⚡️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”

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

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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 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.

😎Notice of Appearance: J. Scott Victor, Managing Director at SSG Advisors LLC😎

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This week we welcome a Notice of Appearance by J. Scott Victor, a Managing Director at SSG Capital Advisors LLC, a boutique investment bank based in Philadelphia. We edited the dialogue lightly for content and length. Enjoy.

PETITION: You've carved out a niche in the middle market. What is your assessment of distress in the middle market today and what may we expect in that area in the next 6-9 months?

There is always distress in the middle market.  Regardless of the macroeconomic environment there are universal constants: undercapitalization, too much debt, poor management decisions, sales declines, lack of margin control, excessive expense structure.  I could go on and on – all resulting in a steady stream of distressed middle market companies.

From multi-generational family-owned or single owner and operator businesses with inadequate systems and not enough equity capital to PE portfolio companies leveraged to the hilt with debt to VC-backed and public bleeders that have been startups for a decade or more burning through tens to hundreds of millions to failed rollups, the distressed middle market has it all including real industry-specific Disruption.  These beloved underperformers are in every industry and every region of the country and while they aren’t generally big enough names to warrant coverage in Petition, they provide an abundance of work for middle market professionals.

Nothing will change in the next 6-9 months.  There is an incredible amount of debt capital from an ever increasing number of lenders – bank and non-bank ABLs and cash flow lenders, BDCs, commercial finance companies, factors, equipment and real estate lenders.  The better underperformers will continue to be refinanced out of their existing bank lenders and live to sink or swim next year.  The rest can expect §363 sales, Article 9’s, ABCs, receiverships, or straight-up liquidation.  It’s economic Darwinism at work.

PETITION: What is one thing that most needs changing in order for middle market clients to get the most they can out of an in-court bankruptcy proceeding? 

Don’t get me started on this one!  Chapter 11 is too expensive and lower middle market companies can’t afford it.  More importantly, the lenders for the smaller borrowers don’t want to pay for it.  Thus the rise of Article 9’s, ABCs and state court receiverships being utilized for smaller transactions.  Almost every one of my Chapter 11 cases has two sets of counsel, a financial advisor, an investment banker, and a claims agent and that’s just for the debtor.  Factor in two sets of counsel and a financial advisor for the creditors committee and another two sets of counsel and financial advisor for the lender(s) and that’s before any other professionals such as real estate advisors, special counsel, liquidators and independent board members. And, don’t forget the new UST fee schedule!  The fee burden on debtors is often why there’s rarely ever a meaningful distribution to unsecured creditors.  I know I’m preaching to the Petition choir, but Chapter 11 just costs too much.

PETITION Note: See #1 above if you skipped the end.

PETITION: We've written a lot recently about the decline in L. Brands' Victoria's Secret ($LB) line and the rise of direct-to-consumer and celebrity-backed (i.e., Rihanna) brands. You did the Peekay Acquisition LLC bankruptcy. What lessons did you learn there that may apply to L Brands and other legacy lingerie brands that are currently under attack? 

I learned that sexual health and well-being is a very good thing!  Peekay was too small to be public and had way too much debt resulting from a poorly-implemented roll-up strategy.  Victoria’s Secret has numerous issues including deteriorating product quality resulting from revolving manufacturing facilities around the world and an underwhelming yet distracting customer store experience that a huge marketing spend can’t fix.  Insta-friendly celebrity brands, including lingerie and cosmetics are trending, but their sustainability is ultimately tied to quality, buying experience and the celebrity quotient.

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

My first legal mentor told me that practicing lawyers will make a good living, but never be rich.  My second legal mentor told me to become an investment banker.  My investment banking mentor told me to dress well and to drink heavily.  I take advice well.

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

Two books:  The 1st edition of Peter and Wendy by J.M. Barrie – the opening line “All children, except one, grow up.”  I say no more.

