note, though, tell us about how this all came together. What was one thing that surprised you about this process?

Alexa: Old school is right. Like Garrett Motion, LSC Communications was in a changing industry.  But industrial disruption was having a much more severe effect on LSC. The liquidation of large business lines was not out of the question. So the company’s focus was on jobs, not capital structure. Management already had been downsizing successfully for years ahead of the filing. By the time of the chapter 11, the company gave the advisory team a goal:  preserve as many of the remaining 21,000 jobs as possible. So we designed a case strategy around that objective.

Personally, a case like this can be really rewarding — where our job is to preserve the business and protect the livelihoods of individuals, to the extent we can and still be fair to creditors.  Luckily, we were fortunate to find a solution that worked for the creditors that preserved the vast majority of the jobs at risk.

As far as what I found surprising, what I remember most is the stark contrast between LSC and another major commitment we had at the time:  preparing and negotiating the California Resources Corporation restructuring. CRC was a pre-arranged chapter 11, with a stark difference between the treatment from lenders and vendors. In CRC, we had competing DIP financing offers, while we barely eked out a minimal DIP for LSC. And in CRC the financial creditors wanted the keys FAST. So we were able to use our control of the timetable to get CRC general unsecured creditors fully paid, even when financial creditors took a big haircut. LSC came out the other way, with financial creditors laser focused on every nickel and ready to spend the time necessary for deep impairment of the general unsecured creditors. After some early litigation skirmishes in LSC, we managed to find a way to obtain the support of the creditors’ committee and facilitate settlements of litigation claims that maximized value for general unsecured creditors too.  

PETITION: Given all of the recent drama, we’d be remiss if we didn’t ask you about White Star Petroleum, a case that was transferred from Delaware to Oklahoma back in 2019. What is your take on all of the recent fuss (including from us) about venue shenanigans and what, if anything, do you think should be done to address the issue? We’ll note to our readers that there are some S&C views on record.

Alexa: Talk about drama. We were ready to file White Star on Friday in Delaware before Memorial Day. The company (in particular the very thoughtful CEO and GC) did not want the filing to ruin everyone’s holiday weekends. So we agreed to wait until Sunday. Unfortunately, that did not work out quite as planned … a group of local Oklahoma vendors filed an involuntary petition against White Star in Oklahoma on Friday afternoon! 

At the end of the day, it really did not matter much. The decision to file in Delaware was based on creditor preferences and familiarity with the Delaware bench. Our venue analysis showed few significant legal differences in Delaware and Oklahoma bankruptcy case law.  As soon as we had our first hearing in Oklahoma, we became very comfortable with Judge Loyd in the Western District of Oklahoma, and quickly agreed to keep the case there. Glad we did. We got to know a new city, had some nice steak dinners and ran a robust auction and sale process (there’s a theme here and yes, I think I’m ready to be a banker!). And, in “Wild West” style, we even had surprise overbids shouted from the audience in open court at the sale hearing!   

As for the venue debate, White Star was not really the kind of case that Andy Dietderich referenced in his article because the substantive law did not drive the filing decision.  Personally, I am really not sure what the correct answer is on venue.  In my practice, we file based on where the substantive law is best for the reorganization plan (general lower case “p” plan and not just “chapter 11 plan”) and that flexibility has proven very valuable.  Wherever the venue debate finally lands, I hope the ability to file where the law is best is preserved for companies.

PETITION: What is your favorite thing about the bankruptcy code? On the flip side, you must have some thoughts about inefficiencies in bankruptcy. What is f*cked and needs fixing? Is there one subject that not enough people are talking about? If you could implore Congress to take action about one thing, what would it be?

Alexa: My favorite part about the Bankruptcy Code is that it is written to reorganize and help companies, not merely to maximize short-term senior creditor recoveries. It has an amazing set of tools to renegotiate contracts, address and treat claims, handle employee issues (just to name a few) – all which are deployed not to help one party more than others but to maximize the pie for all and to stabilize and reorganize businesses. 

A great example is California Resources Corporation.  We spent the early months of the pandemic negotiating a reorganization of the over-levered capital structure (also from a prior spin) amidst the oil and gas market collapse. We successfully convinced the financial creditors that leaving all general trade (employees, vendors, customers, etc.) unimpaired was in the best interest of the company.  As the future owners of the company, the secured lenders recognized the cost and uncertainty of having a lengthy chapter 11 proceeding required to impair trade claims. As a result, all general trade claims received full recovery while unsecured bond claims received less than 10 cents on the dollar. 

