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DistresseD InvestIng report ApriL 2008
HigHligHts from tmA’s And tHe deAl’s 2008 distressed
investing ConferenCe
DistresseD investing r e p o r t
ApriL 2008 VoLume 1 issue 1
HAppy DAys for DistresseD Debt inVestorsOppOrtunItIes—and rIsks—are great, yet experts warn that thIngs cOuld get cOmplIcated
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� DistresseD InvestIng report ApriL 2008
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It’s our great pleasure to present you the highlights of the second annual Distressed Investing Conference, co-produced by the
Turnaround Management Association and The Deal. Over 550 corporate renewal professionals and financial and corporate dealmakers gathered at the Wynn Las Vegas on January 23-25, 2008, and enjoyed an unrivalled opportunity to exchange ideas and hear the latest trends on distressed investing from leading experts in the field.
This report details the keynote and panel discussions that took place over both days. From an examination of the state of the leveraged markets, the most pressing issues facing distressed debt traders, the CLO, derivative and SWAP markets and the opportunities presenting themselves in China to the Founders Panel, which gathered the founders of significant distressed investment funds, we hope this report gives you insight and ideas on how to benefit in the next phase of the distressed investing cycle.
TMA and The Deal are already planning our next Distressed Investing Conference to be held in Las Vegas in January 2009, at which we hope you will be able to join us. Mark your calendar for the third annual Distressed Investing Conference for more news in the dynamic world of corporate restructuring and finance.
Colin P. Cross Managing Director Crystal Capital LLC Immediate Past Chairman, Turnaround Management Association
Kevin Worth President and CEO The Deal LLC
contents
Highlights from TMA’s and The Deal’s 2008 Distressed Investing Conference
Executive Director, TMA: Linda M. Delgadillo, CAEManaging Director of Events, The Deal LLC: Allan Cunningham
Director of Fund Development, TMA: Joseph KarelVP, Communications & Development, The Deal LLC: Martha Brown
Project Manager, The Deal LLC: Mark A. BaileyArt Director: Cezanne Studio/Paul Colin
Writer: Leila Zogby
HEADQUARTERS
The Deal LLC Turnaround Management Association105 Madison Ave 150 South Wacker Drive, Ste. 900New York, NY 10016 Chicago IL 60606212.313.9200 312.578.6900www.TheDeal.com www.turnaround.org
For more information on the Distressed Investing Report, please contact: Allan Cunningham at 212.313.9162, [email protected] or Joseph Karel at 312.242.6039, [email protected].
The Distressed Investing Report is a sponsored publication produced by The Deal LLC and the Turnaround Management Association.
DistresseD investing r e p o r t
3 Happy Days For Distressed Debt Investors In 2008 Opportunities—andrisks—aregreat,yetexpertswarnthatthings couldgetcomplicatedastheeconomystruggles
6 The Why And How Of Turnarounds KeynoterJerryYorksaysacommittedmanagementteamthat takesthelongviewcanovercomethefailureofpoorstrategyand execution
8 Experts Advise Patience And Caution For Distressed Debt Investors Thebetterdealswilllikelycomealonglater,butthatdoesn’t meaninvestorsshouldn’tstartshoppingnow
11New Players Emerge In Leveraged Cap Markets Yet,hedgefundsandothernewinvestorsmayfacesurprisesas economicstormcloudsgather
13 2008 Distressed Investing Conference Photos
16 When Creditors Are Traders, Gray Areas Arise Withthesupposedprotectionofbig-boylettersnowinquestion, creditorsmustweighthebenefitsofservingoncommittees
19 CLOs: Down But Not Out CLOshaveproventobeasolidassetclassthatwillsurvivethe currentmarketturmoil
24 China’s New Bankruptcy Law Opens Possibilities WhileamoreWesternlegalcodewillhelpopenmarkets,cultural differencesmakeimplementationaslowprocess
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HAppy DAys for DistresseD Debt inVestors in 2008 opportunities—and risks—are great, yet experts warn that things could get complicated as the economy struggles
Whatadifferenceayearmakes!Whenthedistresseddebtinvestmentcommunitygatheredinearly2007forthefirstannualDistressedInvestingConference,talk
centeredonhowtheamazingamountofliquidityinthemarketswasmakingittoughtoearnabuck.
Atthisyear’sevent,againco-producedbytheTurnaroundManagementAssociationandTheDeal,youcouldalmosthearthemorethan500participantshummingthetuneHappyDaysAreHereAgain.Lastsummer’ssubprimemortgagecrisisturnedoffthecreditspigotandchangedthegame.