Hostile Witness by William Lashner.  Bill was a colleague at my first law firm in the mid-80’s and the son of my legal mentor.  He left the firm to become a writer.  I am Victor Carl.

😎Notice of Appearance: Evan Hengel, Managing Director of Berkeley Research Group😎

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This week we welcome a Notice of Appearance by Evan Hengel, a Managing Director in the sunny Los Angeles office of Berkeley Research Group LLC. We edited the dialogue lightly for content and length. Enjoy.

PETITION: You're located in the entertainment capital of the world. What is your assessment of distress in TMT today? What may we expect in the next 6-9 months?

Looking at the local LA entertainment scene (to address the broader TMT market would require more space), further studio consolidation (e.g. Disney/21st Century Fox) could put the next tier of industry participants in a tough position, as they’ve already struggled to adapt to a theatrical release schedule that is organized around fewer tentpoles. That said, with the number of new expensive series (I hesitate to call it TV) being green lit, concerns of a “content bubble” in the near term are probably overblown, as the appetite for that content appears to remain insatiable, even if it’s shifting from theaters to the home. The more interesting story may be the role of tax incentives in the geography of movie/TV production. Other states are obviously hungry for a piece of the industry (hello, Georgia and Louisiana), and foreign countries have not been shy either (a 32% tax rebate may have played a role in the decision to shoot The Last Jedi in Ireland, for example). The recent renewal of California’s own tax credit program will help slow the exodus of work, but there’s no denying the trend toward industry decentralization.

PETITION: Unbeknownst to many, LA has one of the top tech ecosystems in the country now. We write a lot about "#BustedTech" in PETITION. As an operational advisor, what is one piece of advice you'd give early stage startups to ensure that they're setting themselves up for operational success down the road? 

I’d advise early stage founders to do everything possible to keep more cash than you think you need. As we also see on the other side of disruption, horrific business decisions are often made not out of incompetence, but rather due to a lack of liquidity/options. Trying to negotiate bridge financing between rounds is tough to do when the people on the other side of the table know you’re low on alternatives, and it’s near impossible to make the right long-term strategic decisions/investments when you’re worried about making payroll next week. Also, hire people who are good at what you aren’t. A spitting image of yourself may grab your attention (we’re all prone to vanity) but won’t add new skills to your company.

PETITION: Your firm tends to do a lot in retail. What is one thing that retail management teams continue to get wrong despite all of the hyper-focus on the area today? 

One thing we often still see is a failure to amend merchandising plans to reflect realistic expectations of traffic and conversion. The effect of the resulting glut of inventory is both immediate and long term…margins deteriorating as excess goods are then shoved through discount channels, which in turn hurts the long-term perception of the brand in consumers’ eyes (nobody wants to see their prized $750 jacket being sold at an off-price retailer next week for 60 percent less). Committing to a lean purchasing plan is difficult, as it often requires you to admit that tough times loom ahead, but the risk of not doing so is immense. Being realistic about demand (and the brick-and-mortar footprint needed to meet that demand) will be a key differentiating factor in who will survive the current period of disruption intact. Those who can hold back meaningful allocations of certain products at the distribution center to assess where it should be deployed at maximum margin get bonus points for reducing discount-dependency to clear inventory, but the road to get there has a lot of potholes.

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

Reading The Lords of Strategy by Walter Kiechel gave me a helpful sense of history regarding the consulting world. It’s easy to step in to this field and think of it as relatively static, but when you go back in time, it’s actually changed fairly quickly relative to other professional disciplines. The types of work that consultants were engaged in during a given decade are often unrecognizable when compared to the decade prior. Shining that light on restructuring advisory specifically (a fairly minor subset of the larger community), becoming an expert at 13-week cash forecasts and lease rejection analyses may keep you around in the immediate future, but long-term success will be enjoyed by those who push boundaries and identify what executive teams and stakeholders really want from their advisors that they aren’t already getting (and may not even know that they want yet).

