😎 Notice of Appearance - Justin Bernbrock, Partner at SheppardMullin😎

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This week we welcome Justin Bernbrock, a partner in the Finance and Bankruptcy Practice Group of SheppardMullin out of Chicago, for a discussion about various restructurings he’s been involved in, some thoughts about the future, and some sage counsel for our younger readers. We hope you enjoy it.

PETITION: Welcome and thanks for doing this. Presumably you have a bit more time on your hands to do it because things have obviously been relatively quiet, lol. What has been keeping you busy? What are SheppardMullin 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? And what industry are you watching that maybe isn’t getting as much attention as it should?

Justin: Thank you very much for having me; I’m a huge fan of PETITION, and I truly appreciate your inviting me into the Borg.  Yes, it’s been very quiet on the restructuring front. But, thus far, I’ve been successful at fending off extreme panic — you know, “this too shall pass” and all. 

We are fortunate, as a practice group and as a firm, to have partners and colleagues in several different disciplines, many of which aren’t as slow as the complex restructuring market.  We also have important mandates in the middle market, particularly on the West Coast, that enable us to continue developing talent and honing our skills. 

As for 1H22, I don’t expect there to be a huge upswing in restructuring activity, but I do expect there to be an increase relative to 2H21.  That said, I subscribe to the view that modern macroeconomics are far more exposed to dynamic changes than they have been in the past.  For example, if Mr. Putin decides to invade Ukraine (after the Olympic Games, of course), there could easily be economic aftershocks that reverberate throughout Western economies and thus result in significant restructuring activity.  Beyond a geopolitical event, we continue to watch for climate-change–based events that could drive restructuring activity.  Absent these types of external drivers of restructuring activity, I do expect companies in the low-to-mid market to suffer the initial effects of the Fed’s interest-rate hikes.    

There’s no one industry on which I’m especially focused.  Much like the mighty P-3C Orion (pictured below), I like to say that we’re an all-weather, all-purpose restructuring shop. 

PETITION: Let’s take a look at some things from your professional past. A little over a year ago you filed and represented Alpha Media Holdings LLC, a privately-held radio broadcast and multimedia company, in it and its affiliates’ prearranged chapter 11 bankruptcy cases in the Eastern District of Virginia. The company struggled with the pandemic; its advertising customers were small to mid-size businesses that severely reduced advertising budgets. This looks like it was the quintessential middle market deal with approximately $266.5mm of outstanding funded indebtedness at the time of the filing. Brigade Capital Management of “F*ck Citibank in Revlon” fame provided the DIP to take out the first lien lenders (and subsequently rolled into an exit facility) and the second lien lenders swapped debt for equity in the reorganized company. Structurally subordinated holdco notes were wiped out, meaningfully deleveraging the enterprise. General unsecured creditors were left unimpaired. You were in and out in a few months and effective within half a year. A lot of our “Notices of Appearances” have focused on mega deals. What was of particular interest in this middle-market deal that you think our readers might find educational? And please address the lawsuit against the Small Business Administration relating to PPP funds in bankruptcy. If we recall correctly, Alpha Media was on the frontlines of that issue.

Justin: The key takeaway from the Alpha Media case is don’t sleep on middle-market cases; they often provide opportunities to push the edge of the envelope without the risks attendant in a mega case.  To this day, I’m a bit sheepish about the things we were able to achieve in the case:  a day-one priming DIP, a full take out of our first lien lender prior to the final DIP hearing, uncontested plan confirmation, and a lawsuit that prompted the SBA to change its interpretation of what it means to be a debtor in bankruptcy (i.e., after our lawsuit, the SBA opined that a post‑confirmation debtor was no longer “in bankruptcy” for purposes of the PPP loan application). 

I’d be remiss if I didn’t point out that, shortly after our tussle with the SBA in the Alpha Media case, we sued the SBA on behalf of the debtors in the Sizzler USA Restaurants, Inc. chapter 11 cases to ensure Sizzler obtained its second draw under the PPP.  We had the Sizzler debtors in and out of bankruptcy in a little over three months.  You’re welcome, America:

PETITION: You represented the Conflicts Committee of the Board of Directors in the Seadrill Partners LLC bankruptcy case. Why was a Conflicts Committee necessary in that case and what does conflicts counsel do? That’s not a subject we’ve focused too much attention on.

Justin: Seadrill Partners LLC was an MLP created by its ultimate parent company, Seadrill Limited.  In conjunction with Seadrill I (2017–2018), Seadrill Partners underwent an out-of-court restructuring, whereby its funded debt was decoupled from the broader Seadrill Limited enterprise.  Nonetheless, Seadrill Limited continued to operate the Seadrill Partners rigs and vessels, and Seadrill Limited retained a significant equity stake in Seadrill Partners. 

In late 2019 and early 2020, a group of lenders to Seadrill Partners asserted several complaints regarding the terms on which Seadrill Limited was providing services to Seadrill Partners.  Throughout 2020 the bonds of affection between the two companies were continually strained by these disputes.  And our client, the Conflicts Committee of the Board of Directors, was at the center of the relationship between Seadrill Limited (and its stakeholders) and Seadrill Partners (and its stakeholders).  Our role, therefore, was to guide the Conflicts Committee as it discharged its fiduciary duties—and, moreover, we added a layer of independence in a situation that was something akin to an unmarked minefield.   

PETITION: You have a number of oil and gas restructurings on your resume. There was a period several years ago when it seemed like every restructuring pro was taking up residence in Houston. A lot of debt was eliminated in countless bankruptcies. You were involved in Penn Virginia Corporation, Magnum Hunter Resources Corporation, and Midstates Petroleum Company Inc. Since then, there’s been a bunch of industry consolidation and, seemingly, a lot more discipline in the industry. Still, there are ESG concerns and huge political pushes towards cleaner energy sources, just to name a few macro headwinds. Do you think we’re going to see another wave of oil and gas restructurings in the next several years?

Justin: Yes.  There’s no question in my mind that energy transition is real.  Over the coming years, I fully expect to see continued pressure and real movement from non-renewable energy sources to renewable ones.  That transition will take time, however.  I expect first-world countries to transition in a meaningful way to renewable sources over the next 20 to 30 years, whereas it may take longer in developing countries.  As a result of this, I expect there to be a period of consolidation among oil and gas companies over the next decade and an increased focus on delivering hydrocarbons to the developing world.  This all assumes, of course, that the earth doesn’t evaporate first.  #dontlookup 

PETITION: You represented Patriot Coal Corporation too. What do you predict for what remains of the coal industry? It sure feels like Peabody Energy Inc. ($BTU), to name one, is doing some sort of balance sheet maneuver every, like, six months.

Justin: Like the oil and gas industry, I expect we’ll see additional consolidation in the coal industry (what’s left of it).  And we’ll see more focus on exporting coal mined in the United States and coal-related technology to the developing world. 

PETITION: Looking more towards the future, we’ve been spending some time talking about some of the fresher things that are happening these days whether that’s the rise and evolution of DAOs or the growth of “decentralized finance.” We have no idea whether any of this stuff is real or top-of-the-cycle chicanery but we suspect, as we’ve written, that these things will end up converging with bankruptcy processes at some point. What do you think?

Justin: Here’s how I want to answer this question: 

“There are very few things that I will defend with true passion: medical marijuana, the biblical Satan as a metaphor for rebellion against tyranny, and motherfu**ing Goddamn cryptocurrency.”  — Bertram Gilfoyle, Silicon Valley

Alas, I’m not as cool as Gilfoyle.  In reality, I’m very torn over the subject.  I’m fascinated by block-chain technology and cryptology, I’m personally invested in a few “decentralized finance” products, and I generally favor things that run counter to the status quo (#RiotFest 2022).  That said, if taken to its farthest reaches, decentralization could have incredibly destabilizing effects on our current societal structure.  Huge swaths of the financial sector—on which much of the modern U.S. economy is based—would be rendered irrelevant.  There’d be no need for central banks, and the value of fiat currencies would plummet.  The parade of horribles could continue ad infinitum. 

I do think we’ll see additional intersection between decentralized finance entities and the bankruptcy process; Mt. Gox is a clear example of this.  Nonetheless, I think this intersection will also give rise to complex challenges—i.e., using a centralized system to administer intangible assets, the values of which are subject to wide–ranging differences.  Nevertheless, I think it’s wise for restructuring professionals to get smart on these topics now.  Again, to quote Guilfoyle:

“Let’s say Buffet is right.  Bitcoin dies.  So what?  Myspace and Friendster both died but they paved the way for other social media like Facebook and Twitter to completely overrun the planet.  Crypto is out there and it’s not going away.”  Bertram Gilfoyle, Silicon Valley             

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?

Justin: My favorite thing about the Bankruptcy Code is that it works!  I don’t think it’s a stretch to say that the U.S. insolvency regime, writ large, is the envy of the world.  And it’s played a major role in the U.S. economy by acting as a value recycling system. 

As for inefficiencies, and this is a statement against interest, I’ve long thought that the practice of preparing and filing voluminous first–day pleadings is a waste.  Save for a few critical documents in which a narrative story is important, I think a majority of the relief sought by FDMs could be achieved via check-the-box forms.   

PETITION: You and some of your colleagues have gotten into the podcasting game. That’s something we’ve always wanted to do but … well … we have some obvious constraints (😉 ). One day, maybe. That said, why does the world need another restructuring podcast and what do you and the team hope to get out of it? Is this … not to be cynical here … just another indication that things in the market are slow (akin to what we’d dubbed the “Weil Bankruptcy Blog Index”)?

Justin: We could absolutely use the Stephen Hawking voice—without all the clever stuff (hat tip to R. Gervais)—if you’re worried about maintaining anonymity. 

In truth, the idea for Restructure This! came while I was riding Metra into Chicago (pre pandemic, of course), and I couldn’t find a recurring podcast from the perspective of a restructuring lawyer.  And, candidly, it’s something that I pitched to Sheppard Mullin when I was first interviewing.  It’s taken a bit longer than I’d hoped to actually launch, but I’m very proud of what we’ve put out thus far.  And, yes, we’ve had time to focus on the project because the market has been quiet—the challenge, I think, will be to keep it going once restructuring activity picks up.     

PETITION: What is the best piece of professional advice that you’ve ever gotten and why? Any lessons you apply to your career from your experience in the military?

Justin: To quote one of my mentors, “care about your job” and “DFIU,” which stands for…well, you get it.  At the crux of these is the idea of doing good work, which I think is essential to having longevity in this business.  Indeed, performance has to be the bedrock of any successful career—no gimmick or social–status relationship is going fill the void left by not doing the work or not doing it well. 

My military background is central to who I am; it’s difficult to reduce that experience to a series of transferable, discrete lessons.  For example, I’ve not needed to field strip a Sig Sauer P320 in my time as a restructuring lawyer, nor have I needed to fold an entire compliment of uniforms so they could fit into a seabag.  But, owing to my time in the military, I have a keen sense of attention to detail—and that’s something that has served me very well in my current capacity.  I also think my military background provides a perspective that’s somewhat uncommon in my line of work.   

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

Justin: Here’s a list of books that come to mind:

PETITION: 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 but please list one thing that’s legal/financial and one thing that’s … well … whatever.

Justin: I’m long on post-pandemic, work-life dynamics.  Our youngest daughter, Madalynn Grace, was born on April 20, 2020, and I’ve been able to observe and participate in her development far more because I’ve been home for most of her life.  Time will tell whether she’s long or short on “Dada time.”    

Of course, I think it’s important to spend meaningful, in-person time with clients and colleagues, but I suspect the future of these interactions will be more intentional and efficient.  And I think that firms and companies will continue to evaluate policies and practices with an increased focus on human health and well-being.

I’m short on non-consensual (or quasi-consensual) third–party–release provisions in Chapter 11 plans.  Purdue Pharma and Ascena are the latest flash points in a cold war that’s been lurking for some time.  And I expect that Bankruptcy Courts across the country will more closely scrutinize all release and exculpation provisions in the wake of these decisions.  To be sure, the United States Trustee Program will take up the standard (to the extent it hasn’t done so already) in the hopes of further eroding the practice of seeking/receiving broad releases under Chapter 11 plans.  The harder question, I think, is whether it would be more beneficial for the canon of release law to develop in the Courts of Appeal (and, perhaps, SCOTUS) before a Congressional solution is fashioned.       

PETITION: Thanks Justin.

😎Notice of Appearance - Alexa Kranzley, Special Counsel at Sullivan and Cromwell LLP😎

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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.

😎Notice of Appearance - Ryan Preston Dahl, Parter at Ropes & Gray LLP😎

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This week we welcome Ryan Preston Dahl, a Partner in the business restructuring group at Ropes & Gray LLP. Ryan has been practicing law for nearly 15 years and has had stints at some of the top restructuring practices in the nation. We hope you benefit from his perspective here.

PETITION: Ryan. What’s up? Let’s get into it. You likely noticed that we’ve written — though not as much recently — quite a bit about creditor-on-creditor violence in our newsletters. You’ve been involved in two of the poster child situations for that theme: Serta Simmons Bedding LLC and J.Crew. Please explain those situations to our audience: why all the fuss? Boiled down to their simplest form, were both matters just a matter of what the docs permit? What do you make of the trend and do you expect it to continue?

Ryan: At their core, these transactions (or attempted transactions) are sophisticated parties enforcing their rights under sophisticated documents.  No more and no less. 

For me at least, an interesting facet is the extent to which companies and their stakeholders are all willing to explore and also pursue these sorts of esoteric deals to a degree that simply wasn’t the case, say, 8 or 10 years ago.  In 2010, at least some professionals were still calling themselves “bankruptcy lawyers” and the analysis of incurrence basket consumption was not a daily exercise.  But for the last few years now, some of the most interesting transactions are not the ones occurring in bankruptcy court but are the result of creditors and their borrowers “just” enforcing their respective documents. 

In a way, I think this is a function of a much slower restructuring market in the traditional sense:  creative types have more time on their hand to do creative things (‘creative’ being used relative to corporate balance sheets).  Related to this is the fact that you’ve got larger and larger special situations and event-driven funds chasing what seems to be a shrinking number of deals in the traditional, in-court restructuring space.  So, at least on the credit side, you’ve got a lot of players with incentives to structure and implement transactions that, previously, weren’t really necessary where you had very large capital structures going through more traditional, in-court processes.  And, given how loose credit documentation continues to become, you’ve got a wide open playing field on which to put creativity to work. 

PETITION: Give us some insight into what it was like to restructure CEC Entertainment Inc., the owner of the Chuck E. Cheese brand, over the course of the pandemic. There have to be some interesting anecdotes there. Did you abscond with some old game tickets before they were set ablaze? 😜

Ryan: It’s interesting given where we are and where we’ve come since COVID really took hold in 2020.  When CEC really got going, at least speaking for myself, it was difficult to figure out whether the world was ending, whether it was simply mass hysteria but a passing phase, or something altogether different.  With the passage of time, obviously the world didn’t end.  But COVID’s impact was incredibly real and incredibly hard; it’s difficult even for someone like me to be snarky about it.  One thing that really does stand out from that time and, frankly the “experience” (if you can call it that) of advising creditor groups and businesses through COVID, was the importance of staying focused and keeping perspective on the big picture in a given deal.  Matt Barr, who was really an incredible leader in CEC (and a lot more for that matter), really set a great example in that way.  He’s nothing if not cool under pressure with a board, creditors, company, everyone.  A great role model, although he’s also a terribly big soccer fan. Nobody’s perfect.   