“Evenhealthycompaniesarehavingtroublegettingfinanced,”notedMarcLeder,SunCapitalPartnersInc.,“andthetroubledcompaniesreallycan’tgetfinancedatall,orwithalotofdifficulty…..But,we’veseenthisbefore.Thishappenedbackin2001,evenlate2000,andthewayIandmycolleagueswhoinvestindistressedcompaniesrespondedandreactedisthroughstructuringthedealsdifferently.Inalotofdealsoverthelasttwo,three,fouryearsinagoodfinancingenvironment,
wewouldgointoanydealandwe’dbeanall-cashbuyer,knowingwecouldgetthird-partyfinancingafterclosing.”
That’snolongertheprocess.LedertoldthoseattendingapaneldiscussionthatSunCapitalisworkingonmanydealsnowinwhichlendersareoverleveragedandthecompanyis
underperforming.“Itwasn’tagreatcompany,anditshouldn’thavehadthiskindofleveragedcapitalstructuretobeginwith.They[lenders]knowthereisnochancethey’regoingtobetakenoutofthedeal.So,whatthey’relookingtodoistobringsomeoneintoprovidenewcapital.
“Inalotofdealswedidin’01,existinglendersstayedinplace.Wewouldinvestequityintothecompanytoprovideliquidity.Wewouldtakealargemajorityownershipposition.Therewouldbenoimpairmenttoanycreditors,nowrite-offs,maybesomeloweringofinterestrates…butthewholestructureofthe
dealhaschangedfromacontrolledsaleforcashtoanequityinvestmenttorecapitalizeacompanythatnevershouldhavebeensoleveragedtobeginwith.”
Collateralizedloanobligations(CLOs)tookabackseatfollowingthesummercrisis,andnontraditionalinvestors,suchashedgefundsanddistresseddebtfunds,assumedadominantroleinthemarkets.“Oneofthethingswesawlastfallafterthemarketdidcorrect,”explainedMattGerdes,managingdirectorofFreeportFinancial,“wassome[price]stabilization…assomeoftherelativevalueplayers,thenontraditionalinvestors,high-yieldhedgefundscrossedoverandprovidedsomesupport,seeingalotofvaluethererelativetotheircoreassetclasses.”Henoted,however,thatstabilizationwasshort-lived,ashigh-yieldspreadshavewidened.
TherecessionmaybeaspoilerManyexpertsspeakingattheconferencewarnedthatthecurrentrecessioncouldholdsomesurprisesthisyearandnext,andurgedinvestorstotreadcarefully.SeveralspeakersnotedthatMoody’sInvestorsServicepredictedthattheglobaldefaultrateonhigh-yield,high-riskbondswilljumpmorethanfivefoldbythecloseof2008becauseofaweakereconomy.
TheMoody’sreportalsoexpectedthedefaultratetoreach5percentin2009,whichcomparestothe26-yearlowrateof0.9percentpostedatthecloseof2007.Theratingsagencyalsonotedthatthepercentageofissuerswithdebttradingatdistressedlevelsatthebeginningof2008was11.5percent,thehighestlevelsinceJuly2003.Ayearearlier,theratewas4.2percent.
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“…troubledcompaniesreallycan’tgetfinancedatall,orwithalotofdifficulty….But,we’veseenthisbefore.”
“Ihavebeenpreachingpatienceandcaution.”
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Thesizeofloansthatmayfacetroublewasalsoaworryamongexpertsspeakingattheconference.“Ifyoulookattheaveragesizeofwhataleveragedloanlookedlikein2007,itwasgoingfor$1billion,”explainedJimJeffries,managingdirector,WachoviaSecuritiesInc.“Ifyougobacktothebeginningofthelastcyclein2001,itwasaround$350million,maybe$400million.So,we’reatleastthreetimesbiggerbasedonthatstat.”
ComplexcovenantsandliensThedealsnotonlywerebig,buttheyalsowerecomplicatedinstructure.“Weseeadifferentcreatureintheleveragedloan
market,thatofcovenantliteandsecondlien,”SeanLynch,directorofcreditandco-manageroftheSutterhigh-yieldfixed-incometeamatWellsCapitalManagement,toldtheaudienceattendingapaneldiscussionthathemoderated.“Obviously,secondliensdidnotexistatallinthe2000timeandcovenant
lite,asweallknow,hasexpandedtoatleastone-fifthportionofthemarket.”