😎Notice of Appearance: Darren Klein, Partner at Davis Polk & Wardwell LLP😎

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This week we welcome a Notice of Appearance by Darren Klein, a Partner in the restructuring group at Davis Polk & Wardwell LLP. We edited the dialogue lightly for content and length. Enjoy.

Your firm, Davis Polk, appears to do a lot of international restructuring work. With turmoil in emerging markets lately, what are some things that distressed investors should be focused on? A previous commentator highlighted US-denominated debt in a strong dollar environment... 

I would highlight the recent retreat from globalism and the increase in nationalism happening around the world. Knock-on effects of a trade war with China will show up in many other countries. Take South Korea as an example. There has been plenty of press coverage asserting that South Korea would be one of the big losers in a trade war as a large supplier of products to China that then get exported to the US. Less well covered is that rising nationalism in China may continue to put independent downward pressure on South Korean businesses operating in China. The combination could create a tipping point for at-risk companies.  

More generally, increasing nationalism could hurt the value of foreign IP in countries where consumers associate that IP with “disfavored” countries. Distressed investors relying on foreign IP of US companies to sell at high valuations beware.

Dovetailing off of the previous question, what is one notable trend that you expect to see in Q4 of this year that not enough people are talking about? What about the beginning of 2019? 

I don’t know about Q4 or the beginning of 2019, but not enough people are talking about batteries. Every year, computers get smaller and faster. Every year, Amazon can deliver more products almost instantaneously. Yet every year, my smartphone battery gets worse. Five years ago, my phone could go several days between charges, now my new phone doesn’t even make it a full day. The lack of disruption in the battery industry is troubling. Whichever company figures out how to disrupt the battery industry is going to chase Apple and Amazon to a trillion dollar market cap. 

In fact, I think this could make an interesting regular coverage piece in Petition.  You are great at spotting disruption in an industry.  I especially enjoy your retail coverage showing the story is more complicated than an “Amazon effect.”  But you are missing an opportunity to showcase the disturbing lack of disruption over time in certain industries. Where is my my battery 2.0?

PETITION Response: Perhaps you had one of those faulty Apple batteries? Did you get it swapped out? In any event, yes, batteries are a big deal. Tesla’s valuation is a testament to that. Do you value it as a car company or as a battery company? The stock market seems to be stuck in a perpetual catatonic state of confusion on the subject.

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

When I was a junior associate, a mentor told me that the most precious asset a lawyer possesses is his or her reputation. It is very true advice, especially in our small restructuring community. A reputation takes a career to build and can be squandered in a moment.  

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

“Oh, the Places You’ll Go!” by Dr. Seuss.  The book has a deep message. Life will not always go the way you would like, but you should never give up.  You should keep working hard and focus on controlling the things within your control.  The genius of Dr. Seuss is that he delivers an important message in a way that my young children can understand and want to hear again (and again . . . and again).  If only more lawyers could draft that way!

Notice of Appearance: Gabriel MacConnaill, Partner at Sidley Austin LLP

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This week we welcome a Notice of Appearance by Gabriel MacConaill, a partner in Sidley Austin LLP’s sunny Los Angeles office.

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

GM: Serious: “Observe successful people you admire and adopt the traits you can authentically inhabit.” Somewhat tongue in cheek: “Don’t **** it up.”

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

GM: Lawyering skills: The Curmudgeon’s Guide to Practicing Law by Mark Herrmann (especially recommended for younger lawyers). Substantive knowledge: Collier (I know, I’m a nerd).

PETITION: What is one notable trend you expect to see in the second half of ’18 or first quarter of '19 that not enough people are talking about?

GM: Increasing European impact on U.S. restructuring. Many public companies took advantage of tax advantaged structures since the last cycle (lots of double Irish with a Dutch sandwich etc.). In addition, international debt investing structures mean that there is a European bond overhang on more U.S.-based/U.S.-focused companies than the last time we ramped up. American professionals should be aware of potential solutions and leverage points available, particularly the flexibility of schemes of arrangement provided by our friends in the United Kingdom, and the framework for cooperation across European jurisdictions in the European regulation on insolvency proceedings.