PETITION: You’ve written in the past about the need for proper governance in the restructuring context (specifically we refer to Claire’s). You recently represented an independent director in Basic Energy Services Inc.’s chapter 22 case. We’ve been hard on independent directors. In what ways is the proliferation of independents benefiting the bankruptcy process and in what ways is that construct breaking down? Have we been overly harsh? Feel free to call us “morons”: you wouldn’t be the first.

Ryan: At the outset, I’m coming at this from the premise that the debtor-in-possession is one of the foundational elements of chapter 11.  The US system doesn’t mandate the appointment of a third party trustee or equivalents.  We don’t appoint a quasi-fiduciary, like a monitor.  Chapter 11 is also different than, say, an examinership that by design gives certain creditors a free hand to drive their own outcomes. 

Regardless of where you stand on the comparative merits, we have a bankruptcy system where the debtor manages its affairs, and is obliged to balance competing interests, outside truly extraordinary circumstances.  With this in mind, the focus applied to governance, and independent governance, is absolutely right.  Our system requires independent fiduciaries to be, well, independent—and not just independent in name only.  Independent fiduciaries cannot just be order takers.  The women and men who have this responsibility need to be wiling to drive a process in the right way and the right time.  They need to be willing to make unpopular decisions where they are at no small risk of personal attack from very capable attackers.

But here is where the dialogue around the ‘independent director role’ can get a bit lost in its own rhetoric.  For example, the criticism gets raised that somebody has been on ‘too many boards’ for distressed companies and, therefore, is either going to drive a pre-ordained outcome (‘because that’s what they do’) or else can’t really be disinterested in a given matter.  This is a bit of a logical fallacy; post hoc ergo propter hoc if you like either pretentious Latin or old West Wing episodes.  More fundamentally, this argument treats experience as a disability—which is odd.  A restructuring process can impose existential risk on any business.  Companies and their stakeholders should consider, and certainly have the right to consider, whether to seek out women and men with the expertise to guide those processes, whether as directors or professionals for that matter.  This is not to say that directors without a restructuring background can’t get up the learning curve—many do and do the job well.  But this is not an easy task at the best of times and not everyone wants to do it. 

Another criticism that gets raised is more of the ad hominem attack applied on a global basis; that is, something along the lines of “all of these so-called independent directors are shills, and they aren’t really ever going to be independent.”  This criticism gets more immediate traction precisely because the integrity of individual fiduciaries is so important.  Personal integrity matters, full stop, and allegations questioning a fiduciary’s integrity must be taken seriously.  And it would be naïve to think that there are not people who will trade their integrity to get hired.  Fortunately for me, I haven’t had to spend time working with, or working for, that kind of person.  My own experience is that directors are genuinely trying to get it right in difficult situations. 

I also tend to think these types of attacks involve more than a little bit of misdirection.  “Criticism of the independent director” easily becomes a smoke screen for “criticism of decisions I do not like.”  But this doesn’t change the fact that independence is not a popularity contest or an exercise in counting noses.  A fiduciary for the debtor in possession is stuck with the job of balancing competing interests in a way that is fair under the Bankruptcy Code.  You can’t just look out for the interests of a single constituency or serve as their in-house advocate, and no one constituency gets to dictate outcomes.  So independence means independence, which can sometimes be easier to accept in theory than in practice. 

PETITION: Outside of the director context, 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?

Ryan: This is probably not the sexiest topic, but if I were the legislative king for a day (a contradiction in terms) I’d emphasize the need for easier access to the bankruptcy courts for individual women and men.  The bankruptcy process is complicated enough at the best of times; it can be prohibitively complicated for an individual dealing with the issues that can come with having to file personal bankruptcy.  The problem of access to the courts is not unique to bankruptcy, of course, but I’m a bankruptcy lawyer so there you go. 

Here, it’s worth noting how retired Judge Eugene Wedoff is taking on this challenge.  Judge Wedoff spent nearly 30 years on the bench and is a role model for lawyers who were fortunate enough to spend time in His Honor’s courtroom.  He is now representing individual debtors in bankruptcy appeals on a pro bono basis.  This is absolutely the kind of thing that should be supported on a systemic level.

PETITION: Your bio shows that you represented The NORDAM Group Inc. in the “first-ever ‘postpackaged’ chapter 11 cases.” Like … huh? WTF is a postpackaged bankruptcy?

Ryan: A cheeky bit of drafting there, and credit (and for the legal side of the deal generally) really belongs to my colleague, Dan Gwen.  By way of background, NORDAM really could have been a disaster.  The filing was driven by a contentious, complicated dispute between NORDAM and a major business counterparty, which is a big deal at the best of times for an aerospace manufacturer.  (Dad Joke for your readers:  How many parts does it take to fly an airplane?  All of them.)  Everybody started out being very, very unhappy with each other and it was the sort of thing that could have dragged out for years.  Put another way, it could have been a great deal for the lawyers and nobody else.

But we were fortunate to get a global resolution on the business issues very quickly post-filing.  In particular, our CEO and CRO did a great job of working with their respective counterparties to get everyone to holster their proverbial pistols.  The lawyers stood down and business people on all sides then struck a business deal that worked through these very, very complicated supply chain problems.  We also had the benefit of a lender group willing to give NORDAM some breathing room to let that deal play out.  Credit goes to the lenders’ professionals for making what was a very tough pitch in that regard, since a large part of that deal involved repurposing what at least arguably was a good chunk of the lenders’ collateral.  And, once that deal got signed up, we (or, more accurately, Ronan Bojmel and Pete Schwaikert at Guggenheim) did an awesome job of raising new capital that paid all our creditors in full, brought on an incredible partner for the original equityholders, and even funded a dividend at exit. 

So, much as I’d like to take credit for the first (and only) postpackaged bankruptcy, it’s a better example of what can happen when the lawyers just stay out of the way and respect their roles.  That said, the postpack remains trademarked.  It would be great to see more.

PETITION: Caesars has been front and center again thanks to a new book on the matter. Regale us with some war stories from that hot mess please.

Ryan: Oh man.  My tour of duty ended early and that deal still took a few years off my life.  I got to be like the guy at the end of Platoon who choppers out right before the last fight.  In other words, this all happened before Ben Rhode and Joe Graham really went over the top, to continue the wildly inapposite military metaphor, but here we go.

We were working through another negotiation around the first 1L RSA in January 2015, which continued to involve everyone living in the office for yet another weekend.  I had gotten home at what I think was about two am (Chicago time) and was still fielding calls again when the Delaware involuntary petition came across the transom.  That was quite a “buckle up” moment.  So things are now moving even faster on prep ahead of the voluntary filing in Chicago a few days later.  Me and some of my partners are then down in Delaware arguing about whether the first day goes forward in Chicago or not.  But that’s not the funny part.

Meanwhile, Dave Zubricki had been working on a presentation for the first day hearing in Chicago for what I think was about a month straight.  This wasn’t an easy job and not exactly the sort of thing they advertise in law schools.  You’ve got a complicated capital structure, a ton of backstory, and a whole lot of exposition required to frame it all up, so there’s a real benefit to getting that presentation in front of the world at the beginning of the case—but not easy to do.  And, perhaps not surprisingly, you have a dozen different lawyers, bankers, FAs, and the company who are lobbing in ‘conceptual comments’ to Zubricki on a 24/7 basis.  But despite the drafting by committee, Dave’s presentation was metaphysically perfect.  It had hit the sort of Platonic ideal of what a first day presentation aspires to be. There wasn’t a laser light show to go with it, but there should have been. 

So, while we are arguing in the Delaware court about whether “Chicagoland” is a made up word (btw, “Chicagoland” is a real word inasmuch as Malört is a real drink) and where the first day hearing actually gets to proceed, I’m seeing non-stop emails from my partners in Chicago about why the Mona Lisa of first day presentations must be permitted to shine.  Unfortunately, I failed in that task, and my shame is great.  As far as I know, that presentation still hasn’t seen the light of day; I think it’s sitting in a warehouse somewhere next to the Indy Jones’ ark.  Hilarious.

PETITION: You represented Fisker Automotive years ago when it filed for bankruptcy. Henrik Fisker is obviously back with a new EV company that launched in 2016 and IPO’d via SPAC in 2020. As far as SPACs go, it’s actually doing relatively well — up 40% against the $10/share launch (though it was recently downgraded and is meaningfully off its highs). What did you learn about EVs from that restructuring? At what point do EVs usher in the wave of automotive supply chain disruption that people have been discussing for years?

Ryan: Very cool question.  Even then (and this is going back to 2014) one of the takeaways was that sophisticated players were going to deploy tremendous amounts of capital into EV technology and its component IP, as demonstrated by the 72 hour auction we had in that case.  In one of the breaks, our banker, Stephen Worth at Evercore, said something to the effect of ‘this is just the beginning of how people are looking at electric—you’ll see.’  Clearly, he was absolutely right, as we’re all watching these investments into new Fisker- and Fisker-like SPACs, which is in addition to how the OEMs and major suppliers have been making their own investments in the space for many, many years now.

And, to your point, at least some restructuring folks had been anticipating an uptick in automotive restructuring activity heading into 2020, looking at declining sales, lower capex budgets, and some then-current product cycle challenges with the OEMs.  Auto-adjacent deals like syncreon and a few others also seemed to confirm that a cycle was about to turn.  But COVID really threw those calculations to the side, and a bunch of the formerly stressed auto names have performed incredibly well over the last 20 months or so. 

From where I sit at least, there are three really interesting things about the ramp up in EV expansion—none of which are probably all that novel for the operators who live and breath automotive everyday.  The first, and maybe most obvious point, is that there will be winners and losers among the EV companies themselves.  The not quite accurate analogue I think about is the way fiber companies were building out in the late 1990s and early 2000s post-telecom deregulation given the scope of different build outs plus the capital intensive nature of these businesses.  The second is that there will almost certainly be disruption over the longer term (more on this below) in the broader automotive supply chain.  The number of parts required for EV is materially lower than for a car using an internal combustion engine.  Widespread EV penetration will then presumably impact the number of suppliers, and the identity of suppliers, that remain standing as OEMs consolidate their own supply chains. 

Finally, what is really interesting to think about is what widespread EV penetration does to infrastructure in the broad sense:  power plants, charging stations, energy storage infrastructure, changes in housing and transportation infrastructure, and the public and private finance required to make it all work.  This has the potential for some really wide ripple effects.  To be sure, this is the kind of conversation that makes a lot more sense over a few drinks and happy to do that too.

All that being said, I’ve got no crystal ball for when all this comes together.  I call shenanigans on anyone who claims they do.

PETITION: Things have obviously been relatively quiet. What is your prognosis for Q421 and beyond into ‘22? What is the catalyst that creates a more robust restructuring market?

Ryan: Full disclosure here, I’ve predicted twelve of the last two recessions—so my market prognostications aren’t worth much.  I was also the most consistently mediocre fixed income trader in Chicago for about two years running, so spotting trends in the yield curve isn’t exactly my thing either.  But with that caveat emptor, let me try to answer your question.

With the smug benefit of hindsight, COVID pulled forward potential restructuring activity by about 12 to 24 months.  COVID did not really create a wave of “new” restructurings.  With some notable exceptions, the companies that restructured during COVID were already being predicted to have maturity issues or cashflow issues somewhere in the 2020-2022 timeframe.  COVID also re-set the maturity profile across balance sheets generally.  At the risk of gross generalization, every business that was not actually on fire (and even a few that were) did what they should have done by re-setting their cap stacks and getting as much liquidity onboard as possible, and that trend has only continued.  So, at least in my immodest opinion, it’s not totally surprising that companies facing true financial distress are few and far between for the present.  The restructurings that might have otherwise happened in 2021 or early 2022 have already occurred in some form or fashion.

Looking out ahead, there is simply too much liquidity in the market looking to find a home, any home, for there to be any level of macro distress in the immediate term.  That observation is a truism at this point, but true all the same.  Credit funds and equity funds continue to raise huge amounts of capital that they need to put to work, first lien and second lien credit is available seemingly almost everywhere, and even very, very, very challenged businesses are able to raise debt and/or equity capital in seemingly unlimited amounts and at higher and higher valuations. 

That being said, the current situation feels more than a little spooky, at least in the US.  Companies cannot seem to find enough workers, retail and wholesale prices are moving in one direction, and wage inflation at least feels very real for the first time in more than a decade — and at least using the companies I’ve been working with as a sample set.  But valuations keep ripping, leverage keeps growing, and liquidity is, apparently, infinite.  So maybe we’ve hit the formula for perpetual economic growth.  Or maybe this is another case of “As long as the music is playing, you’ve got to get up and dance,” to quote those fateful words.  It ended so well last time.

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

Ryan: Two things come to mind.  First is “If you’re talking, you’re not learning,” is something Jamie Sprayregen would point out from time to time.  Honestly, there’s a ton I learned, and still learn, from Jamie.  I’m grateful for the opportunity to have worked for him.

Second is from Vijay Srinivasan, who was my first real boss when [we] were in the investment banking department at JPMorgan together twenty years ago.  He now runs Scarsdale Capital, but then Vijay was a senior associate, and I was a barely-functional first year analyst.  One midnight we are stuck in a cubicle next to each other and I’m complaining about running yet another scenario analysis ahead of a board call.  He looked at me and said “You need to stop trying to be the smartest guy in the room and try to be the most prepared guy in the room.”  Easy for him to say since he usually is both the smartest and most prepared guy in any room.  But it’s great advice all the same.

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

Ryan: This is a fun one.  So here’s one responsive and two totally unresponsive, but even more pretentious, answers.  First is “Elements of Bankruptcy,” by Professor Douglas Baird at the University of Chicago.  The book is exactly what it advertises itself to be:  the fundamentals of bankruptcy.  Great style, great analysis, and I survived law school because of it.  I still use it, particularly when we are looking at a “first principles” kind of issue in practice.

Second, and this really isn’t a book that has helped my career so much as it is an interesting read, is “Diplomacy,” by Henry Kissinger.  Mr. Kissinger’s political philosophy has its critics, and he’s clearly writing for posterity in this book.  But he writes with great style and is willing to assess history and historical decision makers from the vantage point of knowing that he’s going to be judged by history as well. 

Finally, “Master of the Senate” by Robert Caro.  Saying this book is fantastic is not exactly a ‘hot take’ in 2021.  But Caro’s analysis of political dealmaking and the exercise of political power is quite incredible, and the whole thing is sort of framed against this sense of impending tragedy when you think about what lies ahead for Johnson’s presidency.  Again, not particularly relevant to your question, but it’s a unique book.

PETITION: 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.

Ryan: Very short on the music of Bruce Springsteen.  Not a close call.  This is not to say that Mr. Springsteen’s music is “bad.”  The man is not Nickleback.  It’s just not “great.”  Mr. Springsteen loves New York, New Jersey, blue collar heroes, ennui, cars, and nostalgia.  We get it.  The last 40+ years has made all of that very clear, together with “let’s have a saxophone solo for no reason.”  Huzzah.  The degree to which this music is treated with awe by certain members of the restructuring trade also boggles the mind.  At the end of the day, it’s the East Coast, Camaro-driving version of John Cougar Mellencamp.  None of that is “bad,” just not worthy of religious devotion.

Very long on Team Langbein for The Race to Cure Sarcoma Chicago 2021.  As your readers know (and your support has been amazing), many people lost a close colleague, friend, and loved one with Chris Langbein’s passing earlier this year.  He is irreplaceable.  But thousands of women and men continue to face their own challenges with sarcoma every year.  The Race to Cure is an important event to raise awareness and raise funds for this critical, but underfunded area of cancer research.  Although this year’s race happened last Saturday, people can still donate.  I am sure that the masters of the universe reading Petition can and will dig into their wallets to contribute.  It’s a great cause.  Link is here.