Thesemegadealshaveinvolvedadiversecastofinvestors,whichmayposeanotherprobleminaturnaroundorrestructuringscenario.“We’redealingwithcapitalstructuresnowthathavebecomemuchmorehighlycomplexwiththeintroductionofalotofdifferentlenders,whichchangesthedynamicthataturnaroundmanagerneedstogothrough,”notesJeffZappone,CTP,seniormanagingdirectorofConway,MacKenzie&DunleavyInc.,adding,“I’dsaytheturnaroundandworkoutthatweclassicallyhaddoneinyearspastisgoneandit’snevergoingtocomeback.”
Creditorsmayfacenewtroubles.Inapaneldiscussionthatfocusedonrecentcourtcasesandsettlementsinvolvingcreditorswhosatoncreditorcommitteesandalsotradedinthesecuritiesofthecompanyinquestion,listenerslearnedthatitmaynotbewiseforsellersofdistresseddebttoassumethatabig-boyletterisprotectionenoughfrompost-salelawsuits.Suchlettersaregenerallyprovidedbysellerswhohavenonpublicknowledgeaboutacompanytobuyerswhoagreethattheyare“bigboys”andunderstandthesituation.n
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“We’redealingwithcapitalstructuresnowthathavebecomemuchmorehighlycomplex...”
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tHe WHy And HoW of turnAroundKeynoter Jerry york says a committed management team that takes the long view can overcome the failure of poor strategy
Notingthat“aturnaroundissortoftheflipsideofdistressedinvesting,”JerryYork,CEOofHarwintonCapitalLLC,aprivateinvestmentcompany,and
keynotespeakeratthesecondannualDistressedInvestingConference,describedwhatheviewedasthereasonscompaniesfailandthemosteffectivewaystorescuethem.
BasinghisremarksonhispersonalexperiencewithturnaroundsituationsatChryslerCorp.,IBM,AppleandTycoInternational,Yorkreferredtothewrongstrategyorbusinessmodelandpoorexecutionasthe“symptoms”ofadiseasethatconsistsofpoorgovernance,aculturethattoleratespoorperformance,inadequatemanagementandamajorshiftinindustryconditions.
Pre-turnaroundconditionsYorkdissectedthepre-turnaroundconditionofthefourcompanies.Regardingstrategyissues,hesaid,“Chryslerhadanoverallgoodstrategy.IBM’swasseverelyflawed.Appleessentiallyhadnostrategy,andTyco’swasprettygoodbutexcessivelyrisky.Intermsofthebusinessmodel,bothChryslerandIBMweretooslowandcostly.Applehadseriousdistributionproblems,andTycowastoocostlybecauseoftheredundanciesthatexistedinthebackofficeandmanufacturingareas.
“Occasionally,Chryslerhaddonereasonablywell,buthadbeenleftvastlybehindinpassengercars,hadhugemarketsharelosses.IBMwasbehindineverythingvirtually,exceptmainframesandasmall,atthattime,servicesbusinessthatwasstillsmallerthanEDSatthatpoint.Applehadmajormanufacturingfootprintissues,andTycowasoperationallysubpar.”
YorktermedthepreturnaroundboardsofChryslerandIBMasstrongandindependent,butchidedthemanagementoftheautomakerforlackofteamworkandthetechnologycompany’sleadershipforinflexibility.YorkwasCFOofChryslerandjoinedIBMin1993asCFOunderLouGerstner.
Apple’sboardseemedunabletomovethecompanyforwarddespiteadepthofSiliconValleyexpertise,anditsmanagementunderGilAmelio“clearlylackedthepassionfortheMacplatformthatyouneedwhenyou’reasmallplayercomparedtoabiggorillalikeMicrosoft.”YorkbecameanAppledirectorin1997afterSteveJobsrejoinedthecompany.AsforTyco,acompanyhedescribedas“asingle-leggedstrategyacquisitionmachine,”itsdirectorswereinaweoftheCEOanddidnotaskseriousquestionsofhim,hesaid.Yorkjoinedthatboardin2002afterthecompanywasincrisis.
Japanesecompetitionwastheindustrychangethathurt
Chrysler,hesaid,whileatIBMitwasthe“titanicindustrychangestakingplaceintheITspace”intheearly1990s.Microsoft’smarketdominationwastheissueforApple,butTyco“waslargelyverywell-positionedasset-wise.”