PETITION: What is one longer-term disruptive trend that scares you?

GM: Kids aren’t watching traditional sports anymore. What am I going to do in my meager free time when those business models fail? Personal fears about professional hockey collapsing aside, higher education is something like one-sixth of the U.S. economy, mostly funded or guaranteed by you and me (taxpayers). What is going to happen if (when?) there is a mass default on student loans? We want distress, not destruction.

PETITION: On the flip side -- as a restructuring professional -- that excites you?

GM: Short-term memories in the financial sector (e.g. cov-lite loans account for the largest share of the leveraged loan market ever).

PETITION: What is the biggest threat to the bankruptcy system?

GM: Inflexibility. Whether by statutory fiat, or judicial decision, rigid rules work against the success of our system. See my answer above, some of the rest of the world is catching up; this is a competition and we should work purposefully to ensure the United States remains the restructuring destination of choice.

Notice of Appearance: Ted Stenger, Managing Director at AlixPartners LLC

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This week PETITION welcomes a Notice of Appearance by Ted Stenger, Managing Director of AlixPartners LLC.

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

TS: I’ve been doing this for over 35 years and have received a lot of advice. Sifting through the years the advice, what sticks out the most was the line, “Successful people are prepared to be lucky.” There is an enormous amount of wisdom packed into those seven words, starting with the word “prepared.”

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

TS: I am not a fan of business books as I think they are largely written by people who simply re-package common sense and put a fancy name on it, like ‘transformative leadership.’ Having said that, early in my career I read “Getting to Yes: Negotiating Agreement Without Giving In” by Roger Fisher and William L. Ury, which, as a young professional, I found very instructive as it focused, in part, on what motivates people on personal and emotive levels in negotiations.

PETITION: What is one notable trend you expect to see in the second half of ‘18 that not enough people are talking about?

TS: The bankruptcy and restructuring process has become very costly, especially in light of the fact that so many Chapter 11s today are almost exclusively focused only on the debt stack with little attention paid to fixing the operations of a debtor which often requires more time although it is where enterprise value is created. The profession needs to get more efficient, demonstrate better case management skills and therefore drive up the value equation. A soon-to-become-classic line from the 2017 movie, “Molly’s Game” sums it up. After Molly’s father, a psychologist, delivers very deep and meaningful insights to her, he says, “It is amazing what you can can accomplish in three minutes when you are not billing by the hour.” Nuff said.

PETITION: What is the most under-appreciated service restructuring professionals can provide a distressed client?

TS: Helping management redefine success, both for the organization and, perhaps just as importantly, at the personal level for the company leader. While restructurings and bankruptcies don’t have the “taint” of 30 years ago, they are still for most individuals and organizations seen, initially at least, as a failure. Many if not most clients have not been through real corporate trauma. There is fear and shame permeating the organization and its leadership. Restructuring professionals sometimes don’t fully appreciate this as we have already “seen the movie” many times. Therefore, helping re-define success as early in the process as possible can be a key element of a successful reorganization.

PETITION What is the biggest disservice that restructuring professionals are doing to clients? Don’t pull any punches.

TS: Clients need to understand what will happen in the beginning, middle and end of the restructuring, and understand it from several vantage points. Restructuring pros sometimes fall short on that front. The most obvious one is what is the legal and court process. Second, is fully explaining what the likely obstacles to a deal and what should be expected as to the behaviors of various constituents. Third, what are the implications to operations, employees and customers and how and when can they be addressed? All these are sometimes not done well by restructuring professionals, resulting in less efficient and effective restructurings. Or, in some instances, these things are done once, but not repeated enough. Or, in other situations, the professionals cannot explain all three, as they haven’t done their own homework and simply aren’t knowledgeable enough.