PETITION: Thanks Ryan.

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😎Notice of Appearance: Eitan Arbeter, Portfolio Manager and Partner at Oak Hill Advisors😎

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Today we continue to expand the perspectives we offer by adding another investor voice to the mix. We welcome for this Notice of Appearance, Eitan Arbeter, a Portfolio Manager and Partner at Oak Hill Advisors, an investment firm with $53b in AUM across performing and distressed credit strategies in North America, Europe and elsewhere.

PETITION: Welcome Eitan. Let’s jump in. You’ve been at OHA for 16 years and so you’ve been through the GFC and now whatever it is we’re calling 2020. Tell us about how OHA approached 2020: where did you get active? What did you look at and pass on? What are your big wins and your big losses? Anything you didn’t get in on that you really wish you had? How did the lessons you learned from the GFC inform your view on ‘20?

Eitan: Thanks Petition. Wow, 2020…feels like a lifetime ago. Remember, in March of last year, all asset-classes were correlated, so we really started at the top from a quality perspective. First we bought IG-type credit and high quality secured loans in non-stressed borrowers that had begun to trade with distressed-type discounts; second we added to high-conviction names in our existing portfolios; and by late April we were almost exclusively focused on directly COVID-impacted credits. We were exceptionally active in “rescue /liquidity capital” financing solutions (both on a public syndicated basis and private/direct) where one could negotiate terms and structural protections (think collateral, incurrence limitations etc.) that just weren’t available in existing instruments. We also re-underwrote numerous credits and picked our spots in the secondary markets in sectors tied to travel and leisure, autos, transportation, healthcare and energy, trying to identify survivors during a very uncertain time. We were really busy, deploying over $4bn in capital from March through December, 2020. In hindsight, you always wish you bought more and went wider, particularly when the world rebounds with the ferocity we have witnessed over the last 6 months, though remember that many of these business models would have been severely challenged had science not threaded the proverbial “vaccine needle”. My biggest regret is perhaps not being more aggressive in the aviation sector. Given the cash burn rates of the airlines and associated counter-party risk to the asset-owners, in addition to potential obsolescence risk associated with certain types of metal, we were cautious, anticipating further bankruptcies in the space. Even today, I am not sure many of the “survivors” will necessarily remain solvent, given all the additional leverage incurred, however security prices (and asset values for that matter), have increased materially, limiting the opportunity. As for lessons learned…sometimes technicals trump fundamentals. And government intervention can trump all (no pun intended).

PETITION: And now, what the heeeeeeeell are you guys doing in 2021? PETITION: Given (a) how quickly the 2020 cycle came and went, (b) how much money is in the system, but also (c) how much new leverage is now on balance sheets, what’s your crystal ball tell you about the future of distressed investing? Tell us what you think the rest of ‘21 will bring and then what you foresee in ‘22, ‘23 and beyond. What catalysts do you see out there?

Eitan: The market environment is generally benign and so our activity has shifted to private, directly negotiated (often structured) solutions for borrowers in need. I wouldn’t call it classic distressed by any stretch but we are seeking ways to manufacture opportunities with debt-like down-side protection, while sharing some right-tail optionality for industries and companies that are still undergoing operational challenges or sectors experiencing a void of traditional capital. I suppose in some respect, the outcome is not too far off what investors look to capitalize on in your typical control investment. The difference here is we are doing it out of court, with no formal process, and perhaps a more book-ended outcome. Absent esoteric events, such as geo-political shocks, major cyber-security breaches etc., it seems like market should remain reasonably stable in the near-term. As alluded to above, I think there will yet be a day of reckoning as the leverage in the system for certain sectors has increased significantly as companies incurred debt to bridge the pandemic. Real-estate and aviation, by way of example, are two sectors that seem ripe for future stress.

PETITION: One thing everyone seems to be talking about is inflation. Do you have a take?

Eitan: Are you a Game of Thrones fan? Cause, like Winter, it’s coming. Economists and central bankers point to “transitory” inflation…which I think is the notion that once pandemic-induced bottlenecks clear, inflation should be range-bound. But, for example, commodity inflation…I don’t believe that is pandemic-induced. We’ve had a long period of underinvestment and if demand fully recovers, it will be very hard to keep a lid on commodity prices. Labor is another one. We hear from companies on a daily basis that you can’t find labor. While that may be the result of folks drunk off of stimulus, human behavior evolves. Will everybody return to the workforce? Have social movements exposed inequalities in pay? That doesn’t revert when the pandemic alleviates. Everyone talks about our increasingly “service-based” economy, but it seems like you need willing people to provide that service. So, I think inflation is real and probably worse than the markets currently expect (future break-evens at 2.4%). The ultimate question is whether the consumer can, and is willing to, absorb that inflation. Because if not, certain business models potentially become severely strained!

PETITION: You led the group that provided the Brandco 1L financing and roll-up to Revlon Inc. ($REV) last year. To refresh people’s recollections, in ‘19, REV (a) transferred IP (American Crew brand) out of the reach of existing ‘16 vintage term loan creditors to foreign unrestricted subs (“BrandCo”) and (b) entered into a $200mm term loan secured by a first lien senior to existing secured debt on the transferred IP (and pari passu on other assets). The lenders then licensed back the IP to the opco. Then in ‘20, REV transferred the majority of remaining IP collateralizing the ‘16 term loan, including the IP supporting the Elizabeth Arden brand, to the BrandCo and used the transferred IP (coupled with the previously transferred IP) to secure a first priority new term loan facility to refi out the ‘19 term loan. It was a savage move that set off a whole slew of dominoes that we’ve covered at length in our “💄Revlon: Lipstick on a Pig?💄” series. Walk us through how that deal came together and give us your two cents on everything that’s transpired since including, if you will, the Citigroup Inc. ($C) vs. hedge funds fiasco.

Eitan: We were lenders to Revlon (both bank and bonds) and had been in dialogue with the company for many months prior to COVID around a financing to help with near-term maturities and provide capital for the company to fund its operational turnaround. This only amplified with the onset of the pandemic as the company had a third urgent need…liquidity. Our view was that the consequence of not providing capital would be dire for the company’s fortunes (a likely free-fall filing) and consequently, our investments. As such, we structured a transaction that provided the company with the necessary funds. But recall, these were extremely precarious times and we priced the new capital (in both rate and structure) to reflect the risk at the time. One of the major underpinnings behind our original exposure was the enormous flexibility in the existing credit documents. We levered that flexibility to create a rock-solid new-money instrument, whilst using the roll-up feature as an enticement for all lenders to participate. This was not some coercive structure…everyone had the opportunity to participate. In fact, several of the dissenting lenders were part of our ad-hoc group at one point, but ultimately had different views on what would be best for the company’s prospects (not to mention their positioning). As the for the Citi blunder, while it is fascinating, we don’t really have a horse in that race. Judge Furman seems to have adhered strictly to the Second Circuit precedent. However, this is just the beginning. Even after the appellate process has been exhausted, if Citi ultimately loses, its not clear whether they simply subrogate into the paid-off lenders’ claims. I’ve got my popcorn…

PETITION: You were involved in the Valaris Ltd. ($VAL) restructuring (in which the company eliminated $7.1b of pre-petition debt and culminated in a $520mm new capital injection by way of ‘28 secured notes). The company emerged from chapter 11 early in May and is back on the NYSE. Walk us through the thesis there. How, when and why did you get involved and what was the outcome for OHA (aside from having someone on the Board now)? In broad strokes (since it is a public company) what is your outlook for the business and why? We’ll note for our readers that the stock is up quite a bit since re-listing on may 3.

Eitan: We have been reasonably active in the oilfield services sector for a couple years now, while largely staying away from upstream. Last year, given the sudden abundance of distressed names, OFS became the proverbial baby thrown out with the bathwater (the commodity backdrop also provided an assist). That is not to say the industry is without headwinds, but due to last year’s dislocation, we were able to enter the position at a time when one was creating the world’s largest drilling rig company at close to the historical newbuild cost of a single drillship! And while it wasn’t lost on us that this industry is a huge consumer of capital when non-operational, the create was just too compelling to ignore. But, this was not merely a value play. The offshore drilling industry has been ripe for consolidation for many years but had an inability to consummate mergers and contract the global fleet due to large over-levered capital structures and the desire to preserve equity options. Well, the pandemic almost facilitated the slew of restructurings that were already necessary. Most large offshore drilling companies (ex. Transocean) have now gone through, or are going through a bankruptcy processes. My colleagues, Joe Goldschmid and Mike Lee played a significant role in the construction of the plan to restructure Valaris and now we will remain active in forging the company’s future strategy through our Board representation. New equity holders, like us, in the sector (with lower bases), will allow for M&A activity and asset retirements to put the industry on better footing. So, our investment was in large part a thesis predicated on both supply rationalization and an improving demand picture as the lack of global investment in reserve development catches up.   

PETITION: Canyon Partners’ Josh Friedman recently told Bloomberg that he sees a lot of discipline breakdown. In particular, he thinks that the aggressive bids pursued by PE shops and SPACs are going to come back to bite and lead to distressed opportunities. Do you agree or disagree and why?

Eitan: I think valuation inflation is a real problem because capital structures are often set up off of LTV. Well if “V” increases, leverage usually does too. Therefore, if we see a re-rating of equity valuations, there’s likely to be reasonable pain in the debt markets. Low rate environment = low coupons. Widening risk-premia with low coupons = principal pain. So I think we may see a reasonable trading opportunity if some air comes out the system. It also makes it extremely important to pick credit correctly, because there will be winners and losers. One word on SPACs...the misunderstanding in the market is that the SPACs themselves will be candidates for distress. While they are certainly culpable for inflating valuations (particularly in growth stage companies), SPACs are not aggressively levered. So I don’t believe we’ll see a huge opportunity in the SPACs themselves, but they have certainly added kindling to the fire.

PETITION: Speaking of discipline and breakdowns, we’re wondering if you have a view on what’s been happening with the “meme stocks” and how that’s been affecting capital structure trades (i.e., the bonds in AMC Entertainment Inc. ($AMC))? How, if at all, has OHA navigated this?

Eitan: OHA employs a deep fundamental approach, so we have not been directly impacted by the meme stock phenomenon. Meme stocks (or is that “stonks”), are a technical dynamic…a greater fool theory if you will. I still think it ends badly for the person without the seat when the music stops, but in the interim it can create lucrative payouts for debtholders in these companies, and in certain instances, has proven to be a self-fulfilling prophecy, giving a second-life to many companies that had exhausted their liquidity. I’m not sure what will become of AMC three or five years from now, but the meme-driven rally has given them a shot to preserve overall equity value.

PETITION: You and your firm have a lot of experience sitting on committees. What has changed about committee dynamics over the years? What would you improve upon if you could?

Eitan: Each experience is unique and really is impacted by the group dynamic, the individuals, the advisors etc. I don’t know that so much has changed, but there’s probably an increased level of cynicism and distrust. With all investors trying to get an edge to create that additional ounce of value, even if you’re a part of the same ad-hoc, you’re always watching your back. Being big and influential helps in that regard.

PETITION: As a follow-up to that, you must have some thoughts about inefficiencies in the bankruptcy space generally. What is f*cked and needs fixing? Is there one subject that not enough people are talking about?

Eitan:

PETITION: We’ve commented about the need for relatively more activist judges (in the context of feasibility and bullsh*t projections) while at the same time criticizing certain judges for being overly power-trippy and punitive on the bench. What, as an investor, do you think the ramifications of this forcefulness/activism may be? To what degree are you and your investor friends fretting over various jurisdictions and judges?

Eitan: It’s always a consideration, and as you know, is often used as a bargaining chip or a leverage point for the Debtor. As such, we like to avoid situations that rely heavily on the subjectivity of a Judge. I, for one, prefer the Judges that call balls and strikes. Ones that look to the precedents and the expert testimony, as that is something an investor can analyze. It’s not always in your control but we try and assert influence on the venue if possible.

PETITION: Talk to us a bit about the asset management business. You’re a young(ish) guy whose been there for a long time. The distressed cycles seem to be getting shorter and shorter. What are you saying to the younger guys coming up the ranks as they fret over what their futures may look like?

Eitan: The last two cycles (COVID and the 2016 mini-cycle) certainly have been briefer than we’d historically come to expect. But that is merely a function of capital availability and a very long period of low risk-free rates. Despite employing a fundamentals-based investing strategy, these technicals have to be taken into account when thinking about entry points. You have to be more dynamic and assertive. However, at it’s core, I don’t believe the calculus has changed that much. The aim of the game remains finding good companies, with sound structures, that may be experiencing temporary dislocation or an unsustainable capital structure. My advice to the younger generation is to keep your head down, accumulate at-bats and build your repertoire. Every situation is unique but experience is the greatest tool in building a long, successful career.

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

Eitan: Apart from what I mentioned above, the best advice I have received is to find a place to work that offers intellectual stimulation, a culture that takes an interest in your development, and most of all, work with people you like. Oh…and have a short memory, both when it comes to losers and winners.

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

Eitan: I’d love to sound really smart and tell you about all the academic material I have read, but truthfully, I’m not a big reader of non-fiction on serious subject matters. That said, one work-related book I enjoyed was Daniel Kahneman’s “Thinking, Fast and Slow”. If you dumb it down, investing is simply about processing inherently limited information and making buy or sell decisions. So exploring theory relating to how our minds work and what exactly shapes our judgement was fascinating to me. Definitely helped me slow down a little. Other than that, I’m a fan of stories about grit and perseverance. My experience has been that having the “grit-factor” is highly correlated with success in this industry.

PETITION: 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. One rule: you cannot say that you’d “Long GOAT” or some other sneaker trading platform. 😜

Eitan: You didn’t really think this one would get through my compliance department, did you?

PETITION: Thanks for your time, Eitan. Cheers.

🔥Notice of Appearance - Daniel Kamensky, Former Managing Partner of Marble Ridge Capital. Part I.🔥

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Daniel Kamensky Speaks. Part I.

Today we welcome Daniel Kamensky, former Managing Partner of Marble Ridge Capital. Unless you’ve been hiding under a rock, you’re likely aware of who Mr. Kamensky is. If you don’t, you can catch up on prior Neiman Marcus coverage here:

Answers were edited only slightly for clarity.

*****

PETITION: Welcome Dan. Thank you for making the time for us. This is not a question we typically ask our Notice of Appearance subjects but these circumstances are obviously extraordinary: how are you holding up?

Kamensky: It’s been a challenging time for me and my family. But we are taking it one day at a time. That’s really the only way to approach something like this. You rely a lot on your support network. The distressed community has been a source of strength, and I am grateful for that.

Going through this experience has made me appreciate even more what is important in life. Purpose, gratefulness. Not that I didn’t have those in mind before, but they were always competing against other day-to-day distractions.

I have a deeper appreciation for friendship and family. And the importance of empathy, the dangers of acting out of anger and panic.

In a moment, your entire life can change.

PETITION: Let’s take a step back and talk about your youth. Any important experiences you would like to share?

Kamensky: I have always had a strong sense of right and wrong and for fighting against injustice. When I was 12 years old I joined Chicago Action for Soviet Jewry. I made a poster with the verse from Deuteronomy, “Justice, Justice, Thou Shalt Pursue” to raise awareness of the plight of Jews living in Russia. It may seem like ancient history, but growing up in the Soviet Union in the 80s was dangerous for Jews. Jews lived in fear and with anxiety of an unknown future.