TurnaroundresultsAllfourturnaroundsdeliveredontheirpromises.AtChrysler,Yorktermedthesuccessspectacular.“Thesharepricebottomedoutin1990,’91atabout$9,andin1993whenthatparticularturnaroundhadbeensuccessfullycompleted,thestockwasat$45.”Daimler-Benz,whichpurchasedChryslerin1998,“totallyscrewedupthatacquisition,”Yorksaid.“Thereisnoreasonthatcouldnothaveworkedout,andworkedoutbeautifully.”NotingthatChryslerisnowinitsthirdmajorrestructuringofthepast15years,YorksaiditwasbecausetheyhadnotadequatelyaddressedtheircompetitivedisadvantagesagainstAsiancarmakers.
IBMisanothersuccessstory.“Thestockbottomedoutat$10onasplitadjustedbasisin1993andit’sat$103currently…they[IBM]haveexhibitedtheabilitytochangeandnotjustwaituntiltheygetincrisisagain,”henoted.
YorkattributedApple’sturnaroundtoSteveJobs’srefocusonbetterproductdesignandproductinnovation,particularlythehugelypopulariPhone.“Thethingsittingonyourdeskdoesnothavetobeanuglygrayorbeigebox.Itcanbeanattractiveindustrialdesign.Interestingly,Dellisnowstartingtoemulatethat10yearslater.Bytheway,MichaelDellin1997saidthatAppleshouldnotbeturnedaround…andtodayApple’smarketcapisgreaterthanDell’sbyasubstantialamount.”
Tyco’sturnaround,whilesuccessful,hasnotbeenplayedout,
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Jerry York, CEO, Harwinton Capital LLC
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accordingtoYork.“Thiswasacompanyinseverecrisis…andwehadahugecredibilityrebuildingjobtodo.IwentontheboardinNovemberof2002.Iwasthesecondnewdirectorandfivemonthsafterthat,theboardhadbeenchanged100percent.LastcountIsawofthetop200executivesinthecompany,190werefromoutsidethecompany.So,wedidwhatwehadtodotogetourcredibilityback.
“Partofthestrategywasjusttosaytoalloftheorganizations,‘Nomoreacquisitions.Runwhatyouhave,straightenitout,maximizethereturntotheshareholders,andlet’sseehowwellyoucandothat,’”herecalled.Thebenefitsofthedecisiontobreakupthecompany,whichtookeffectlastyear,areunknown.“…It’stooearlyinthegametoseehowwellthat’sgoingtoworkoutbecausetwoofthethreemanagementteamsofthenewpiecesarenewtoWallStreet,andWallStreetisgoingtotakeabitofawait-and-seeattitudetoseehowthesenewmanagementteamsdo,”Yorksaid.
TheelementsofsuccessSeniormanagementwithpassionanddeterminationistheessentialingredientforasuccessfulturnaround,accordingtoYork.“You’vegottohavesomebodywhohaslookedatthesituationandsaid,‘Itisabsolutely,vitallynecessarythatwetake
drasticaction.Therearenosacredcows,nothingisoffthetable,andwe’regoingtodowhateverwehavetodotofixthisplace.’”
Communicationisvital.“You’vegottosellittothetroops.You’vegottocontinuouslybeouttherecommunicating…whatwe’redoingandwhywe’redoingit,”hesaid.Symbolicgesturescount,too.“Thetopdogshavetosettheexample,”Yorksaid,“Youcan’thaveascrumptiouslyappointedexecutivediningroom,limousinesallovertheplace.Tonesettersareveryimportant.”
Finally,Yorkpraisedthebenefitsofbenchmarking.“It’sincredibletheamountofinformationyoucangetyourhandson,ifyoureallyworkatit,”hesaid.“AtIBMwehad12initiatives.Wetrackedallofthesemonthly.Wetiedthemtothefinancialstatementssothatyoucouldn’tclaimcostreductionsinthisareabut,bytheway,costsarerisingoverhere.And,ofcourse,measureandreportitfrequently.”
Onepointthatisoftenignored,accordingtoYork,isthatturnaroundsarelikesuccessfuldiets:long-termsuccessrequiresconstantvigilance.“Turnaroundscannotbeconsideredone-timeeventsandmustbefollowedbycontinuousimprovementapproachesandhighlevelsofstrategicadaptability.Ifyoudon’tdothat,thenyou’rejustgoingtogofromonecrisistoanotheronetoanotherone.”n
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� DistresseD InvestIng report ApriL 2008
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experts Advise pAtienCe And CAution for distressed debt investorsthe better deals will likely come along later, but that doesn’t mean investors shouldn’t start shopping now.
Thecurrentclimateinthecreditmarketsandtheaccompanyingeconomicslowdownhavechangedthepsychologyofthedistressedinvestmentmarket,primarily
becausepredicting“thebottom”hasbecomemoredifficult,accordingtoourexperts.