PETITION NOTE: Yikes. Sure sounds like clients are getting a ton of bang for that $1,750/hour buck.

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

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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: Larry Perkins, CEO and Founder of SierraConstellation Partners

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

LP: Making a quick and good decision with bad information is much better than a slow and perfect decision with perfect information.  In our business sometimes its better to make a pretty good quick decision rather than waiting too long and the decision being made for us.  This was taught to me by one of my mentors 15 years ago and has stuck with me.

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

LP: As cliché as it may sound, both Fountainhead and Atlas Shrugged by Ayn Rand have had a huge impact on my life. I think the focus on independence, objective thinking, and having a philosophical spine (regardless of whether you agree with it) have turned me into a better practitioner and leader. I also think there is a big emphasis on non-conformist thinking which is, in my opinion, the essence of creative thinking and solution making.

PETITION: What is one notable trend you expect to see in the second half of ‘18 that not enough people are talking about?

LP: More of the same. I think people are expecting things to change, but I don’t see it.  There is a lot of talk about a restructuring bubble building, maturities rising, a new real estate bubble, and other themes like this that I’ve heard throughout my career. I’d expect that things will basically stay as they are right now until something absurd or otherwise totally unexpected comes and punches us all in the mouth.

PETITION NOTE: This is a fair point. Everyone gets in the business of prognosticating but the last several cycles started due to wholly unforeseeable exogenous events.

PETITION: What is the most under-appreciated service restructuring professionals can provide a distressed client?

LP: Emotional support of clients and principals. We work primarily with middle market companies — including family-owned businesses. Compassion and empathy are underrated skill sets. We could callously conclude “this is just business,” but, ultimately, we’re dealing with emotional beings caught in an insanely stressful situation. People find themselves retaining us because something bad usually happened, and its very rare that those bad decisions that led to our retention were intentional or otherwise nefarious. I go into situations without preconceived judgement and with the objective of understanding a situation rather than rashly concluding that a person is dumb or unsophisticated. It’s rarely the case that someone is those things, and it’s dangerous as a practitioner to assume so.   

PETITION: What is the biggest disservice that restructuring professionals are doing to clients?

LP: Restructuring — particularly formal restructurings — have devolved into a very litigious, expensive, and inefficient way to work out complex situations. A big part of this is the e-mail “thuggery” that is prevalent in these situations: it is more focused on getting a “gotcha” rather than a solution. If people really were trying to get to the right answer, I’d expect that there would be a whole lot more phone calls and face-to-face meetings, rather than 30 person CC lists and 27 versions of documents. If we take the approach that we’re trying to solve the problem, park aside the anger and posturing that comes with the process, and try to work towards a solution knowing that everyone is being impacted, we’ll collectively provide more value to our clients.

Notice of Appearance: Joshua Sussberg, Partner at Kirkland & Ellis LLP

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This week PETITION welcomes a notice of appearance by Joshua Sussberg, Partner in the New York office of Kirkland & Ellis LLP.

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

“Always be the most prepared. Period. Whether it is a call, meeting or court appearance, be the most prepared person there. This piece of advice is something I do not forget and pass on.”

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

“A Civil Action. It was a requirement to read heading into law school and I went back and read it again years later. It teaches that one lawyer can ultimately make a difference. It also speaks to, and without question demonstrates, the high stakes and personal commitment the profession requires and demands. A must read.”

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

“Wireless headphones. Airpods. But it really can be any wireless headphones at all.…”

PETITION: Cool. Anything interesting you’re listening to at the moment?

"Top hits on Spotify!”

PETITION Note: You’re one in (70) million, Josh!

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

“Restructuring professionals spend lots of time these days talking about the retail, oil & gas and the healthcare sectors, with much less attention being paid to real estate (both commercial and multi family). While there is still a lot of capital in the market place, rising rates and lower rents may pressure this and cause dislocation later in the year.”