We had a large family still living in the old Soviet Union. So, I was able to hear of their stories first hand. And it was a call to action for me. We sponsored and worked to have them emigrate to the United States, which they did in the late 80s. We now have a large group of cousins living in Chicago. We helped them find jobs and adjust to their new lives. I then worked with a social service agency that worked with recent Russian immigrants to help them acclimate to their new country.

I have always tried to be a force multiplier for good and believe strongly in charity and doing well for others. That sense of justice and working to help others was borne from my youth.

In college, I studied Cervantes and traveled to Spain. My professor at the time, Señor Juan Lopez, became my mentor and my first great role model. Lopez and Cervantes believed that each one of us is a child of our own labors (Cada uno es hijo de sus obras) meaning that we have to stand up for what we believe in. Quixote criticized the goliaths (the knights and upper classes) of the medieval ages that relied on words of chivalry rather than standing against ignorance and bigotry. He challenged many of the prejudices and biases of his time by calling out inequality - that became a strong influence in my life.

PETITION: You made a jump “to the business side” that a lot of biglaw associates dream of. What advice would you give others looking to make a similar move?

Kamensky: Working at Simpson [Thacher] was at a great experience. I really enjoyed the people and the work but after 6 years there the work lost some of its challenge. Strategizing and the game theory of advising clients was one of the highlights of the job. But too often I spent my time waiting on others. I wanted more control over my career and to challenge myself. My advice to others would be don’t leave a law firm after only spending a few years there. Too many people leave a law firm too early in their career, without getting any of the benefits of the practice. A future employer will see greater value in hiring someone with more experience given the lock-step nature of associate compensation. Use that to your advantage.

Network. Network. Network. Always take a meeting and help others in making career choices. You never know when those people can help you. Read up. Take classes on finance and accounting and learn how to us excel.

And most importantly, play to your strengths. As a lawyer, you will have particular strengths that others with a more traditional financial background will not have. Use that to your advantage. My marketing pitch when I launched Marble Ridge started with, “I play to my strengths”. You should as well.

PETITION: What made you think you could make the jump from big law to an investment bank?

Kamensky: At the time I had no idea. I had no formal financial training, and had no idea how to build a financial model.

But I had learned about risk and reward as a lawyer. Law grounds you in reason and the building blocks of logic. That is an incredibly important skill-set. You can look at any problem and immediately see a three dimensional chess board of outcomes playing out before you. But not all lawyers make successful investors. The difference, and I have said this before when asked, is that most lawyers understand the risk of making a particular decision but few can look at both the risk and potential benefits of making a decision and explain how those roads could potentially diverge. And even fewer still can look at both risk and reward and then advise which decision, in their judgment, presents the best path forward. That is investing. A good example of someone who has that type of mindset would be someone like Paul Basta [of Paul Weiss Rifkind Wharton & Garrison LLP]. Paul does an amazing job of not only presenting bookends, the pros and cons of making a particular decision, but he also recommends a particular course of action even in light of the risks. Most lawyers don’t compare.

PETITION: You ended up at Lehman Brothers. Any defining experiences there?

Kamensky: Walking into the high yield and distressed trading desk of Lehman Brothers as the desk’s legal analyst in March 2005 was like entering a gladiator’s arena for the first time. The 4th floor opens up to a football field sized room with rows of trading desks set up with Bloomberg terminals and phone systems called turrets with dozens of dedicated speed dial buttons connecting sales/traders to clients and a protruding microphone called a hoot that’s used to immediately disseminate information across the trading floor. All this made for a cacophony of yelling and cursing with traders and salesmen yelling back and forth across the rows communicating orders to and from client accounts.

In February 2007, Hugo Chavez nationalized three major heavy oil projects located in the Orinoco region of Venezuela. Each project had financed its expansion with high yield debt placed with insurance companies based in the United States. When the Venezuelan legislature passed laws enabling the expropriation of these projects, the insurance companies ran for the exits. The head of the desk covering the insurance companies, Jimmy G., sensed an opportunity and came running over from his row across the room to the distressed desk asking for help. I ran into an office and closed the door to drown out the background noise and scanned the collateral and security agreement and quickly found what I was looking for. All the bank accounts for the project were based in the United States with deposit agreements in place governed by New York law. As long as PDVSA, the Venezuelan national oil company, continued to ship oil to their specialized refineries located in the United States, which seemed highly likely, cash would continue to accumulate in a U.S. based account for the benefit of bond investors. Within an hour, we were picking up debt that had plummeted from near par to as low as 30 cents on the dollar. Of the $600 million of debt outstanding, Lehman Brothers had quickly become a holder of $100 million of bonds.

Bondholders then started the process of declaring a “prospective default”. For as long as a prospective default existed, cash could not be distributed out of the collateral accounts and over the next year cash continued to build in the collateral accounts, eventually surpassing the total amount of debt outstanding. By the end of 2007, bondholders had negotiated a full pay out of the bonds including a premium, the best possible outcome representing an enormous success for the trading desk and for me professionally.

PETITION: At Paulson & Co., the next stop on your career trajectory, you allegedly made a killing trading Lehman claims. Walk us through your process there and what — other than your knowledge of Lehman from your stint there — positioned you for success with this strategy?

Kamensky: Analyzing financial companies is probably the most difficult skill set I’ve learned in my career. Working on insurance liquidations in my first few years as a lawyer helped prepare me to understand how a financial company undergoes stress. For a financial company, you have to understand how they finance themselves. If a company is relying on financial instruments other than funded debt to finance its business, it likely has a complex financing structure where legal niceties give way to financing tools. And that usually leads to shifting assets throughout a capital structure to find the most efficient financing structure.  In those cases, you have to ask what counter parties relied on in extending credit. In the case of Lehman Brothers, it was a very simple observation that counter-parties extended credit based on the rating of the holding company. That ultimately led to the theory of substantive consolidation, which benefits holding company bondholders over subsidiary creditors. I also had precedent on my side. The only other comparable broker-dealer to have filed for bankruptcy, Drexel Burnham, relied on substantive consolidation to distribute assets to creditors. In early 2009, we purchased approximately $9 billion of holding company bonds and created a coalition of the willing, led by Jerry Uzzi [of Milbank LLP] (including bond behemoths like PIMCO and governmental agencies like the County of Santa Rosa in California) to advocate for bondholder interests. In April 2011, we filed a plan premised on substantive consolidation and ultimately negotiated a plan (kudos to Raj Iyer [of Canyon Partners LLC]) that included significant value allocation to holding company bondholders. While this was a successful investment it, more importantly, led to friendships that still exist today (you know who you are).

PETITION: On the flip side — putting aside Neiman, what was one trade that went horrifically sideways in your career and why? What did you miss and why? What could you have done differently?

Kamensky: Stay away from energy. It’s nothing but a bad bet on oil prices. We lost a ton in the energy space and I would stay away.

PETITION: In February 2015, you jumped ship from Paulson and decided to hang a shingle, so to speak. Tell us a bit about that process. What was it like starting a new fund as a first-time emerging manager and what was the fundraising process like? What were some of the challenges and if you could give your younger self any advice about it, what would that be?

Kamensky: It takes every ounce of energy, commitment and confidence to launch a fund. It is taking the ultimate risk, and my launch was risky even by those standards.

In 2015, I was preparing for a much celebrated launch of a hedge fund with significant funding from a large fund of funds based in Chicago.  But as we neared our launch in October 2015, our seed went out of business and I had to pivot quickly and launched Marble Ridge Capital only a few months later in January 2016.  We came limping out of the gates with only a bare minimum of capital raised from friends and family in what was an unheard of amount of $17 million for a credit fund.

We were well below the amount of assets required by even the most forgiving of banks to act as an intermediary between a hedge fund and a trading counter-party. Without a bank acting as a “prime broker” to extend credit to ensure closing of a trade, you cannot trade. And, if you cannot trade, you are out of business.

10 days before our anticipated launch, I managed to schedule a meeting with the Head of Prime Brokerage at J.P. Morgan Chase & Co. ($JPM), Mike Minikes. Mike is a throw-back to a bygone era, when relationships meant something and deals were made by handshakes. I had already been through credit and risk reviews with every third-tier bank and knew I would have to pull a rabbit out of a hat to make JP Morgan take us as a prime brokerage client. When I arrived at Mike’s office, he had his entire team assembled: risk, credit, capital introduction and relationship management. I made a pitch from my heart, that no challenge was too great but I needed JP Morgan to make my dream become a reality. At the end of my speech, Mike rose and shook my hand and the rest, as they say, is history.

As I left, my head was spinning. Not only did we have an open-for-business sign but it had been planted by none other than JP Morgan.

2016 was a banner year for my new fund. Of the more than 500 hedge fund launches in 2016, we received the much coveted “Absolute Return Award” for best risk-adjusted returns of any new hedge fund launch for that year. And investors began to pile in. By the end of 2016 we managed over $200 million, by 2017 $500 million, and nearly $1 billion by 2020.

But that growth came at great emotional cost. Stress and anxiety took their toll on me. I sought help and am better for that. But we need to do a better job of talking about the challenges of mental health in what is an incredibly intense and stressful business. No one should be afraid to ask for help. That’s the first step toward getting yourself to a better place.

PETITION: Neiman. Initially, you won. Discuss. How did it feel to defeat a couple of funds, BS independent directors, and a powerful law firm that had been gaslighting you for years?

Kamensky: This was never about winning or losing. This was about seeing something so wrong and so brazen that it needed to be called out. It is not about defeating any one party or about achieving a victory as such but rather righting wrongs. Throughout my entire life, my commitment has been to help right wrongs whether it be a social cause or otherwise. I have always believed and will continue to adhere to the concept “Justice, Justice thou shalt pursue.” In the end, my efforts to hold the board of Neiman, its management, lawyers at Kirkland and Ares accountable for their severe wrongdoing was addressed and was made right ultimately for Neiman creditors, which included not only bondholders but merchants and suppliers who had been harmed by Ares’ actions.

PETITION: But then you lost. You couldn’t stop yourself, exhibiting a fierce sense of entitlement in your interaction with Jefferies. Walk us through your thought process there.

Kamensky: At the end of the day, my position was vindicated by every unbiased party in the case.  What happened on July 31 is somewhat unrelated to Ares’ fraudulent conveyance. What I lost was my ability to manage my emotions at a particular moment in time on July 31, when I let anger get the better of me, propelling me into an ill-fated phone call with Jefferies over their last minute attempt to get themselves cut into a potential bondholder deal. At the time, it felt like a shake-down by Jefferies and I did not believe that they were real. Subsequent events have proven me right.

Giving in to my anger in that moment has forever changed my life. I hope others can learn from my mistakes….

*****

In part II in Sunday’s a$$-kicking briefing, PETITION and Daniel Kamensky discuss:

📍More on the Neiman Marcus case;
📍Creditor-on-creditor violence;
📍The MyTheresa IPO;
📍Necessary changes to the bankruptcy process;
📍Activist judges;
📍Legal ethics in restructuring and more.

You don’t want to miss this.

😎Notice of Appearance -- Nicole Greenblatt, Partner at Kirkland & Ellis LLP😎

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This week we welcome Nicole Greenblatt, a Partner in the restructuring group at Kirkland & Ellis LLP.

PETITION: Welcome Nicole. Let’s dive in. M&A was bananas in Q1 this year and the capital markets are, to put it plainly, open AF. There’s a lot of dry powder out there. All of these factors have contributed to a dramatic drop-off in restructuring activity thus far this year. What’s your take on the rapid rebound from Q220 and what’s your prediction for Q221?

Nicole: Thanks for having me! Yes the markets are indeed white hot — and wide open. So there’s plenty of (cheap) money to throw at whatever problems a company may be experiencing, and we restructuring professionals may be feeling the drought for a while.  There’s no question the pandemic triggered a major acceleration of chapter 11 filings that cleared most of what was in the pipeline for 2021 and even 2022.  And given the intensity of last year, I’m sure many of us are grateful for the reprieve (its nice to have time to devote to conference panels, pro bono work — and family of course!). Your guess is as good as mine as to whether it’s a bubble and when/ if it will burst. But in the meantime, even when macro conditions create a slow restructuring environment, there’s always something unexpected - within an industry or within a particular business - that drives demand for our work. So don’t despair friends! 

PETITION: You recently worked on the Town Sports International LLC bankruptcy filing. The company filed in September 2020. Talk to us about administering that case in the heart of a pandemic that obviously completely disrupted gym chains all across the country. Specifically, we’d love to hear some war stories about (i) the competing DIP proposals and (ii) whatever the hell happened with the company’s ultimate DIP lender and original stalking horse bidder? Why did the initial transaction fall apart?

Nicole: Wish I had something juicy to share with you guys but the reality is what you read in court papers is the whole truth and nothing but the truth. We were brought into the situation very late in the game — and well into the financial impact of the pandemic. Unfortunately there was a lot of bad blood between (and among) the lender group and management. Bottom line - they were engaged in a fairly typical restructuring dispute (over how much new money was needed; to support what footprint and capital improvements; and whether that new money would soak up all the value in the business) in a very atypical and unpredictable operating environment (given ever-changing rules and restrictions on gym openings and varying consumer protection mandates across relevant operating states). Ultimately, “requisite lenders” banned together and used that contractual power to block the larger DIP/sponsored restructuring path the company might have preferred in hopes of locking in some modest recovery through a quick sale. Needless to say, prevailing/worsening market conditions and the cost of the proceedings hampered the Buyer’s own fundraising efforts, and the principal decision makers shifted as the case progressed. But in the end, the funding came through for the company, the sale closed, jobs were preserved and we were able to cover all administrative costs of the case and confirm our plan on a critical timeline.  That was no small feat and is a testament to the extraordinary efforts of everyone involved, especially the CRO team and independent directors who jumped into the case and worked through it every step of the way. 

PETITION: Similarly, what was the biggest challenge in the Lakeland Tours, LLP d/b/a WorldStrides case? Clearly students weren’t engaging in “educational travel experiences” in 2020. How did you overcome it?

Nicole: Worldstrides was a shining example of “collaboration in crisis” where the lenders, sponsors and management worked together towards an optimal solution. The company was directly hit by the pandemic during its peak travel season, meaning costs had already been incurred for a significant volume of trips that had to be canceled — and customers wanted their money back. So it was a double whammy: revenue came to a halt and the company needed serious cash to comply with its refund policy and otherwise bridge to a return to travel.  The sponsors and certain lenders ultimately both stepped up to fill the hole in a manner that effectively preserved their relative priorities in the capital structure. Those negotiations were fraught with the typical challenges, which were only exacerbated by the uncertainty of when worldwide travel would resume and the compressed timeline. But the most critical driver of case strategy was getting everyone aligned on one thing: how important the customer experience would be to preserving the long term value of the business (and how damaging and widespread negative consumer publicity could be in a pandemic environment where social-media is rampant).  That meant prioritizing (unsecured) customer refund claims over all other recoveries — and getting those checks out with no delay (i.e., early access to a large DIP).  This critical business objective posed legal and practical challenges in any bankruptcy scenario, and simply would not have been achieved without broad support among the secured lenders. The partnership reached among the sponsors and secured lenders to deliver committed financing for a ‘DIP to prepackaged exit’ was the key to our success.  Starting the case with a comprehensive solution (the target end game) provided essential direction for the case and gave us greater flexibility to get the new money where and when it was needed most. The case was a terrific experience for our whole team (of all women at Kirkland!) who saw first hand how valuable consensus can be in driving an efficient bankruptcy process to solve real world problems. It’s certainly worth fighting for!