“Thisisamarketplacethathasmadeincrediblecorrectionsinveryshortperiodsoftime,”saidDavidMatlinofMatlinPatterson,whilespeakingonapanelofdistressedfundfounders.“Thepsychologyhastotallychanged.Themantrathatyou’resupposedtobuyinthedips,Ithink,hascompletelyunraveledafterthesubprimedebacle.”
Patiencewaswellregardedasastrategyinthisenvironment,since“goodcompanieswithbadbalancesheets”won’tstarttoappearuntillaterinthedowncycle.“Thebestdealswe’vedonehavebeeninvestmentsmadelateinarecessionaryperiodorcrisisperiod,”saidMichaelPsaros,KPSCapitalPartnersLP.
“Wehavefoundthatitistheworstcompaniesintheirrespectiveindustriesthatarethefirstonestogetsick.And,thebestcompaniesintheirrespectiveindustriesarethelastonestocapitulate.So,we’reverycontenttojustsitandlettheopportunitiescometous,”headded.
Psaros,therefore,cautionedinvestorsagainstoverenthusiasmforbuyingadistressedcompany’sdebtduringthebeginningofaneconomicdownturn.Inparticular,henotedthattraditionalmiddle-marketleveraged-buyout(LBO)metricsaredifficulttoapplytoaverydistressed,underperformingcompanyoroneoperatinginbankruptcy,andasaresult,traditionalLBOfundsmustbewary.
OpportunitiesexistOpportunitiesnonethelesspresentthemselves.Psaros,whosefirmfocusesonmanufacturing,saidthatsectorssuchasautopartswillbehardhit,butsincehisfirmhassolidportfoliocompaniesinautoparts,“we’regoingtobuildthemoutbecausenowisthetimetobuy.”
MarkK.HoldsworthofTenenbaumCapitalPartnersLLCconcurred,notingthatsomeofhisfirm’solderportfoliocompaniesarenowpoisedforgrowth.“Wehaveveryhealthybusinesseswithgreatbalancesheets,soI’mtellingmymanagersthatnowmightbethetimetopickoffsomeweakercompetitorsanddosomeacquisitions.”
HealsopredictedthatEuropeancompaniesthatboughtNorthAmericanmanufacturingdivisionsorsubsidiariesathighpricesandfailedtomakeagooftheseinvestmentsareanxioustosellnow,creatinganotheropportunity.
OperationstakeonnewimportanceThedistresseddebtinvestmentindustryin2008isfardifferentfromthatof2001-02,anotherdifficulteconomicperiod,ourpanelistsnoted.Tennebaum’sHoldsworthdescribedtheindustryduringtheearlypartofthedecadeas“almostkindofacottageindustry,muchsmaller.Wehadsophisticatedwell-knownplayersbackthen,butitwasreallyaspecializednichewithinthealternativeassetspace.Todayit’smuchmoremainstream.”
Theresultisamorecompetitivemarketplacewithmajorplayersanddeeperpockets.Tobeabletosnagthebestdeals,therefore,it’sessentialtodifferentiateyourselfasaninvestor,andourpanelistsbelievedthatastrongtrackrecordofoperatingportfoliocompaniesisessentialindoingthat.
“Tobereallydifferentiatedinthismarket,Ithinkyouhavetobepreparedtoownandoperateabusiness,”saidHoldsworth.“Ifyou’reprovidingarescuefinancing,sometimesthosegosouthandyouendupowningthebusiness.Sometimes,you’reaccumulatingbondsintheopenmarketandyouendupowningthebusiness,perhapsbydesign.So,youhavetobereadyforthat.”
Operatingadistressedbusinessisnopicnic.Ourpanelistsnotedthatsuccessrestsonselectingsolidmanagementanddesigningappropriatecompensationprogramsforthem,implementingeffectivecostcutting,andlearningtoworkasateamwithotherowners.
“I’venoticedthatthedealsaresobig,thecompaniesaresobig,andtheamountofdistresseddebtinthebalancesheetsofthesecompaniesissobigthatit’sgoingtobehardforanyonefirmtoendupinarealpositionofcontrol.So,wehavetolearntogetalongwitheverybody,”saidHoldsworth.
MarkLederofSunCapitalPartners,Inc.offeredthisadviceaboutoperatingcompanies.“ThetwomostimportantlessonsI’velearnedovermanyyearsandmanydealsisthatwhenyou’ve
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gotastrugglingcompany,youcannotmovetooquickly,butyoucanabsolutelymovetooslowly.”