PETITION Note: We agree, Josh. We’ve been writing since our inception that the cavalier attitude that many players in the space have taken vis-a-vis the real estate sector is mistaken. If anything, the recent low price offered by Brookfield Capital Partners for General Growth Properties may be the canary in the coal mine for commercial real estate. Note also, this, relating to the liquidation of The Bon-Ton Stores:

Feedback: Is a Lot of Fraud-based Bankruptcy on the Horizon?

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A number of you seemed surprised and impressed by Anne Eberhardt’s Notice of Appearance. We asked and Anne answered,

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.

There has been a rash of thematically-on-point news on this front in the past week.

Regarding General Electric ($GE),

“The two largest proxy-advisory firms are recommending that General Electric Co. fire KPMG LLP as its auditor after 109 years, in light of accounting issues at the industrial giant.”

Regarding PriceWaterhouseCoopers,

“The Federal Deposit Insurance Corp. could collect the largest damage award ever against a global public accounting firm when a federal judge decides what to award the agency after a verdict against PricewaterhouseCoopers.”

Relating to Longfin ($LFIN), a charade among charades in the blockchain/cryptocurrency space:

“But in the last 10 days, the shares have fallen about 80%. There were several triggers: A number of prominent short sellers made public attacks on Longfin; the company’s shares were added and then days later removed from the Russell 2000 Index; and on Monday the company said the SEC was conducting an investigation called In the Matter of Trading in the Securities of Longfin, which hasn’t resulted in any conclusions.”

And Mozido, a once-high-flying tech startup:

“Michael Liberty advertised that Mozido, the start-up he founded which once boasted a valuation of $5.6 billion, would revolutionize mobile payments and bring financial services to 2 billion unbanked adults worldwide. But securities regulators claim Liberty hyped up Mozido while raising $55 million that mostly went into his own pocket.

The Securities & Exchange Commission has sued Liberty for fraud in federal court in Maine, saying Liberty stole most of the $55 million he purportedly raised for Mozido from 200 individual investors.”

And then there is Theranos, the fraudulent “unicorn” helmed by Elizabeth Holmes that has fallen on some tough times of late. Per The Wall Street Journal last night,

“Blood-testing firm Theranos Inc. laid off most of its remaining workforce in a last-ditch effort to preserve cash and avert bankruptcy for a few more months, according to people familiar with the matter.”

And:

Once its cash falls under that threshold, the terms of the Fortress loan agreement allow the New York private-equity firm to seize the company’s assets and to liquidate them, she said.”

What exactly did Fortress Investment Group LLC lend Theranos $100 million against? Is there even IP here? The blood testing tech was a fraud; the Zika test isn’t working. What gives here?

At least Ms. Holmes has been focused on “burn rate” and conserving cash with an eye towards giving the Zika trials a fighting chance:

“Until Tuesday, Ms. Holmes still had two personal assistants and two security guards who drove her around in a black Cadillac Escalade SUV, according to the people familiar with the matter.”

What. The. F*ck.

We are sure that there will be at least a handful of high profile fraud-based bankruptcies that emerge in due time. Mark our words: 60% of the time it happens every time.

⚡️A Quick Update⚡️: The Bon-Ton Stores

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On Monday, The Bon-Ton Stores filed a motion seeking permission to pay a $500k diligence fee to a combination of DW Partners, Namdar Realty Group, Washington Prime Group Inc. ($WPG) and AM Retail Group Inc. in connection with a signed letter of intent to purchase the company’s assets. The former three firms would seek to own all of Bon-Ton’s assets other than a distribution center, which would go to AM Retail. The company also postponed its sale auction to April 16. The purchase price is:

“…no less than (i) an aggregate purchase consideration sufficient to have a minimum excess availability of 22.5% at closing; and (ii) a minimum aggregate cash payment of no less than $128,000,000.00 (the “Baseline Bid”), a sufficient portion of which shall be funded into an escrow account to pay fees and expenses (including professional fees) associated with the wind-down of the Debtors’ estates after the Closing.”