PETITION: What do you make of the narrative that the “Yield Baby Yield” fervor the past few years is doing nothing more than propping up zombie companies that ought to have restructured by now? That this trend doesn’t translate to economic optimization of resources?

Nicole: That’s a hard thing to judge. There’s always a subjective element as to what makes a business relevant.  And if a company is doing well enough/ generating sufficient cash flow to continue to service its debt and deliver the yield, it must be relevant enough to some demographic. Don’t get me wrong- I’d love nothing more than to see proactive, resource “optimizing” restructurings — but in my experience most companies (and most people) won’t undertake that effort and expense until the need is clear. Which is of course completely rationale.

PETITION: Women constitute the overwhelming minority around the restructuring negotiation table. Up until very recently, you were the only female equity partner in Kirkland’s restructuring group. How did you navigate that reality? What is your advice for the junior associates or law students out there who are questioning how realistic it is to be partner and succeed in what remains a male dominated industry?

Nicole: There is SO much opportunity for women in this profession! I love what I do and the people I do it with, so I’ve never felt that was something I had to navigate. I’ve always been inspired by the many influential, women leaders in our field — and today there are such incredibly talented women moving up the ranks within Kirkland and across the many legal and financial advisory firms we work with. So at a high level, I suppose my advice to them is simple: keep your eye on the prize. Set your intentions, be great at what you do — and stay focused on the work and delivering results for your clients. Don’t waste time and energy worrying about whether or why you’re the only woman in a conference room or courtroom. Trust that you’re there for all the right reasons — and that your distinct perspective, judgment and skill sets are precisely what make you valuable to your clients and colleagues.

And MOST importantly, please stick with it. The long term rewards of this career are abundant and far outweigh the challenges.  So the best practical advice I can offer is to use all resources at your disposal to set yourself up for success. Outsource ALL non-essential tasks (yes, throw $ at your problems — without apology).  Prioritize your health and wellbeing (I struggle with this one but its essential to staying on top of your game; No excuses).  And finally, surround yourself with positive energy and people who are rooting for you and will always show up for you. You will need them. NO one does this alone - it takes a village...or at least a few of your very own cheerleaders.

PETITION: As we’re sure you’re aware, a book recently came out about the Caesars bankruptcy. You worked on that case. What are 2 or 3 primary lessons that you walked away from that case with? Be candid with us here: what was one thing that was a big win from your perspective and what was one thing that your side could have, maybe, done a bit better?

Nicole: Yes I lived the Caesars case for several years and as acrimonious as it was, it will always be one of the top professional experiences of my career. The case presented every category of complexity you can imagine — from intense corporate governance and litigation related analysis, to novel corporate finance, valuation and structuring issues, to legislative and regulatory issues — and of course just managing the wild ride and larger than life players. I witnessed and learned a lot about so many things, including the influence and importance of the (often unpredictable) rule of law and the relevant inputs to predicting legal outcomes; how deals are made (or not) and the people, negotiating styles and motivations behind them; and the simple truth that not everything is black and white — and what is “right” or “just” can be highly subjective. It’s hard to say what our “side” could have done better — mostly because the question implies everyone in the case was on one side or another of some hypothetical battlefield. We acted for the company so the goal was to get the case done (I know, typical debtor lawyer response - but it has the benefit of being true!)  So for me the biggest “win” was getting to the end and executing the exit: an incredibly complex exercise requiring coordination among many sophisticated advisors across multiple disciplines at many of the firms reading this. They are the unsung heroes of the Caesars story - at least in my book. 

PETITION: Speaking of books, what are some books or podcasts that have helped you get to where you are today?

Nicole: I’ve admittedly never been a big pleasure reader (or podcast listener) —do too much reading and listening on the job — so can’t claim that any inspirational words lit my path. I find my escape in films or TV series (thank you Netflix!) so I’d credit my passion for law to an early obsession with the West Wing... But I have been trying to read more and recently discovered Untamed by Glennon Doyle. It really hit home for me at this stage of my life and career — and is a must read for every woman and mother out there! The general theme is to live “untamed” - true to yourself and free of the cages society places on us (women in particular).  It’s filled with such raw truth, observations and practical guidance - it’s like a modern reference book for life (I wanted to bust out my highlighter on so many passages!).  The author has an amazing way of putting the exact right words around the feelings and sentiment we all experience but can’t necessarily define or articulate for ourselves.  So many golden nuggets in those pages. Good for the soul - and so motivating.

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

Nicole: This is a hard one - I’ve gotten so many pearls from so many wonderful, well intentioned people over the years, including the ever important maxim of “done is better than perfect” (thank you Sheryl Sandberg) - words I’m feeling in trying to finish this Q&A. 😊

But for me the rule I live by is to always be your authentic self. I’m a firm believer that you can learn something from absolutely everyone. But it’s never effective to try and mimic what works for others - especially if it means trying to ‘tame’ the parts of yourself that are uniquely you. I’ve been told so many times to be “less sensitive”  (it can be a curse...) but now I embrace my sensitivity as a gift that provides insight into what others need; Observations that influence my approach and recommendations. At the end of the day clients rely on us for our experience and judgment — and they want advice from a trusted source. When you share your true and distinct perspective it should be a reflection of your authentic self - the culmination of your very personal and ever evolving experiences. That’s how you make genuine connections. And that’s where the magic happens.

PETITION: Interesting stuff. Thanks Nicole!

😎Notice of Appearance: Daniel McNamara, Principal at MP Securitized Credit Partners😎

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Today we welcome Daniel McNamara, a Principal at MP Securitized Credit Partners, where he’s worked since the summer of 2012. Prior to that he was a CMBS trader at Societe Generale, Braver Stern & Co., and UBS. He’s our first investor to make a Notice of Appearance with us and so we hope you enjoy this. It will be a bit longer than usual.

PETITION: Welcome Dan. Thanks for doing this. Let’s dive in. Back in January 2017, we, like seemingly everyone on Wall Street, got our hands on Eric Yip of Alder Hill Management’s 58-page treatise on CMBX 6 BBB- in what, months later, several mainstream media outlets would dub “the next big short.” Yip’s report had “DO NOT DISTRIBUTE” tagged on the bottom of it. Lol. For the uninitiated, in simple terms what is CMBX 6 and how does it work?

McNamara: Thanks for having me. CMBX 6 is an index that tracks the performance of 25 commercial mortgage-backed securities (CMBS) that originated in 2012. Each securitization is backed by loans on commercial real estate, and the underlying loans are diversified across geographic regions and property types, including multi-family, office, hotel, industrial, and finally, retail: CMBX 6 has a higher exposure to retail (over 40%)--and to regional malls, specifically (17%)--than any of the other indices (CMBX 1 thru 14). As for the terminal value of a tranche within the CMBX index, that can be derived by adding up the number of deals that an investor expects to pay off. Each of the 25 deals that payoff in full will contribute 4 points to the ultimate recovery of each tranche. (25 deals x 4 points = par)

PETITION: Your shop bought in almost immediately. But not literally: your team took its time and did its own research before putting money behind the concept-adoption; your colleague Katie McGee and others visited several malls and saw the dumpster fires up close. Eventually you pulled a Michael Burry and went in on credit default swaps against CMBX 6. Mr. Yip was much earlier than you. Why? What ultimately was the straw that broke the camel’s back and catalyzed your ultimate investment? If you can share, how big was your position? What percentage of your fund? We’d love to see what the level of conviction was!

McNamara: We started to visit a lot of malls in 2017 as the CMBX 6/Mall Short gained a great deal of attention in 2017 with the Alder Hill White Paper. It was a very well thought out paper that laid the foundation for all the fundamental reasons to be short the Regional Mall space using CMBX 6. Our only concern was timing: The negative carry on CMBX 6 was the main issue (3 points a year for BBB-6 and 5 points for BB.6), and we thought there might be better opportunities to add to the short trade as maturity approached in 2022 and the “short” became less expensive. It was our highest conviction trade and largest position in the Hedge Fund in 2019/20. In February 2020, we launched the “MP Opportunity Fund I,” which was created entirely to short CMBX 6 and to take advantage of the massive mis-pricing. 

PETITION: What was it like, shortly after putting on the position, getting your face ripped off? Yip shut his fund. Other funds collapsed on the trade. You were up against AllianceBernstein and other large institutions and they were winning. Why? How?

McNamara: 2019 was a difficult year for MP. CMBX BB.6 rallied from $72 to $88.50 along with the negative carry of 500bp, even though we continued to see the fundamentals behind these properties deteriorating. The rally seemed to be driven by a perfect storm of a Goldilocksian economic backdrop, hedge fund short covering, and mutual funds adding to their long positions as they received inflows. 

PETITION: Ultimately what changed? Did Carl Icahn’s involvement move the needle?

McNamara: Icahn’s involvement definitely improved the technicals of the short squeeze that took place in 2019. Icahn placed a large investment in shorting CMBX 6--and the publicity behind his involvement encouraged others to make similar investments.

PETITION: At this point, how has the trade worked out? What’s the return look like? What’s your go-forward view on CMBX 6? 🤑

McNamara: In May of  2020, we wound down the above-mentioned MP Opportunity Fund with an approximate return of 120% net to investors. Our focus now is solely on shorting CMBX BB.6: The asymmetric return available in CMBX BB.6 at this price ($53) is very attractive. After taking down our BB.6 and BBB-6 shorts post covid last year, CMBX BB.6 is now our largest position again in the hedge fund. We believe the ultimate terminal value for CMBX BB.6 is ~$28. 

PETITION: 😳

PETITION: The pandemic has claimed CBL and PREIT. WPG is teetering and Macerich looks wobbly. A lot of people think David Simon is full of sh*t. Thoughts?

McNamara: The Mall REIT space is fascinating. We have always believed that higher quality malls will survive; lower quality regional malls is where the pain lies. CMBX 6 malls most resemble the CBL, WPG, and PREIT portfolios. SPG and Brookfield have focused their efforts on the Class A malls and have continued to give back the keys on their lower quality malls.

PETITION: What do you make of SPG’s strategy to buy up distressed retailers and function as both landlord and equityholder? They’ve clearly been busy in bankruptcy court.

McNamara: SPG is trying their best to hang onto as many tenants as possible, and buying these bankrupt companies in order to stem the exodus from their enclosed malls isn’t without risk. That said, these aren’t large investments relative to the size of SPG: If the approach grants some of their malls more time, they might not be throwing good money after bad. TBD. 

PETITION: What do you make of Amazon Inc ($AMZN) reportedly gobbling up dead malls and converting them into distribution points?

McNamara: Amazon is taking advantage of some redevelopment opportunities in areas where they need more space. As it relates to CMBS, Amazon will not be the savior that some are hoping for: The cost to redevelop these malls is very large. The Amazon bid for these malls is ground value minus demolition costs. I don’t believe that any of the malls left in CMBX 6 will be paying off their debt because Amazon purchased them.

PETITION: Let’s move away from malls. There’s a lot of fear out there among commercial real estate lenders that offices won’t come back. That work-from-home isn’t going away. What do you think? What are your thoughts about co-working spaces like WeWork going forward?

McNamara: Work from home is here to stay. How much that will affect offices going forward is difficult to quantify at this point, but we do think that it will put pressure on office valuations and create more opportunities down the road for mortgage credit investors like us. 

PETITION: The delinquency rates are falling across the board but hospitality remains stubbornly high. What do you expect to happen in that sector now that the economy is re-opening? How would one play continued pain in the sector?

McNamara: Headline delinquency rates are falling primarily due to forbearance agreements. This is just a short-term band-aid. Post 2008, it took 3 years for CMBS delinquencies to reach their peak. CRE is a slow moving product, and it takes time for these properties to sort their way through the system. We are expecting CRE to be the epicenter of distressed investing in the next few years. Costar currently predicts that about $320b in distressed assets will come to market over the next five years — a remarkable 60% increase over the $192b in distressed assets that came to market between 2010 and 2014, following the last recession.

PETITION: Why hasn’t there been a flurry of distressed real estate activity in NYC?

McNamara: Forbearance agreements have provided a lot of borrowers with a "free option." While many realize their property is under water, they will hold on until the forbearance period is over in hopes of a speedy CRE recovery. Also, we have seen foreclosures being delayed and a large bid/ask spread between sellers and buyers which all contribute to a "kicking of the can". None of these things are long term solutions though and we are confident that a long period of "distress" will be coming to the CMBS/CRE markets.

PETITION: Which recovers first? NYC or SF? Do you buy into the idea that, long-term, those cities will lose out to places like Austin and Miami?

McNamara: Pre covid, NYC & SF were losing residents for Miami & Austin just based on taxes and I don't see that migration slowing anytime soon. Some cities (like SF and NYC) were bulletproof post 2008, due to capital fleeing to safety; I believe they will struggle more post covid relative to the gateway cities. Also, NYC & SF were priced to perfection pre covid and it’s difficult to see that pricing returning anytime soon. This is especially true as people feel more comfortable living/working further away from these larger cities.

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

McNamara: “Work hard and play nice in the sandbox.” The former part is obvious but what people don’t realize is the CMBS market is a small place relative to the size of the entire CRE market--if you don’t act with integrity, it can very quickly impact your reputation. And in general, I like the sandbox analogy because it’s good to remember that we can have fun here--if you love what you do, work can feel more like play.

PETITION: What are some books or podcasts that have helped you get to where you are today?

McNamara: The best podcast I listen to right now on the topic of CMBS/CRE is the weekly Trepp Podcast. They do a great job of boiling down the latest relevant topics in my space. For books, I’m a Michael Lewis fan, of course--my favorites are Liar’s Poker and The Big Short.

PETITION: Those are definitely classics. Thanks for doing this, Dan, and good luck.

😎Notice of Appearance: Jeffrey Cohen, Partner and Chair of Bankruptcy and Restructuring at Lowenstein Sandler LLP😎

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Today we welcome Jeffrey Cohen, Partner & Chair of the Bankruptcy and Restructuring group at Lowenstein Sandler LLP.

PETITION: Welcome Jeffrey. Let’s kickoff with UCC representations generally. You’ve done a lot of retail work. There’ve obviously been a lot of cases — particularly those involving private equity sponsors — where the UCC had to step up and do combat with the debtors, the debtors’ private equity sponsors, and the debtors’ “independent” directors. What do you make of this dynamic? What of the cottage industry that’s formed around “fiduciary services”?

COHEN:  I’ve always relished being the underdog.  I’ve never minded battling from behind or overcoming obstacles.  I view this dynamic the same way.  Most cases start with the deck substantially stacked against unsecured creditors, generally, and the UCC, specifically.  The debtors, private equity sponsors, lenders and debtors’ “independent directors” spend months devising a strategy to box in the UCC and unsecured creditors and we get weeks and sometimes days to fight back.  I think it’s unfortunate to treat your vendors, landlords and trade partners that way, but it is what it is.  I am intimidated by nobody and will back down from no situation.  I’m about getting dollars in creditors’ pockets.  Along with my team, we’ll roll up our sleeves and surgically dismantle most well devised plans when given the chance.

As far as the “cottage industry” you have referenced … over the last year we’ve all adopted new terminology in our daily vernacular including, most notably, “WFH” for “work from home.”  We should just call these guys “DFH” for “director for hire”. Honestly, there are so many wildly talented and bright individuals that have become the usual suspects in these independent fiduciary roles that it’s really a shame the nature of the business (i.e. keeping the parties who hired them happy) prevents them from doing their job to the best of their ability sometimes.  Thankfully most judges see right through the charade and let the committees do their job anyway, despite protests by the debtors that their “independent director” has already performed their investigation and found no basis for a claim. 

