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

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

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 - Ross Waetzman, Director at Gavin/Solmonese⚡️

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? 

The following economic indicators are in decline:
🔻 Retail sales
🔻 Personal income
🔻 Consumer spending
🔻 Industrial production
🔻 Manufacturing activity
🔻 Consumer sentiment (UMich)
🔻 Housing starts
🔻 Existing home sales
🔻 Leading economic indicators
And more… pic.twitter.com/Mcj7DJzvdi

— Mitch Nolen Retail (@mitchnolen) March 6, 2019

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: Ted Gavin, Managing Director & Founding Partner of Gavin/Solmonese🤓

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 Ted Gavin, Managing Director & Founding Partner at Gavin/Solmonese.

PETITION: There are a number of chapter 22s on the horizon. We've been poking fun at the "successful retail chapter 11" designation but, really, it is tragic and the process is failing. What do you think this is attributable to and what can be done by all involved -- lawyers, advisors, bankers, investors -- to avoid them in the future? 

These are all unforced errors born of greed disguised as impatience in the form of short timelines that are driven by the immovable post of restrictive budgets. All of these chapter 22s have the common trait of having used the first filing to strip off debt, but the efforts to actually fix the underlying company were either insufficient (in some cases) or outright absent. If the company couldn’t meet its operating nut, stripping off some debt just gets you back to the same place eventually. If you’re not taking the time provided by the bankruptcy to fix the damn company, you’re just spending money for what will, in all likelihood, turn out to be a broken investment.

PETITION: The Creditors' Committee pitch process is becoming an inside game. UCC Lawyers are hiding behind UCC FAs and company-side FAs are sharing advance peaks with UCC FAs to give them a first-mover advantage. What gives? 

A lot of this can be blamed on Lawyers’ Rule of Professional Conduct 7.3 (the prohibition against solicitation) and how it hasn’t scaled to deal with modern practice. The other issue is the inconsistency in practice within the U.S. Trustee Program – not only from Region to Region, but from office to office and, in some cases, from staff attorney to staff attorney. What is commonplace in one jurisdiction is impossible to accomplish in another because of this. Are there lawyers with undisclosed pecuniary interests tied to FA firms? Of course there are. Do some FAs shill for law firms while acting as attorney-in-fact for creditors without disclosing some other financial interest in the outcome of that efforts? Of course they do. So do lawyers. It happens. It’s indefensible.

Want it to stop? Change Rule 7.3 so it reflects the committee organization process or form all committees by mail and do away with the “in the room” beauty contests so proxies are no longer necessary and having a hand-holder in the room to move the process in the way they want becomes a moot exercise. Easier said than done, but still doable if the practice decides to get serious about it.

PETITION: There seems to be new independent director candidates popping up every day. Is this good, bad, or neutral? 

It depends. When an independent director is really independent and is there to oversee the process with unfettered autonomy and no fear of reprisals, it’s fine – good, even. When the independent director’s future business depends on finding that nothing untoward happened, and the same individual keeps getting dropped in by the same law firm, it’s a problem. Independent directors should be viewed the same way we view expert witnesses – if you keep showing up for the same law firm, you’re not independent.

PETITION: Restructuring advisory shops seem to be proliferating. What can a financial advisor do in today's crowded market place to separate herself/himself from the crowd?

Be easy to work with. Be about the work. Be proactive. Be generous with your experiences and knowledge. Make your referrals look like effing geniuses for having referred you. Know more than the next shop and be able to do something with it that gives your side an edge. There’s a reason I went to law school, and it wasn’t the scintillating debate and the excitement of reading the Blue Book.

PETITION: What book has helped prepare you to be the best professional you can be? 

Hue 1968 by Mark Bowden. It’s an incredibly compelling analysis of prolifically bad decision-making that became the turning point of America’s involvement in Vietnam. It’s a walk-through, from the ground, of the event that changed our national dialog about our purpose in the war and, when it was over, America would never again fully trust its leaders.

Ponder This: Anne Eberhardt of Gavin/Solmonese Discusses Fannie & Freddie Mac

This week we welcome Anne Eberhardt, a Senior Director at Gavin/Solmonese, a Delaware-based financial advisory firm. We previously featured Anne in a “Notice of Appearance” segment that very much resonated with PETITION readers and so we invited her back to share some new thoughts. Here is the latest from Anne:

Ten years ago, the U.S. Treasury rescued Fannie Mae and Freddie Mac from the financial apocalypse, placing them in conservatorship and mandating Treasury-financed draws for any balance sheet deficits they incurred. These draws were originally subject to a 10 percent dividend but, in 2012, when Fannie and Freddie began returning to profitability, Treasury changed the terms to require a quarterly sweep of net worth, which critics charged was a ploy to help fund the government’s deficit spending.

Fannie and Freddie were always strange beasts – hybrid entities with public shareholders but also a Congressional charter to implement public policy encouraging home ownership - that most sacred of cows, the fullest expression of the American Dream. When, in the depths of the Great Depression, Congress created Fannie Mae, cynics could be forgiven for arguing it was a direct response to the Bolshevist challenge, a latter-day opiate of the masses. How could the average proletarian foment revolution against his capitalist oppressors when he has to mow the lawn, clean the gutters, and paint the trim?

As Fannie and Freddie lurch zombielike into their second decade of conservatorship, the number of legislators eager to attach their name to the End the American Dream Act is roughly zero. But it bears asking whether housing will – or indeed should – continue to occupy its exalted place in American life, and what role the federal government should play in guaranteeing practically all of the mortgages that are made in this country.

Notice of Appearance: Jeremy VanEtten, Director at Gavin/Solmonese

This week PETITION welcomes a notice of appearance by Jeremy VanEtten, Director in the New York office of Gavin/Solmonese.