Hedgefundsinvestorsmaybeatadisadvantagewhenplansgoawryandtheyendupasowners.“Idon’tseethehedgefundshavingtheabilityandthepeopletositandworkonmorethanoneofthesedealsintheirportfolioatatime,”notedMatlinofMatlinPatterson.“Ithinkthere’sgoingtobealotofopportunity.”
ForeigninvestmentsandinvestorsPanelistsdidnotviewEuropeandAsiaatpresentasstrongmarketsfordistresseddebtinvestors,particularlybecauseofthedifferentlegalandfinancialsystems.“AswelookoutinAsia,it’sveryquiet,”saidMatlin“UntilChinameaningfullyslowsdown,they’renotgoingtopulldownSoutheastAsiawiththem.We’llseewhathappensaftertheOlympics.”HenotedthatAustraliais“startingtohiccup,”andhethoughtthat2009mayopenopportunitiesinEuropeasthoseeconomiesslowdowninresponsetotheUnitedStatespicture.
HoldsworthalsosawpossibilitiesgrowingforinvestinginEurope,butcautionedthatlawsandcreditorrightsareverydifferentfromthoseoftheUnitedStates.“Ifyou’regoingtogooverthere,
you’dbetterdoyourhomeworkandyourresearchonthelawsbecauseyoucanfindyourselfinsomeprettystickysituationswithnowayout,”henoted.
Yet,panelistspointedoutthatforeigninvestorshavenotbeentimidaboutmakingalternativeinvestmentshereinU.Sfinancialfirms.AnexamplecitedwastheKuwaitiinvestmentinCitigroupinJanuary.“TheUnitedStatestodayisthemostsophisticatedfinancialmarketintheworld,”saidHoldsworth,“particularlywithrespecttoalternativeinvestmentproductslikeprivateequityanddistresseddebtinvesting.So,it’sanopportunitytogetafrontrowseatintermsofseeinghowit’sdone.”
Foreignersarenottheonlyonesseekinganeducation.“You’regoingtocontinuetoseestatepensionsandendowmentsalsomakinginvestmentsinfirms,againforalotofthesamereasons:thelearningprocess,accesstothefinancialminds,and,obviously,profit,”Holdsworthadded.
Theranksoflimitedpartnersareexpectedtoremainvirtuallyunchanged,accordingtoourpanelists,allofwhomreportedfewdefectionsamongLPs.“There’sanextraordinarilyhighlevelofre-uppingbyLPs,”saidLederofSunCapital.“Wetendtolosebetweenzero,oneandtwoLPsperfund.So,we’reintheneighborhoodof99percentre-upping.”n
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neW plAyers emerge in leverAged CAp mArKetsyet, hedge funds and other new investors may face surprises as economic storm clouds gather
Theleveragedcapitalmarketsof2008lookdifferentfromthoseoflastyear,ourexpertssay,asthedominanceofcollateralizedloanobligations(CLOs)hasgivenwayto
hedgefunds,high-yieldfundsanddistressedfunds.ThisinfusionofnewbuyersfollowingthesubprimecrisisofJuly2007helpedtostabilizethemarketforcompaniesseekingfinancing,butwillthatlastastheeconomycontinuestoslow?
“Youhadanewsetofbuyersstepup,whichwerethehedgefundsandothernontraditionalleveragedloanbuyers,”explainsSeanLynch,directorofcreditandco-manageroftheSutterhigh-yieldfixed-incometeamatWellsCapitalManagement,whomoderatedapanelentitled,LeveragedCapitalMarkets:What’sHot,What’sNot?
“Thathelpedtostaveofftheamountofdefaultsandtheabilitytotakedowndebtforinstitutionalbanksthatstillhaddealsontheirbooks.”Lynch,however,seestroubleahead.“Overtime,weshouldseethedefaultratepickupquitesignificantly,”headds.
CovenantliteloansAccordingtothepanelists,anewwrinklethatmayaffectpredictedworkoutsandrestructuringsisthenewandmorecomplexstructuresnowinplay.“Weseeadifferentcreatureintheleveragedloanmarket,thatofcovenantliteandthesecondlien,”saysLynch.“Obviously,secondliensdidnotexistatallinthe2000timeandcovenantlite,asweallknow,hasexpandedtoatleastaone-fifthportionofthemarket.”