PETITION: Let’s talk about the recent mini-trend of hyper-expedited prepackaged bankruptcy cases. Belk Inc. and several other cases come to mind. Surely the aversion to longer more expensive cases is a “credit negative” for practices like Lowenstein Sandler LLP that represent official committees of unsecured creditors. Do you see these types of cases becoming more and more common and, if not, why not? What do you make of the manufactured venue that’s been leveraged to help make these cases happen?

COHEN:  A lot of work goes into these expedited prepackaged cases in advance of their filing, so the professionals involved aren’t really hurting for work.  Does it shorten and sometimes eliminate opportunities for a committee to be appointed and, in turn, for Lowenstein or one of our talented competitors to represent the Committee?  Absolutely. But our goal remains focused on putting dollars in creditors’ pockets.  In Belk, we represented approximately a dozen separate vendors, all of whom will get paid 100 cents in the ordinary course of business.  In the long run, our clients’ happiness is good for business.  So while I would have loved to represent the committee in Belk had there been one, the outcome for unsecured creditors was worth the tradeoff.

With respect to venue, the first large and notable chapter 11 case in my career was Enron, so venue selection or manipulation is nothing new to me or our industry. Remote appearances at hearings is certainly making venue selection even easier as armies of attorneys, financial advisors and bankers do not need to board planes and stay in hotels to appear around the country right now.  I think this will lessen as cases start pivoting back to in-person hearings.  Hopefully someday soon, we’ll all be on the Acela to Wilmington again, avoiding the bathrooms at the train station and eating granola bars for dinner. 

PETITION: You represented the committee in the Blockbuster Video case. Tell us a crazy story about that company and/or that case that isn’t commonly known.

COHEN: Fun question.  There are actually a few stories that put a smile on my face, but the one that sticks out the most is when, during a large meeting between the Committee and the company, I asked the company’s new CEO if I could see his Blockbuster card (I showed him mine) and he admitted to not being an active member but rather being a Netflix subscriber.  At the time, Netflix was still delivering DVDs by mail and wasn’t the behemoth digital content provider they are today.  Seriously dude?!?!

PETITION: What surprised you the most about the short-lived cycle that transpired over the course of 2020?

COHEN:  The speed and growth of the technology we used to run our cases and represent our clients. For example, my first cross examination of a witness during COVID involved having to dial-in by phone, login to a designated court platform and then separately have my litigation partner and witness connect by Skype.  Just months later, court hearings were run much smoother and generally on one video platform, auctions were run with numerous bidders and hundreds of attendees without too many hiccups and driving value in virtually the same manner as in-person auctions.

Also, how quickly all case parties came together to work collaboratively to try to figure out a solution.  When all stores were closed, it made it impossible to run store closing sales if you couldn’t physically access the locations.  But this wasn’t a debtor-specific problem.  This was a problem for all parties involved and, to the credit of our industry, we saw a lot of collaboration to get parties to the best result possible. 

PETITION: Where do you think there’ll be activity in 2021? Is there something hiding under some rock somewhere that people should be paying more attention to?

COHEN:  I don’t look under rocks, although I am a big fan of Dwayne Johnson.

I think there are some obvious possibilities including lodging, entertainment, travel and fitness, but it really depends on the level of stimulus funds these industries receive and whether they successfully bridge them to the other side of Covid or not.  Unfortunately, your guess is as good as mine here.

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

COHEN:  I was lucky to have several mentors, both personal and professional. One common piece of advice I received was that it’s about the long game and not the quick fix.    As a result, I have continued to hold myself and my team to a high moral and ethical standard that I won’t compromise to get hired as counsel in a single case or resolve an isolated case-specific issue.  I want clients to hire me, and the Lowenstein bankruptcy group for years to come, because we’re loyal, smart and qualified.  We never want to be the flavor of the month.  

PETITION: What are some books or podcasts that have helped you get to where you are today?

COHEN:  “The Long Run,” by Matt Long.  It’s the only book I’ve ever read multiple times … by choice!  If you’re not inspired by a New York City firefighter who had less than a 20% chance of survival after getting hit by a charter bus during a MTA strike, not only surviving, but relearning to walk, then run, then train for and attempt to run the NYC marathon and a full Ironman triathlon, you aren’t capable of being inspired.  His grit and determination is something that gets me through case challenges, long hours, party disputes and dirty litigation tactics by adversaries.  Keep pushing.  Don’t stop.

PETITION: The fact that you’re analogizing restructuring practice with a firefighter who got hit by a charter bus, had to fight to walk again, did so, then ran 26.2 miles on one of the harder core marathon courses and the for sh*ts and giggles, did a full Ironman …. is … probably not that confidence-inspiring for MBA and/or law students considering a career in restructuring. Juuuuuust sayin, homie. 😂

Anyway, thanks, Jeff, for participating. Cheers!

😎 Notice of Appearance: Max Frumes, Co-Author of the New Book, "The Caesars Palace Coup: How a Billionaire Brawl Over the Famous Casino Exposed the Power and Greed of Wall Street"😎

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This week we welcome Max Frumes, co-author (along with The Financial Times’ Sujeet Indap) of the new book, “The Caesars Palace Coup: How a Billionaire Brawl Over the Famous Casino Exposed the Power and Greed of Wall Street.”

PETITION: Hi Max. Thanks for joining us. Let’s cut right to it: you’re in a room in front of 50,000 people who have an interest in private equity and/or restructuring. Why should they care about this story? Give us the elevator pitch.

Max: “If you’re in that crowd, Caesars is THE seminal moment in PE and restructuring. Everything that came before – Michael Milken, the GFC, the mega-LBO, the distressed debt boom – culminated in the fight over Caesars. Everything that’s come after – getting “J. Screwed”, creditor-on-creditor violence, corporate governance games, extreme liability management in the time of coronavirus – can be traced back to Caesars.”

PETITION: For our readers who were either too busy to follow the Caesars situation in real-time or weren’t yet focused on distressed investing, give us the rapid fire version of who the top winners and losers were and, in one sentence, why. Feel free to bullet point it.

Max: “In this case, Appaloosa, Elliott and Oaktree can claim decisive victory over Apollo. While basically every distressed investor did well because the company turned around, those three funds drove the battles that resulted in a court-appointed examiner finding as much as $5 billion worth of credible claims of fraudulent transfers and corporate governance misdeeds that tipped the case. Just those three funds profited in the billions, whereas Apollo and TPG lost their entire initial equity checks. David Tepper not long after the case ended paid a record price for the Carolina Panthers, coincidentally or not.

Ironically, long-term, Apollo might have the last laugh. What others saw as financial shenanigans that crossed the line over and over, LPs saw as a PE firm able and willing to go to all lengths to save an investment. Apollo raised a record $25 billion PE fund shortly after the case. Apollo’s point-men on Caesars are ascendent with David Sambur now the co-head of private equity and Marc Rowan soon to be CEO. What’s more, Apollo is back on the Vegas strip, just last week announcing a deal to buy the Venetian – with the help of the REIT created out of the Caesars bankruptcy.”

PETITION: This bit made us laugh out loud:

“But now, on September 23, 2016, [Jim] Millstein was five years removed from this stint as a Washington insider [serving as Chief Restructuring Officer of the United States]. He had set up his own firm, Millstein & Co., to capitalize on his sterling reputation and experience. However, he had not fully appreciated just how nasty the restructuring world had become in his absence. After having the power of the US Treasury Department behind him for the better part of two years, he now found himself being mistreated by ex-Ivy League jocks almost half his age.”

Care to expound upon this state of affairs?

Max: “There is a ton of money in the distressed asset class relative to the number of good opportunities so it should not be surprising that tempers are short. And while stars rise fast on Wall Street, sometimes judgement and maturity do not advance as quickly as raw horsepower, which Jim Millstein, the Caesars ringmaster, found out the hard way.”

PETITION. Purportedly “independent” directors were very much a part of this story. In what respect to you believe this case affected the use of independent directors in subsequent restructuring situations? Are you surprised to see some of the same players cycling around?

Max: “Totally shocked (I’m not shocked). Caesars provided the perfect test case for what happens when you use an independent director versus when you don’t, regardless of how “ugly” a deal is: Out of all the aggressive pre-petition transactions perpetrated by Apollo, the one the bankruptcy examiner liked the least, he assigned no liability to whatsoever almost entirely due to the fact that newly appointed independent directors signed off. From then on, law firms have figured out how and when to parachute in "independent" directors to cleanse messy transactions. Everybody by this point is in on the joke.”

PETITION. Put yourself in the shoes of an MBA student. If you’re considering interviewing with a large private equity shop, what’s your main takeaway from the book? Then do the same exercise for a third year law student looking to get into big law.

Max: “The key takeaway for both the business and the law students should be just how interconnected the two are once you get to the big leagues. The distressed investment theses in Caesars required weighting probable versus possible legal outcomes in addition to understanding the underlying business, not to mention the skill needed to whip up a precise cap table. And the best lawyers in the case understood the dollars that hinged around each minute legal fight. Deep down, however, I hope students take away that they should just spend a few years in big law or finance before finding their true calling as a journalist.”

PETITION: Creditor-on-creditor violence has obviously been a hot topic lately — something you quickly mention at the end of the book (referring to J.Crew and Serta Simmons, specifically). Whether it’s TriMark USA, Revlon Inc. ($REV), Tupperware Corporation ($TUP), Transocean Ltd. ($RIG), or Boardriders, market participants are getting buried alive. We point out that the volume of shady-cum-combative deals always seems to increase when there isn’t a ton of distressed activity out there and funds are scratching and clawing for returns. Are there any recent situations that have piqued your interest lately and why? In what way, if at all, do they give you PTSD after spending four years writing this book? Is there one, specifically, you’d love to write about?

Max: “Love the question, and my team at LevFin Insights has been in the weeds on each of those deals. What is interesting about this world is how the same sets of funds and the lawyers and bankers all end up on different sides making arguments that they complained about in the case before. Apollo was the sponsor in Caesars but is a creditor in Serta Simmons and AMC. Oaktree, in orchestrating the priming deals in TriMark and Boardriders, was even called out for acting like Apollo. AMC may be the most fun one of late because of the crazy Reddit fireworks that helped keep the company out of bankruptcy.”

PETITION: We’d be remiss if we didn’t acknowledge the small “Notes and Sources” section at the very end of the book. You and Sujeet expressly call out Paul Weiss for their antics as you both worked on this project. You write:

Paul, Weiss, after repeatedly ignoring our inquiries in 2019, eventually agreed to only respond to written questions. The set of limited responses it sent back to us in December 2019 was almost immediately followed by a remarkable letter that demanded that we turn over our manuscript as well as a list of Paul, Weiss sources that they believed we had approached outside of official channels. The letter went on to accuse us of acting in bad faith and culminated with a threat to sue us for defamation (all well before a first draft of this book existed).

You continued:

We share these events to underscore the strong feelings that underlie the Caesars story and to demonstrate how the news media continues to face undue harassment from powerful forces, like Paul, Weiss, for simply attempting to do its job.

Do you have anything else to add to this now that the book is out?

Max: “Intimidation and bullying do work sometimes when powerful forces are trying to silence underfunded news outlets and journalists. So first, support good journalism (especially investigative work done by places like ProPublica and Reveal). But more importantly, I believe those powerful forces are better served by not fighting it; don’t obfuscate, own mistakes, right wrongs, and vie to be better if, in the light of day, those things turn out to be ugly.”

PETITION: When you guys set off to write this book was there a model for you? What prior book, if any, served as your inspiration here?

Max: “I mean both of us marvel at James Stewart, especially the Den of Thieves. And like a couple of guys shooting fadeaways in the driveway thinking “Kobe!”, greats we tried to emulate included Connie Bruck’s Predator’s Ball, Bethany McLean and Peter Elkind’s Smartest Guys in the Room, and Bryan Burrough and John Helyar’s Barbarians at the Gate (which our book is frequently next to on Amazon, which is kind of exciting!).”

PETITION: Thanks Max. Good luck to you and Sujeet with the book.

⚡️Notice of Appearance - Ted Gavin, Managing Director and Founding Partner of Gavin/Solmonese⚡️

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This week we revisit with Ted Gavin, Managing Director and Founding Partner of Gavin/Solmonese. Enjoy.

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PETITION: You represented the UCC in the Videology Inc. chapter 11 case that filed back in May 2018. Videology is an adtech company that had received a significant amount of venture money and, later on, venture debt. What did you learn about the adtech business, the impact of venture debt on upstart companies, and how might these lessons be applied to bankruptcies in the future?

“Yes, there was venture money, and yes there was venture debt. And sure, maybe that venture debt was more venture money than debt. Here’s the thing about adtech in general and Videology in particular: the value of these businesses is wrapped up in their intellectual property, which generally comes in two forms: a proprietary engine, and the customer lists. If an adtech company isn’t running a proprietary engine, then it’s just a service bureau with aspirations. And customer lists (and, for that matter, the proprietary engine technology) are incredibly portable. This makes for blurred lines with respect to what corporate family member actually “owns” the assets. You can move the IP from company to company, and that can be done for legitimate purposes (if we’re calling the creation of a middleman to create opportunities to upcharge customers by intermediating them from the sale side of the business “legitimate”) or it can be done to frustrate creditors, please noteholders, or any other suspicious or quasi-nefarious purposes. While Videology came to command decent value in a sale, it took a lot of investment to get there. Those proprietary engines cost money to create, develop and prove out – yet they’re still nothing without turning that into a revenue-producing customer list. Someone’s got to foot that bill and, if it’s done with debt, the company will not likely survive long enough to realize a return on the investment because of over-leverage (think of it as a tech company version of the Revel Hotel & Casino – sure, you’ve over-invested in startup, but put it through bankruptcy a couple times to strip off that debt and pretty soon you’ve got yourself a good business!). Generating enough cash to fund ongoing operations and also be able to pay back the cost of development is gonna take a minute. Videology, which commanded a respectable sale value (at least in relation to its stalking horse bid), couldn’t do it.”

PETITION: You also represent the debtor in the Consolidated Infrastructure Group case. This one has some hair on it: breach of contract allegations, de minimis asset value, etc. Was chapter 11 a suitable option for dealing with this company's issues or do you think this case could've been avoided with agreements outside of court? 

“Chapter 11 was the only suitable option. Reasonable people can see the same facts differently. Reasonable people can try and fail to find common ground. But parties who aren’t talking to each other never will find the basis for resolving their issues. If the destruction of the other party is what each party is fighting for, then it’s a war of attrition. And that was the story of CIG. This case wasn’t ever going to find an equitable and consensual resolution outside of a court-supervised process. The exigencies of the case required neutral oversight and a transparent process, and there were years of history to support the premise that it was never going to happen outside of bankruptcy. Once that process was in place, there was a platform for the various parties’ grievances to be heard, and for an open sale process to be run. A sale process in which all the parties are involved can be a de-escalating force once it’s done.”

PETITION: You and the G/S team play a lot in the small to middle market. A lot of the noise these days has been emanating out of big retail and energy: the small and middle markets don't get as much media love. What are you seeing there that is notable as we inch closer to Q4 '19? 