In filing the motion, the Debtors champion that this bid is the only bid it received by its bid deadline that would allow for the Debtors to continue to operate as a going concern rather than liquidate; it is the only bid that would have the effect of:

“saving over 20,000 jobs and preserving a 120-year-old business that is a significant customer for its vendors, an anchor tenant for many of its landlords, and the leading hometown department store for millions of consumers in local communities throughout twenty-three (23) states.”

This will, no doubt, be a controversial course of action as certain creditors have been pursuing liquidation since the petition date.

Four things of note:

1. The minimum cash consideration offered — the $128mm — is INCLUSIVE of professional fees to fund the wind-down of the case. With only one Operating Report on file with no professional fees paid to date, it’s unclear how much of that consideration will actually inure to the benefit of the estate.

2. The offer is contingent upon a “[d]emonstrable commitment…by a substantial number of the Debtors’ existing landlords and trade vendors…to support the Company’s liquidity needs at close and through a period of no less than one year from the closing date….” In other words, this is very much pay-to-play: if landlords and vendors want to benefit from Bon-Ton remaining a going concern, they have to agree, upfront and for one year, to engage in rent and receivables forgiveness. What do they do? This is the quintessential “cutting off the nose to spite the face” dilemma.

3. The Official Committee of Unsecured Creditors filed a “Statement” last night supporting the proposed diligence fee; it analogizes this case to Aeropostale and notes how the work fee there helped encourage a going concern transaction. It said the diligence fee and a going concern offer “…is the last and only hope to save Bon-Ton from the fate of so many retailers that have filed for bankruptcy during this ‘retail apocalypse.’” Dark and stormy. We dig it.

4. Morgan Stanley Research analysts are bullish on the transaction for the mall operators. Per CoStar,

“If they were to lose Bon-Ton as a tenant, cap rates for their malls would likely widen if given the risk of co-tenancy and capex requirements to redevelop. 

But it could also be somewhat of an offensive move. It's possible that the landlords could place Bon-Ton stores in malls where they have a big box vacancy. 

’We can't help but think this would be a competitive advantage for these two mall landlords relative to their peers,’ the two analysts said. ‘First, they could choose to keep open stores at their properties while closing others at competing locations. Second, it could provide them an opportunity to buy malls from their competitors at more attractive valuations if there is a risk of losing a major tenant.’”

This is retail today, ladies and gentlemen.

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

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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: Rachel Albanese, Partner at DLA Piper

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This week PETITION welcomes a notice of appearance by Rachel Albanese, a restructuring partner in the New York office of DLA Piper LLP.

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

"Trust your instincts." I first heard this advice as a kid and even as recently as this past week from a mentor. It applies to every stage of life, but it's especially helpful to navigate the substantive, interpersonal and ethical issues lawyers face all the time. 

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

“Debt's Dominion” by Penn Professor (and Puerto Rico Oversight Board Member) David Skeel. Not as lofty as all that, but it's an eminently readable history of bankruptcy law in the US. Recommended reading for sure. 

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

My BlackBerry PRIV! I will never give up my BlackBerry, and there is a tribe of lawyers who feel the same way. We will keep them in business forever, notwithstanding this. 

PETITION NOTE: We legit had to look up what that even is. But we dig the old school. But, Rachel, check it…BLACKBERRY LIVES!:

Source: Yahoo! Finance 4/6/18

Source: Yahoo! Finance 4/6/18

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

Large companies outsourcing legal services to legal vendors, like GE recently did with UnitedLex. Talk about law firm disruption... 

PETITION NOTE: Someone is thematically on point.

Public Pensions (Long Slow-Burning Crises?)