What’s screwed up?  We have a saying internally that 95% of bankruptcy questions are not actually bankruptcy questions, but questions of underlying state law. In other words, bankruptcy tends to get blamed for a lot of things that are not bankruptcy’s fault. How priorities shake out hinge on issues like the corporate veil, secured creditor priority over workers, etc., all of which are policy decisions made by state legislatures long before a bankruptcy starts. State law issues can only be fixed by state law and not through the Bankruptcy Code.

PETITION: Kodak. You represented the company in its chapter 11 case. You must have some good war stories…?

Alexa: Where do I even begin … I lateraled to S&C six months into the case in June 2012 (S&C filed Kodak in January 2012). I had both the initial culture shock of being at S&C (it was surprisingly less white shoe and way more leanly staffed than I anticipated) as well as it being my first debtor case (and my first oral argument). 

The Kodak “campus” in Rochester was really something. I remember walking into the lobby and seeing that shiny Oscar in a glass case next to the front desk. I could not wait to see the glamour inside the building only to find that our key vendor meeting was in what looked like my fourth grade classroom, complete with the individual plastic chairs with the fold down “desk.”  The only difference was there was also a cardboard cutout of Eastman himself watching from the corner of the room (apparently these were in a lot of rooms!). 

There was a lot happening during the case – a contested DIP, a DIP refinancing, a mega-complicated sale of IP, a retiree committee and ultimately a retiree settlement, litigation with some of the largest technology firms regarding IP rights and from our individual shareholders, and the novel exit deal that flipped two business lines to the underwater UK pension to settle their claim in kind. My favorite war story—though—was related to the sale of the Kodak power plant (yes, Kodak owned a power plant in Rochester!). The negotiations over the sale terms were just as hard fought as the sale of Kodak’s IP sale, but the most interesting part was over an easement near the power plant. The owner of the fire hydrant (yes, a fire hydrant) was upset with Kodak for the sale and related transfer of the easement and we ended up before Judge Gropper on the very issue. I’ll never forget that my first oral argument was over a fire hydrant! Oh, and the coolest thing we sold in Kodak, the Times Square billboard!  

PETITION: Things have obviously been relatively quiet. What has been keeping you busy? What are S&C clients calling about? And what is your prognosis for 1H22? What is the catalyst, if any, that creates a more robust restructuring market in the near-term?

Alexa: S&C is pretty steady. It follows a generalist approach to staffing so the lawyers in “restructuring” are constantly moving in and out and doing other things as well. We call it an accordion:  we can have hundreds of lawyers or tens of lawyers on debtor mandates, depending on the market. We have some classic chapter 11 work (Kumtor, a very meme worthy case…) but are keeping busy with liability management transactions, mass tort management and advice, litigation, strategic planning and other general corporate work.  I like that model — I get to do some long-range advice and help out with new money and other types of transactions — which frees me from sitting around and wishing for corporate misfortune.  

PETITION: What is the best piece of professional advice that you’ve ever gotten and why?

Alexa: There are too many good ones to remember. One that I have continued to live by is the simple “Be Nice”. I personally believe that each of us have something in common, no matter how ordinary, small or bizarre (being in New York, the most common one for me is being a Mets fan, we can all commiserate together but 2022 is our year right?!). 

This is how co-workers and adversaries become friends and colleagues rather than just another person we are asking for comments from on a Friday evening or another person we are yelling at over the phone. (Okay, so maybe the professional advice is more “Kill them with kindness.”) This is how clients depend on and call us — they see that we, too, are human, understand and can help solve their problems.  Super cheesy, I know, but a little kindness makes those late night negotiations and drafting *slightly* more bearable. 

PETITION: What are some books that have helped you in your career?

Alexa: I am going with the completely unconventional answer here.  “The 500 World’s Greatest Golf Holes,” “Fifty Places to Play Golf Before You Die,” and “A Good Walk Spoiled:  Days and Nights on the PGA Tour”. Common theme here as you can see. The golf course has always been my sanctuary away from work. Plus, I’m still waiting for the LPGA to have a senior tour that I can join one day…

PETITION: Someone invite Alexa to play some golf please. Ok, finally, you’ve likely noticed that we like to snark “Long ABC” or “Short XYZ.” What are you “long” these days? What are you “short”? Feel free to be creative here.

Alexa: Long a Mets World Series championship, or at least being serious playoff contenders again…

PETITION: LOL. And ALWAYS short Benny Agbayani. Thanks Alexa.