Lackingtraditionalfinancialtriggers,covenantliteloansmayleadtosituationsinwhichlendersareunawareofacompany’s
distressuntiltoolate.“Ifyou’retheownerofanasset,”saysJimJeffries,managingdirectorofWachoviaSecurities,“youmaybeinasituationwhereyourfirstchancetohaveadiscussionaboutthecreditisreallyasit’shitaliquiditycrunchandisclosetohittingthewall.That’svastlydifferentfromthelastcycle,inwhichthereweremaintenancecovenantsthathadteethandyou
couldgetbacktothetable,resetyourself,andagreeordisagreewiththeplanbasedonwherethebusinesswasheaded.”
Workoutsrestontheperceptionthatacompanystillhasvalue,andourpanelistsbelievethenewstructuresmayaffectthatnegatively.“Ourruleofthumbisthatyou’llgetonehopefulbiteattheapplefromaprivateequitysourcetoprotect,preserve,anddefendtheirinvestment,”saysEdwardSiskin,executivemanagingdirectorofCrystalCapital.“Theproblemisthatifyou’redownattheendoftheline,wherethereisn’tanymoreperceivedvalue,sometimestheyhavetobecrazytoputupthemoney….Thewholerecovery,Ithink,andworkoutstrategyiscompromised.”
DiverseworkoutinterestsAnotherissueaffectingfutureworkoutsisthenumberoflendersinvolvedinthesestructures.“We’redealingwithcapitalstructuresnowthathavebecomemuchmorehighlycomplex
withtheintroductionofalotofdifferentlenders,whichchangesthedynamicthataturnaroundmanagerneedstogothrough,”notesJeffZappone,CTP,seniormanagingdirectorofConway,MacKenzie&DunleavyInc.,adding,“I’dsaytheturnaroundandworkoutthatweclassicallyhaddoneinyearspastisgoneandit’snevergoingtocomeback.”
CLOsareseenasbringingsimilarproblemstotroubledcompaniesinthefuture.“Mybiggestfearasasecondlienlender,”saysSiskin,“isthediversityandthenumberofCLOsthatareinthecredit.So,whenyouneedarestructuringdone,asimpleamendmentdone,tryingtogetallofthevotestogetherinaquickperiodoftimesometimesisanightmare.”
Howwillprivateequityfirmsthatfindthemselvesinthesesituationsbehave?“ThefundsforBlackstoneandKKRoranyPEfirmthatnowhasCLOsoutstanding,wehaven’tseenthat
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“Theturnaroundandworkoutthatweclassicallyhaddoneinyearspastisgoneandit’snevergoingtocomeback.”
“Youmaybeinasituationwhereyourfirstchancetohaveadiscussionaboutthecreditisreallyasit’shitaliquiditycrunch.”
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1� DistresseD InvestIng report ApriL 2008
they’vehadtodothisyet,butwilltheirgoalsbethesameasthoseoftheotherlendersinthegroup?”wondersRobPolenberg,researchanalystatStandard&Poor’sLeveragedCommentaryandData.“Aretheyinittoownthecompanyontheotherside?Aretheygoingtomaketherestructuringorthebankruptcyorwhateverprocessthey’regoingtogothroughmoredifficult?Nobodyknows.”
Thesizeofsomeofthecompaniesthatmayfindthemselvesinthesecomplicatedsituationsisanotherworry.“Ifyoulookattheaveragesizeofwhataleveragedloanlookedlikein2007,itwasgoingfor$1billion,theaverage-sizedfacility,”explainsJeffriesofWachovia.“Ifyougobacktothebeginningofthelastcyclein2001,itwasaround$350million,maybe$400million.So,we’reatleastthreetimesbiggerbasedonthatstat.
“And,you’vegotmultitudesmoreinvestorsinvolvedinthesecredits.Ithinkthatinsomerespectsit’llcreateawonderfulopportunityforsomepeoplebecausethestructuredvehiclesmaygetinasituationwherethey’reforsellers,andthatwillcreatesometechnicalsupply-and-demandproblemsinthemarketwhereyoucanfindrealvalue,”heconcludes.
Opportunitiesfor2009Therearealwayswaystoturnlemonsintolemonade,andourdistressedinvestingexpertsseeopportunitiesincertainmanufacturingsectors,suchasautomotiveparts,andtheretailsector,whichexperiencedalacklusterholidayshoppingseasonin2007.“You’rebasicallylookingattransportation,distribution,consumerproducts,”saysZappone.“Weknowwhat’sgoingoninthehomebuildingsectornow...andthoseofuswithexperienceinautomotiveknowwe’regoingtoseealotofhighactivityandhighdistress.But,youknow,withthatyoualsoseealotofopportunitiesinthemarketplace.