Corporate pensions are again an issue in bankruptcy court after a slew of filings riddled with underfunded programs and vociferous constituencies, e.g., Tops Holdings, Cenveo Inc., Appvion Inc. Outside of bankruptcy, underfunded public pensions are also getting increased attention. In Kentucky, state Senator Joe Bowen filed a new pension plan“designed to save the Bluegrass State’s public pension system” and address the state’s $60b unfunded liability. And its a whopper. The plan (i) requires a subset of teachers and government workers to put in an additional 3% toward health benefits (PETITION NOTE: there goes those tax reform benefits), (ii) eliminates cost of living adjustments for new teachers and cuts current teachers in half, (iii) unused sick days will no longer be eligible as an early retirement credit, and (iv) benefit calculations (read: how much you get paid upon retirement) will be rejiggered to require more service time to get paid a pension based on the “highest three years” of salary.

Elsewhere, in California, the California Public Employees Retirement System made a change to its amortization policy requiring the recoupment of future investment losses in 20 rather than 30 years. What does this mean? It means the state government and thousands of local government agencies and school districts will have to accelerate their mandatory contributions to the trust fund. Critics are b*tching that this accelerated schedule will push cities into Chapter 9. Assuming the pension’s 7% investment earnings target is realistic, the system is STILL underfunded by 33%. Choice quote,

“So on one hand, CalPERS is doing what it has to do to remain financially solvent, but on the other hand its self-protective steps threaten local government solvency. That’s the crisis in a nutshell.”

Allbirds, Stride Rite, Fye, LL Bean & More (Long Sheep Farmers & Footprint Consolidation, Short Mozzarella Sticks)

When Allbirds opened its SoHo location late last year, we were convinced that it would be a short-lived hype storm. Maybe we were, gulp…wrong? The footwear startup is now credited for launching a wool fad, with Adidas, Lululemon ($LULU) and Under Armour ($UA) all adding wool to its product line. The result? Supply issues. The sheep population in Australia and New Zealand is at a 100-year low and, therefore, wool prices are on the rise. Are consumers seeing price increases? Not yet. But it looks imminent.

Looks like Stride Rite could’ve used some wool shoes in its stocks. Parent company, Wolverine Worldwide Inc. ($WWW), announced earlier this week that the children’s shoe seller closed 215 stores (leaving only 80 remaining). There are heaps and heaps of “#retailapocalypse” lists out there: query whether they’re taking into account all of the non-bankruptcy closures…?

Speaking of non-bankruptcy retail closures, in entertainment retail, Fye has quietly shed stores. Yes, Fye still exists to satisfy all of your CD buying needs (apparently they didn’t get the memo that cds are being discontinued all over the place). They shed 30 stores since last year and 14 since last quarter.

In the search for a penny here and a penny there in retail finances, the latest hot topic - in the wake of L.L. Bean’s criticized decision to scrap its endless and uber-forgiving return policy is…wait for it…return policies (frankly, we, also, wondered by L.L. Bean didn’t simply implement a registration policy). While we feel as if the issue is a bit over-blown - what percentage of people make buying decisions based on the return policy (serious question: email us if you have a view)? - this is yet another consideration that retailers are grappling with in real time.

Interestingly, while incumbent retailers wrestle with all of these challenges, Snap Inc.($SNAP) just auditioned its “discovery” chops with a Nike Inc. ($NKE) partnership showcasing the new Air Jordan kicks. Here’s the kicker via ReCode:

“Guests were then able to purchase the sneaker right within Snapchat with the help of technology from the e-commerce software company Shopify. And most of the kicks were delivered to customers on the same day, thanks to a logistics startup called Darkstore.”

Order in app. Seamless payment with Shopify (which accepts ApplePay - just a thumbprint). Same day delivery via Darkstore (address already embedded thanks to ApplePay). Retailers are so effed.

And, finally, as yet another example of the casual dining space spiraling downward, Dine Brands Global ($DIN) indicated earlier this week that it intends to shutter 80 Applebee’s locations, on top of the nearly 100 it shut last year.