“Lordy – in the last 15 years across the restructuring spectrum we’ve gone from restructurings, to cleaning up the balance sheet with a quick sale, to “screw it we’re just going to liquidate because retail”. Where do we even start? With small and middle-market companies, there exists the opportunity to actually accomplish something that resembles an actual turnaround and reorganization.  Sure, the companies are running on fumes, but so are large company cases because they’ve waiting too long to file. So, with smaller companies, you need less capital to get past the “running on fumes” stage. Smaller cases often present with less of a foregone conclusion, which means there can be more creative solutions. I’ve seen small-market debtor plans that look almost indistinguishable from chapter 13 plans. And, like chapter 13, small-company chapter 11 work can be an interesting and unfamiliar neighborhood.”

PETITION: Cases these days appear to be veering more towards chapter 11 363 sales with liquidating plans. You do a lot of liquidating trust work: what are some things about liquidating trusts that you think need changing? Are there tech solutions out there that can make liquidating plan processes much more efficient to the benefit of creditors?

“Liquidating Trusts are a mixed bag: what appears to be simple can become burdensome and expensive, particularly when there is protracted motion practice to resolve claims. On the other hand, what looks like it will be lengthy and complex can often be made simple by understanding reserves and pushing money out sooner rather than later. But the one constant seems to be the complete lack of transparency and oversight over how the Liquidating Trusts come to be. If a bankruptcy plan is akin to a law, a Liquidating Trust agreement and the subsequent oversight is more like an executive order – it just sort of happens. And Liquidating Trustee work can get unwieldy and complex – particularly with recent case law narrowing what types of claims a Liquidating Trustee can bring, and who can bring claims that a Liquidating Trust will later inherit. As for the one thing that would improve Liquidating Trusts, I say transparency. Constituents should know why their Liquidating Trustee should be their Liquidating Trustee and they should be aware of the whole of the business or pecuniary relationship between the Liquidating Trustee and any other parties in the case. Those relationships aren’t fatal, but they should be disclosed like any other connection in a bankruptcy case.

There are plenty of tech solutions that streamline Liquidating Trustee work. I use one at the moment, and I’ve used most of the others. There are plenty out there; but the bottom line is that if a Liquidating Trustee isn’t using a consolidated claims management and banking platform, they are wasting time and resources on a process they could be having done for free.”

PETITION: Thanks Ted.

⚡️Notice of Appearance⚡️ - Scott Chabina, Director at Marathon Capital

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This week we welcome Scott Chabina, a Director at Marathon Capital, an investment bank focused on the global power and infrastructure markets, to talk with us about interesting energy trends that we haven’t paid enough attention to in our a$$-kicking briefings. This dialogue is edited slightly for length and clarity.

PETITION: As you know, Scott, PETITION is primarily about disruption. What are some things that you're seeing in the alternative energy space that ought to have incumbents quaking in their boots? Have you seen any recent M&A that had you nodding your head thinking "yes, that is the future"?  

Absolutely!  One of the more “disruptive” and rapidly-developing segments that I cover is renewable natural gas (“RNG”), also known as biomethane.  As opposed to natural gas produced by the petroleum industry, RNG is derived from abundant, organic waste resources (ag-waste, food waste, wastewater treatment facilities, etc.).  RNG is interchangeable with traditional natural gas and can be directly injected into the existing interstate utility natural gas lines.  Critically, when used specifically in transportation fuels, RNG is eligible for key environmental attributes through federal and state programs (RINs and LCFS credits, respectively) and, as a result, generates tremendous value above the prevailing commodity price of natural gas (in some instances 20-30x on a MMBTU basis).  The continued de-carbonization of the transportation sector, as well as the need to materially reduce harmful methane emissions, will continue to support the need for these types of environmentally-impactful projects.  While the transportation sector is clearly the most valuable end market for RNG today, further out on the horizon we anticipate broader applications of RNG to a wider range of industries.  For example, RNG for use in the renewable electricity markets is a particularly compelling proposition (electric vehicle charging stations powered by truly renewable energy resources doesn’t sound so crazy these days).

PETITION: Narrowing in on solar, specifically, there was a period a few years ago when a number of solar-based companies were filing for bankruptcy. Lately, not so much. Have solar companies figured out their business model or is there trouble on the horizon?

Broadly speaking, a major historical challenge with public YieldCo or IPP business models is they exposed the solar sponsor to capital markets financing risk.  Sponsors, such as SunEdison, were unable to continuously raise the required corporate equity from the public markets to fund all of their new projects.  Large solar sponsors have since pivoted from the public to the private markets to reduce capital markets financing risk.

PETITION: The International Maritime Organization will, come 2020, start enforcing limits on the sulfur content in marine fuels for ocean vessels. By volume, sulfur content will need to decrease from 3.5% to 0.5%. In addition to tariffs potentially curtailing demand, is this a headwind for the shipping industry? What other effects might arise out of this? Increased prices for diesel and constrained US gasoline supply? 

Great question.  In a nutshell, we are facing the most significant fuel specifications shift since the phaseout of lead additives in the 1970’s.  Notably, this regulation is global in nature and binds the shipping industry to these lower-carbon fuel commitments.  This has left ship owners with a number of options ranging from installing scrubbers to switching to compliant fuels.  While there is no “one size fits all” solution, refiners have publicly indicated that they are prepared for IMO 2020 and are ramping up production of low-sulphur fuels in the second half of 2019 ahead of implementation.  However, we anticipate second-order effects to impact the refining, chemicals, mining and industrials sectors.  In fact, Goldman Sachs recently estimated that if the entire shipping industry were to follow the rules (100% compliance) consumer wallets could be hit by around $240 billion by 2020 – clearly, this transition needs to be closely monitored and the effects of such a transformative shift are yet to be fully understood.

PETITION: Unlike more recent participants in this segment, you're a younger guy. As you look out on top of you, what growth opportunity do you see for folks of your vintage in distressed/restructuring/banking? What is the best piece of advice that's helped guide your career?

Well, thank you very much for that…I think.  I am very fortunate to have had a diverse background in the restructuring and investment banking sectors, having advised clients across the capital structure in more than 20+ industries over 13 years, prior to joining Marathon Capital two years ago and deepening my focus within the renewable fuels and renewable chemicals sectors.  In terms of advice, let me offer two lessons I’ve learned that I hope will be valuable to others, particularly professionals in the earlier stages of their careers: (i) be open to new opportunities and try to recognize that each engagement is a chance to learn more about what you are passionate about (equally as important to know where you are NOT passionate).  This can take time and isn’t always obvious in the moment, but reflection is a powerful thing when you have a diverse range of experiences upon which to form a perspective; and (ii) consider every engagement an opportunity to audition both your firm and yourself for the future.  Some of the best relationships I have made in my career are with other professionals (yes, even competitors) that were on the “opposite side of the table” in one engagement or another.  These are the folks that ultimately will rise to decision-making capabilities for future business on similar timelines as yourselves.   

PETITION: Lastly, if you had to recommend one book to folks interested in banking, what would it be? 

For a lighter, quicker read, I strongly suggest “The Madhouse Effect: How Climate Change Denial is Threatening Our Planet, Destroying Our Politics, and Driving Us Crazy” by award-winning climate scientist Michael E. Mann and Pulitzer Prize–winning political cartoonist Tom Toles.  As Amazon will tell you, the book “aims to address the manipulation of the media by business and political interests and the unconscionable play to partisanship on issues that affect the well-being of billions,” which I found to be done in a very approachable and humorous manner. 

For a longer read, I always find myself recommending Daniel Yergin’s “The Prize” and “The Quest”, both of which are tremendously insightful accounts of the global energy landscape and how energy impacts all spheres of our daily lives – political, social, etc.

PETITION: Thanks Scott.

⚡️Notice of Appearance⚡️ - Gregory Segall, Chairman and CEO of Versa Capital Management LLC

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This week we welcome a notice of appearance from Gregory Segall, the Chairman and CEO of Versa Capital Management LLC.

PETITION: Everyone is talking about "too much money chasing too few deals." Can you enlighten us a bit as to your experience looking to acquire or invest in middle to lower middle market companies (in or out of bankruptcy)?  

Can safely say the conventional ‘distress cycle’ has been hyper-extended by the combination of low interest rates, multiplying sources of non-bank lending sources and economic strength. We track the outcome of all deals we do not buy and our number one competitors at the moment are either “liquidated” (i.e., too sick to save) or “refinanced” (i.e., found someone who let them kick can down road...again). But at the end of the day, the cycle has been delayed, not denied, so our mantra remains “Distress 2020!” (unless it’s 2021...)

PETITION: Given how disruptive technology has become and how quickly "change" appears to be occurring, how do you evaluate management teams and scrutinize their projections today? Have you changed any methodologies from, say, 10 years ago?

I see two layers to the question, one being the effects on a business of technology and how that impacts projection reliability, and then management competency in making projections. On the former, most everyone’s crystal ball has been off both in identifying where technology may be applied to or disrupt a given business’s expectations. On the latter, the quality of management projections, whether 13 week cash flows or 5 year valuation models, is usually a function of how long a given companies business cycle is (ie fast food has pretty good short term insight but pretty foggy about 1 or 2 years out, vs. building locomotives usually cannot do much about short term but can have pretty good visibility over the medium-longer term given the procurement cycle). Sprinkle all this with the question of management’s competency and command of the business, both from the forest and the trees, and that will tell you something about projection reliability.

PETITION: Versa owns Avenue Stores since its 2012 bankruptcy. The company once had 500 stores and now, according to its website, it has 262. What lessons have you guys applied to that business and what continued evolution is in store? Where do you see retail in 5 years? 10 years?  

When we acquired Avenue its store base was immediately pared to about 300, and over the last few years the company has been letting leases roll off where stores are less productive; fortunately Avenue has always had a strong and sizable eComm/direct business (~33%) so the store roll off gets offset by ecomm growth, and going forward where possible a retailer like Avenue can operate in a much smaller footprint (ie 3,000 sqft instead of 5-6,000) and therefore more profitably so they are executing that shift wherever they can. Retail will continue to transition for years to come, and it is somewhat helpful that landlords are starting to become more realistic about the need to make accommodations or lose tenants.  “Retail” has always been a rough neighborhood; I expect it always will be whether 5 years or 10 years out, will just be a new set of challenges.

PETITION: The bankruptcy business has changed considerably in the years you've been in the space. What is the biggest issue you see today with the bankruptcy process and what's your remedy to solve it?  

Aside from the bankruptcy code looking like the tax code in terms of all the “special interests” getting their fingers in the pie going back to the BAPCPA amendments, there used to be a much greater emphasis on seeing debtors reorganize. I won’t be the first to observe that most mid-market debtors “can’t afford to go bankrupt” given the cost and other pressures including timing and all the parties who keep trying to elevate their priority resulting in rapid administrative insolvency. Since “high costs” are certainly a difficult issue but almost impractical to reduce to a fixable sound bite here, If I had to choose one or two remedies it would be getting rid of or extending the shortened deadlines for lease assumption or rejection, as well as reducing the number and kind of pre-petition creditors that can elevate their claim priority.

PETITION: In addition to a lot of accomplished, senior folks like yourself, we have a great number of junior professionals and students that read PETITION. What is your advice for them? What is the best book you've read that's helped guide your career?

When starting out early in your career, don’t every view any task as being beneath you - add value by being seen as a go-to resource, make yourself like fly paper and things will stick to you, increasing your role and experiences in your organization. As for a book (or four), gIven how often it is cited It seems almost passe to reference Sun Tzu, but it is a great book on strategy and tactics; also recommend “How to Win Friends and Influence People” by Dale Carnegie, another classic - success in this business, or really in any, is often all about working with people. Regardless of your politics, “Rumsfeld’s Rules” is also a terrific summary of common sense management techniques from a guy who has had enormous public and private sector experiences. And finally from the standpoint of bankruptcy, I highly recommend “Feast for Lawyers” by Sol Stein - if you can find it, a great if slightly dated primer on the reorganization process, and a great read - more like a novel though based on true stories.

PETITION: Thanks, Greg.

⚡️Notice of Appearance - Ross Waetzman, Director at Gavin/Solmonese⚡️

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This week we welcome a “Notice of Appearance” by Ross Waetzman, a Director in the Corporate Recovery group of Gavin/Solmonese.

PETITION: In the most recent Gavin/Solmonese newsletter, "The Next Chapter," you provide a solid macroeconomic summary in your "2019 Outlook." You conclude, "...the U.S. benefited from strong growth in 2018 that could continue into 2019. However, threats to growth far outweigh potential for simulative surprises. In short, prudent corporations in or nearing distress should undertake corrective action soon, while opportunity still permits." To what degree does the tweet below — particularly combined with the recent disappointing February job numbers — affect your 2019 outlook, if at all? 

In the words of Douglas Adams, “Don’t Panic!” one month of data—particularly erratic data—does not make a trend. Yes, nonfarm payrolls grew 89% fewer jobs than expected.  This could very well be just a “fluky” result. Since the end of the government shutdown, there have been a number of recent economic surprises (see the Citigroup Economic Surprise Index). This could simply reflect government agencies challenged to catch-up following a historically long shutdown. If true, expect data revisions in upcoming months to smooth out “fluky” reports.

Flukes aside, there are some interesting takeaways to glean from the labor market. In January, U.S. job vacancies hit an all-time high. Curiously, Europe is also facing labor shortages despite an economy that is slowing more rapidly than in the US, notably in the UK and Germany. This suggests that baby boomers are retiring faster than millennials are entering the market.  Further pressures come from the February jobs report, which showed that wages grew at their fastest pace since April 2009. 

Continued wage increases could lead to higher consumer purchases, a harbinger for inflation, and ultimately Fed rate hikes. How likely is this scenario? 

On March 20, the Fed said it would not raise rates anytime soon. They lowered guidance for GDP growth and inflation while raising their guidance for unemployment.  The following day (and for the first time since 2007), the Treasury yield curve fully inverted, a widely recognized signal for a recession.  The market, through Fed Fund futures, is reflecting a zero probability for a rate hike in 2019 with a 31% probability for a rate cut.

This sets up an interesting dynamic. Economic data is signaling high inflation but the Fed and markets are anticipating lower GDP growth. Periods of sluggish growth coupled with high inflation lead to stagflation, a serious economic condition that historically has challenged central bankers.

Academic theory aside, the message to distressed debtors remains the same: reach out to your advisors and take corrective action asap. The reasons for an end to the recent boom cycle is secondary to the fact that the sands of easy credit are quickly slipping through the hourglass.

PETITION: What kinds of corrective actions have you found yourself recommending to clients lately? What, if anything, are you hearing from clients (or just generally in the marketplace) that you weren't hearing just 12 months ago?

The middle market appears to be relatively unchanged during the last year. We are hearing more general chatter about when the next recession might start. In cases where we are selling a client’s assets, we have seen prospective investors express more concern about how our client’s assets will perform in declining economic conditions.  Our job has been to kick the tires harder during due diligence and to be more proactive in supporting rationale for upside projections.  In some cases, that means helping our clients understand they may need to temper aggressive forecasts.

PETITION: What is the biggest inefficiency in the restructuring process? If you had the opportunity to lobby to change one thing, what would that be and why? 

Professional fees are easily a huge disadvantage to the bankruptcy process, which many would argue is an inefficiency.  However, the professionals are largely present for good reasons and are working to help their clients.

Larger debtors are often able to absorb these costs and still emerge from bankruptcy.  The challenge for smaller debtors can be much more formidable. These firms may have similar professional needs but have less cash or profitability to cover their costs. The result is after budgeting for debtor professionals, a creditors committee may find they have less than adequate funds to pay for their professionals.  Certainly lenders have little desire to amply fund a potential adverse party.