PETITION: What is the best advice you’ve gotten in your career?

Jeremy: Listen before you speak. Many times when people first meet me they think I’m quiet, reserved, and even shy. They couldn’t be more wrong. Early on in my career, I learned it's infinitely more important to understand what the other person is saying before formulating a response -- especially if there's conflict involved. Having a thoughtful response can go a long way towards building mutual understanding.

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

Jeremy: Who Moved my Cheese by Spencer Johnson.  When I’m in a rut, approaching a decision, or seeing change on the horizon, a quick visit with this book greatly helps frame my perspective.  The concepts in this book led to my two career changes including entering the restructuring industry. Understanding that I am solely responsible for my personal and professional success, and that I’m not owed anything from anyone is the key here. Get to a point where no one — or no set of circumstances — can take away your cheese.

PETITION: What is one notable trend you’re seeing in ‘18 that not enough people are talking about?

Jeremy: Deal flow seems to be getting more and more consolidated making it harder for mid-level, thirty-something, restructuring professionals to figure out the best way to land new engagements and cases. Many of us have been told: "Start by doing good work, network, attend industry conferences, volunteer, etc.... and it will all come together." But should those of us under forty rethink this formula? Do we need to finally understand personal branding and how to promote ourselves? Should we be expanding the list of organizations we actively participate in beyond the restructuring community? Do we really understand what the decision makers are looking for? All good questions when our industry is evolving. 

PETITION NOTE: Jeremy is the most “junior” person we’ve had in this NOA section and provides some on-point perspective. Thanks, Jeremy.

Many people are concerned about the dearth of deal flow and the concentration of (the limited) deal flow among a few select power players. Jeremy is correct: nobody owes you anything: you need to go out and make your own opportunities. What can you do — given the realities of the industry today — to win new business? What are realistic assumptions given your platform, your methods, and your teammates? What differentiates you from the rest of the pack? There are plenty of people networking and providing solid service. What other edge do you have? Aside from what your platform provides: what investments are you making in your own career? Who have you gotten in your corner to support you? All good questions.

Notice of Appearance: Anne Eberhardt, Senior Director of Valuation & Litigation Consulting at Gavin/Solmonese.

This week PETITION welcomes a notice of appearance by Anne Eberhardt, Senior Director of Valuation & Litigation Consulting in the New York office of Gavin/Solmonese.

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

Do your homework, study, and show up to class.

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

Gone with the Wind. Though not everyone’s idea of a role model, Scarlett O’Hara had several admirable qualities:

Resourcefulness. When Tara Land Resources LLC was on the brink of insolvency, she sought funding from R. Butler Capital Management. Realizing she had nothing to wear to the meeting, she cut up the drapes to make an outfit that would make her desired first impression.

 Entrepreneurship. After the RBCM deal collapsed – and finding herself in a city the Yankees had just burned to the ground – she quickly grasped there was money to be made in the lumber business and sought a partnership with the Kennedy Lumber Company.

 Persistence. Whenever things didn’t quite go her way, she always reminded herself that “tomorrow is another day.”

PETITION: What is the one product that helps make you a more efficient or relaxed pro?

Frank’s Red Hot, Chili ‘n Lime

PETITION: What is one notable trend you expect to see in ’18 that not enough people are talking about?

The fallout from the effects of the collapse of trust. When even the auditors of the auditors’ audits are cheating (see DoJ’s press release of January 23, 2018, announcing the arrest of several former partners of a Big Four CPA Firm, accused of hiring PCAOB staff to provide confidential regulatory information to help the Firm improve its audit inspection results), you know we’re headed for a disaster of biblical proportions: fire and brimstone, rivers and seas boiling, forty years of darkness, human sacrifice, dogs and cats living together…mass hysteria.

PETITION Note: Yikes. Sounds like we ought to stock up the bunker with some Frank’s Red Hot Chili ‘n Lime.

Notice of Appearance: Ted Gavin, Managing Director & Founding Partner of Gavin/Solmonese.

PETITION: What is the best advice you've gotten in your career?

TG: Indecisiveness is decisiveness. Most probabilities are 50/50: even if you're right, it may be just dumb luck. So make a decision. Examine the results. And adjust accordingly.

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

TG: Dangerous Company: The Consulting Powerhouses and the Businesses They Save and Ruin by James O’Shea and Charles Madigan. Random House,1997. 

A glimpse into how consulting powerhouses work, this book provides great insight into how firms and consultants sometimes lose sight of the goal - or replace the goal with their own self-interest - and wreak havoc with their clients. I especially appreciated the focus on strategic decision-making and how personal motivations can lead advisory awry. My friend Teresa Kohl told me about the book shortly after it came out -- I read it, and it remains my "what NOT to do" guide.

PETITION: What is the one product that helps make you a more efficient or relaxed pro? 

TG: My Peloton spin bike. And not because it was featured in PETITION a few weeks ago. It keeps me in good and improving heart health, and there are no excuses when you can go from bed to bike every morning. Forty-five minutes on the bike and I’m mentally relaxed, hugely motivated and ready to attack the day.

PETITION: What is one notable trend you expect to see in '18 that not enough people are talking about?
 
TG: I’m deeply concerned about the continuing erosion of institutions that previously formed what were perceived as the underpinnings of society – notably, the idea of a free, independent and journalism-centric press. We’re in a place now where people don’t choose the news that fits their outlook – but rather, they are encouraged to choose the facts that fit their outlook. Informational tribalism leads to social tribalism, and that leads to economic tribalism. This has already impacted businesses negatively, and will continue to escalate as this behavior progresses.