There is no easy solution to this issue. The debtor has the greatest need for professionals, yet there has to be a balance. In many cases, unsecured creditors could posture that the debtor only is able to pay its professionals because unsecured creditors have not yet been paid.  Fundamentally, this creates a systemic problem – by making chapter 11 too costly for the smaller end of the middle market, these companies delay seeking relief so long that many options for recovery are foreclosed upon by the passage of time. The system needs to be more accessible to smaller companies, and the only way to accomplish that is through procedural and structural changes.

PETITION: One of the great things about PETITION is that we have the senior-most professionals at certain firms that read us AND we have a lot of law and business school students that read us. Thinking about the latter, what is one book that you've read that's helped you become a better professional? Thanks for participating. 

Without question it’s been Sun Tzu’s The Art of War. While there are many comparisons of how TAOW can be applied to business, there are similar comparisons to medicine which I find very applicable to the distressed space. 

Being the first boots on the ground of a distressed company is akin to being an emergency room doctor (not to diminish the tremendous credentials required by actual medical professionals).  From the outset, professionals need to question if they can make a difference or if the patient is too far gone (TAOW: Move not unless you see an advantage; use not your troops unless there is something to be gained). We next read vital signals of our patients through financial reports and analyses (TAOW: know your enemy).  Often plagued by a host of problems, we triage to address the most critical issues first (TAOW: ponder and deliberate before you make a move).

The parallels go on but really cement the similarities between human and corporate health. The very positive takeaway is that corporations, like humans, are wired to survive and will fight tenaciously to do so.  It’s in this context that we as turnaround professionals can feel truly blessed to work in this field where we support those fighting, in many cases, the battles of—and for—their lives.

PETITION Note: The Art of War is becoming a recommendation of choice from the various members of our community who’ve made a Notice of Appearance. While there’s a social commentary there, we will, for once, just leave it alone. 😉

⚡️Notice of Appearance: Lance Gurley, Managing Director at Stephens Inc.⚡️

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For those who are new to us, our “Notice of Appearance” feature provides an opportunity for a professional in the field of restructuring to provide us all with some perspective about the markets generally, the industry, and professionalism. This week, we dialogued with Lance Gurley, a Managing Director on Stephens’ restructuring and special situations team.

PETITION: There has been a surprising increase in recent distressed activity in the oil and gas space. News abounds about professional retentions in E&P and companies correlated to oil and gas are filing for bankruptcy (i.e., most recently, PHI Inc.). What is this attributable to and what differences do you expect to see in the next go-around of oil and gas restructurings vs. the 2014-2017 period? What more should have been done in that first wave to ensure these companies didn't ultimately end up in (or back in, as the case may be) into bankruptcy court? Or was this just a failed option play on oil prices? 

The return of restructuring work in the energy sector is, broadly speaking, tied to companies that either (a) harbored denial about the need to restructure when the market turned a few years ago, or (b) restructured poorly the first time. In the first category, a lot of bondholders have learned to be comfortable with coupon clipping as they see Boards/CEOs continue to burn their furniture hoping for a recovery on the other side and preserved equity value. These companies tend to fall somewhere between hope as a strategy and outright recalcitrance.  Neither are great ways to run an enterprise with funded debt. But it’s difficult to get a board to understand that when their continued role depends on them not understanding it. In the second category, some companies restructured around a more aggressive (drilling dependent) business plan than some industry professionals saw as reasonable at the time, and never really fixed their strategy. They are more representative of the real issue in the market: many of these companies (and their new owners) had an imperfect understanding of what the market would reward in this new normal pricing environment — that cash flow is king. Just ask the average ‘back a management team’ PE investor how offloading that development play is going. Not a great time to be selling a development acreage in the supposed “core” of a new resource play.

PETITION: You're based in Texas. A significant amount of healthcare action has taken place down there. What do you make of all of the filings we're seeing in the continuing care retirement community and other specialty healthcare provider segments (e.g., behavioral health, etc.)?

Bad business models, frankly. The SQLC/Seniority filings were a great example of that: I’ve never been a fan of healthcare models that require elderly patients to, um, “move out”, in order to make way for a new dues paying member. The financial viability of the CCRC companies and the wellbeing of their patients/tenants seem to be in conflict. I’m not a healthcare professional, but playing real estate roulette with geriatric care in the balance is not an endeavor I could see working well for anyone involved (save for perhaps healthcare professionals?).

PETITION: Your firm is a middle-market oriented investment bank. What are some things you're seeing that are specific to the middle market space that give you the sense that distressed activity might pick up there? Or, alternatively, do you see a system awash with capital sparing the middle market from some needed fixes? 

The middle market as we define it — $250mm to $2.5bn — seems to be turning towards malaise. More and more of the equities my research colleagues cover are trading under half of their 52-week highs; my capital markets colleagues are hearing major accounts talk of less and less deals in the market, etc. Does that mean we should all batten down the hatches for a bankruptcy bonanza? That would be wishful thinking.

Practically, that means we are using restructuring technology to solve issues a long way from the courthouse. We are seeing a deluge of liability management work, nipping and tucking balance sheets to fight for another day. Some companies will recover and some will not, but until we have a meaningful catalyst (Interest rates? Recession? Vaping finally being declared bad for your health?), it’s unlikely to be the distressed wave we experienced in the last cycle. 

PETITION: We received a lot of feedback to our note in "Sears = Drama Queen. PLCE = Future Seer" wherein we noted "most of the retail chapter 22s we’ve seen have come about specifically because the restructuring were not, particularly, holistic. Similarly, we’ll see what happens in the oil and gas space: in many instances there, financial advisors weren’t even retained and in some where financial advisors were retained, the retention was for bankruptcy reporting purposes only." Where do you come out in this debate? In your view, have chapter 11 filings over the last few years accomplished all that they could in a holistic way or have they left issues lingering that should have been resolved?

I agree that many restructurings have not been as holistic as they could’ve been. Bankers and lawyers are driving deals with an intense focus on the balance sheet, and that’s healthy, but that’s left fundamental problems unsolved in many instances. Ch. 11 is a tool that can be transformative if it’s allowed to be but creditors and management teams are loathe to take their medicine on strategy when they are already justifying significant impairments to the balance sheet (especially if those strategy shifts result in further losses). That said, it’s tremendously challenging to enact change through Ch. 11 on the fly and without significant pre-planning — it’s not only too expensive, it’s too risky (like my grandfather used to say, “don’t try to clean a wood-chipper if it’s plugged in.”). If a debtor needs to reject a contract in order to implement a strategy shift, the debtor and plan support parties would be wise to put that in motion long before finding themselves past the bright line of a petition date.

At some point however, restructuring professionals have to rely on management teams that get MIPs to run companies well actually running companies well.

PETITION: Finally, for our younger readers, what book have you read that has guided you most in your career? 

The books that have “guided” me are all boring, so I’ll answer perhaps what has been most influential. Someone gave me a copy of “Barbarians at the Gate” when I was an undergrad and it opened up this crazy world we work in to me. I’d highly recommend it. But I tell young people coming to work for us to read Andrew Ross Sorkin’s “Too Big to Fail.” The financial crisis was so meaningful to so many of us, I can’t imagine starting a career that interacts with the markets and not appreciating it fully.

⚡️Notice of Appearance: Sabrina Fox, Executive Advisor to the European Leveraged Finance Alliance⚡️

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This week we welcome an appearance from Sabrina Fox, a leveraged finance attorney and high yield bond covenant analyst with over 15 years of experience in the European leveraged finance market. She currently acts as Executive Advisor to the European Leveraged Finance Alliance (ELFA), a trade body comprised of investors in European bonds and loans formed to support the resilience of the market through increased engagement, disclosure, and transparency.

PETITION: Dun & Bradstreet was a recent test for the capital markets. What were the results there and what do they portend for capital markets activity going forward?

There are three important lessons to take away from Dun & Bradstreet.

One: Sponsors are thinking tactically about managing their investments through a down cycle. They want to maintain flexibility to access dividend capacity and reshuffle the capital structure, especially when the issuer is heading into stressed territory. The covenants for Dun & Bradstreet’s bonds and loans maintain significant documentary flexibility (including, in the bonds, access to dividend capacity even if the issuer is in default) despite pushback from investors, and the new owners were willing to pay up for it. That’s telling.

Two: Law firm restructuring advisors are talking to the capital markets guys. This means that the capital markets guys are amending and adding provisions to covenants in the primary that will foreclose potential arguments by bondholders about aggressive uses of covenants down the line. This will make it easier for issuers to (for example) use Unrestricted Subsidiaries to benefit equity and other junior stakeholders to the detriment of bondholders if things get choppy. In Dun & Bradstreet, this played out through a broader definition of what constitutes a “Similar Business” (expanding potential capacity for investments in Unrestricted Subsidiaries), and the inclusion of language that makes it crystal clear that recent shenanigans playing out in the retail sector (and the courts) is contractually permitted, essentially ripping a page out of the bondholder playbook.

Three: Covenant flexibility has become an element of arbitrage by borrowers, increasing the competitive pressure between financial instruments that is fueling the race to the bottom in covenant erosion. Large LBOs are often financed with a mix of bonds and loans, and if an issuer can get covenant flexibility in a loan that it’s struggling with in a bond, it may decide to upsize the loan, making it easier to push through covenant flexibility in the bond – or vice versa. The rise of the private debt market only increases sponsors’ arbitrage opportunities.

PETITION: High-yield investors suffer from a collective action problem and issuers take advantage of the information dislocation, too much money chasing too few deals, and FOMO to squeeze investors, flex pricing down and weaken/eliminate covenants. What can investors do better to combat these efforts and level the playing field? 

Stay smart and engage effectively.

Covenants are a lot more complicated than they were a decade ago, and advisors to borrowers have months to prep deal terms that investors get only a few days to review. Investors who stay abreast of new covenant loopholes and focus on potentially problematic flexibility are best placed to weather challenging markets.

And as the markets become more challenging, the ability for investors to engage effectively is more important than ever. Investors need a forum to speak with a single voice – which is one reason that the European Leveraged Finance Alliance came into existence earlier this year. ELFA is an independent buyside trade association focused on improving disclosure, increasing transparency, and encouraging engagement between market participants in the European leveraged finance market. As Executive Advisor to the group, I’m working hard to guide the development of ELFA for the benefit all who access the capital markets, from individuals investing money so they can retire comfortably or send their kids to college, to companies seeking to access capital, and everyone in between.

PETITION: There has been a lot of talk lately about leveraged loans. But private lending through BDCs (public and private) and other direct lending vehicles is exploding. Is this an area fraught with danger and what are the ramifications?

Absolutely. This growing source of capital gives sponsors one more way to divide and conquer to get more flexible terms. The industry is largely unregulated, opaque, with redemption structures that vary widely from fund to fund, creating unpredictable risks of potential runs. As with so many elements of the financial markets, the best way to address the risks is first to understand them, and the Alternative Credit Counsel (ACC), an organization sitting under the Alternative Investment Management Association (AIMA) are doing excellent work to focus the debate about financial stability in the private debt market. If regulation is the answer, these groups are helping to gather information that would facilitate the formulation of a sensible regulatory approach to the issues.

PETITION: What are the biggest issues confronting the European market that US investors don't have to deal with currently? What are one or two things that investors haven't been as focused on as they should be? 

Europe is a far more fragmented market than the U.S. There are more banks and law firms competing for business, creating intense competition. These competitive pressures are one of the factors driving covenant erosion, as advisors seek to differentiate themselves through documentary innovations as a way of gaining market share. If one law firm or bank won’t give a sponsor the terms they want, they can go to the next in line – and there’s a long line of institutions vying for business.

PETITION: What is the best book you've read that's helped guide you in your career? 

It’s not a book, but the ABA Model Negotiated Covenants and Related Definitions holds pride of place in my bookshelf. Covenants have strayed far from those humble beginnings, so it’s important to remember the guiding principles reflected in that document.

PETITION: What question should we be asking that we haven't?

You guys are clearly great at what you do, because I can’t think of one!

Aw shucks. 😍

😎Notice of Appearance: Sean Cannon, Director at GLC Advisors & Co.😎

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For those who are new to us, our “Notice of Appearance” feature provides an opportunity for a professional in the field of restructuring to provide us all with some perspective about the markets generally, the industry, and professionalism. This week, we dialogued with Sean Cannon, a Director at GLC Advisors & Co.

PETITION: Your shop does a lot of creditor-side representations. What can you tell us about cooperation agreements and how are those shaping restructuring negotiation dynamics? 

We’ve seen that in appropriate situations, cooperation agreements can be an extremely powerful tool to combat coercive transactions launched by companies. In those instances, it is imperative that creditors present a united front and cooperation agreements are one way to formalize that unity.  There are certainly challenges to negotiating effective cooperation agreements – the devil is always in the details, and understanding precisely what parties are agreeing to cooperate on, the voting provisions, the term and what can trigger a termination is critical. However, as we saw in iHeart, it is possible for creditors (bonds and term loans) across multiple tranches of debt to align interests via a cooperation agreement in an extremely effective way despite differences in maturities and collateral.

PETITION: There were a significant amount of "Chapter 22s" in 2018 and it looks like 2019 may take it to another level (e.g., Payless, Gymboree, Southcross, Vanguard). What do you attribute these repeat filings to and how can they be avoided in the future? 

It’s industry-specific to an extent, so I’ll pick on everyone’s favorite: retail.  The sector is going through a massive paradigm shift and to an extent many investors are still guessing what a successful retailer looks like in 2019 and beyond. For the Chapter 22s, the first time around there was of course a view that the underlying businesses were viable. In some cases that assumption is simply proving to be untrue and the businesses models have failed. I also think investors mis-priced both value (real estate, intellectual property, customer loyalty programs, etc.) as well as risk (trade credit, consumer behavior, etc.). While views on the future of retail will undoubtedly evolve, I believe we’ll continue to see brick-and-mortar retailers struggle to reimagine themselves for the future.

PETITION: What is your assessment of the distressed opportunity set in 2019 and what is one thing that you think people aren't focusing on that they should be? 

I’m continuing to spend time on the retail and consumer sector, and also on healthcare, specifically acute care providers.  The healthcare cycle is tricky to predict given its dependence on public policy, but the fundamentals are extremely challenged and we believe a breaking point is inevitable.

I also think the muni space is interesting.  Investors have gradually started to pay more attention in the wake of Jefferson County, Detroit, Puerto Rico and others, but there is a massive amount of debt outstanding and many issuers in difficult financial condition.  The public pension deficit alone in the U.S. is frightening – there something like $1.6 trillion of unfunded pension liabilities at the state level alone. Couple that with historically weak credit documents and poor reporting, and I think we could see a wave of municipal restructurings.

PETITION Note: To your point, take a look at the Sacramento California school district.

PETITION: What is the best book that you've read that's helped guide you in your career? 

Tough question.  I read a lot of different stuff, but I’ll say that most of what I read is not directly related to my career. Sure, I’ve checked off all the “required reading” for finance and restructuring, but I’ve always viewed reading as a way to diversify my knowledge beyond my career and personal experiences (important, if for no other reason than to not be the most boring person at a cocktail party). I like historical nonfiction – I recently finished Battle Cry of Freedom, probably the most comprehensive book on the American Civil War, and also Once is Enough, a true story about a couple who attempted to sail a small boat around Cape Horn in the 1950s. Like I said, lots of different stuff.

PETITION: What is the best advice that you’ve been given in your career?

One of my first bosses said, “Whatever pre-conceived notions you have of what your job is supposed to be, or what you signed up for, forget about them.  If you show up to work thinking about how you can be helpful, whether to clients, peers, bosses, etc. – it doesn’t matter – if you show up each day with that attitude, you’ll be successful at whatever you do”