“Thecompanieswhobasicallygottheirdealsdoneandgotthemdoneearly,whohaveenoughliquiditytowithstandthedownturnandareoperatingefficientlyaregoingtobeopportunisticbuyers
inthemarketplace.Whenthiswholethingshakesout,therearegoingtobesomemuchstrongercompanies.But,there’sgoingtobeaperiodofseveredistresswithinthesebasiceconomiesandold-schoolindustries,includingretailandconsumerproducts,”heconcludes.
Whileconcurringwiththeoutlookforthesebasicindustries,[Crystal’s]Siskincautionedaboutcompaniesdependentonrawmaterialssuchasbasicmetals,resinandoil-price-related
materialsbecauseoftheinabilitytopassalongcostincreasesquicklytoconsumers.“IfyousellcarpettoHomeDepotorLowe’s,”hesays,“they’renotgoingtoaccept20percentincreasesinprice,eventhoughyourrawmaterialcostsmighthavegoneuptwicethat….So,youreallycan’tbuyintoEBITDAgrowth,and,quitefrankly,maybeweshouldtakethosemodelsdownbecauseofthetimelagofpassingthosecoststoyourcustomer.”
Whilecertainsectorslikeretail,automotiveandrealestatewilllikelyfounderintheyearahead,institutionalinvestorshavelearnedthevalueofdiversification.“Inthelastcycle,yousawthattelecomwas15percentofpeople’sholdings,”saysZappone.“Rightnow,there’snosectorthatholdsover10percentinanybody’sspecificholdings.So,IthinkthatbecauseofdiversificationthereissomeinsulationintermsofhowsteepitwillhitatleasttheCLOsandsomeinstitutionalinvestors.”n
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1� DistresseD InvestIng report ApriL 2008
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WHen Creditors Are trAders, grAy AreAs AriseWith the supposed protection of big-boy letters now in question, creditors must weigh the benefits of serving on committees.
Asthenumberofdefaultingcompaniesrises,debtholdersmustbecarefulaboutservingoncreditorcommitteesbecauserecentcourtdecisionsandlawsuitsettlements
appeartoplacecommitteemembershipinconflictwithtradingactivities,accordingtomembersofapaneldiscussionentitled,DistressedDebtTradinginVolatileMarkets.
Inthepast,manytradersbelievedthat“big-boy”lettersofferedprotectioninthesecases.Inexplainingthepurposeoftheseletters,EdwardWeisfelnerofthelawfirmBrownRudnicksaid,
“TheconceptisthatifI’vebeenexposedtomaterialnonpublicinformationbyvirtueofhavingbeenaninsiderorhavingparticipatedinsomecommitteefunction,eitherofficialorunofficial,thetheoryisthatIcansellmybondssolongasthesellerunderstandsandevidencesthathe’sa‘bigboy.’Inotherwords,heunderstandthatIwasprivytomaterial
nonpublicinformation,heunderstandsIknowalotmoreabouttheinvestmentthanheevercould,and,nevertheless,he’spreparedasa‘bigboy’toenterintothetransactionI’mofferinghimatthepricethatwe’veagreedupon.”
Suchaletterwasthoughttoinsulatethesellerfromanylegalactionthebuyermaydecidetotakepost-sale,butrecentlegalactionshaveraisednewissues.“Themoreinterestingquestion,”Weisfelnercontinued,“iswhetherornotfromtheperspectiveofthemarketplacetakenaswhole,andenforcementactionbytheSecuritiesandExchangeCommission,thebig-boyletterisgoingtoinsulatemefromFederalregulators.”
PanelmoderatorGlennSiegelofthebankruptcygroupofDechertLLPconcurred,notingthattheoreticallythebig-boyletter“mayworkinthecontextofatwo-partytransaction,butthequestioniswhetherornotthatgetsyoumuchmoreandwhetherornotthatabsolvesyoufromliabilitywithrespecttoallotherissues.”
Mustbigboysbepassedon?Toillustratethepoint,thepaneldetailedseveralrecentcases,includingthelawsuitthatwassettledin2007involvingSolomonSmithBarney(SSB),nowSmithBarney,andR2,aTexashedgefund.SSB,amemberofthenoteholderprotectivecommittee
inanout-of-courtrestructuringfortelecomcompanyWorldAccess,decidedtosellitsbondholdingsinthefailingenterprise.
SSBcontactedJeffriesGrouptolocateabuyer,andtheyfoundR2.WhenitsoldthebondstoJeffries,SSBprovidedabig-boyletter,butJeffriesdidnotpassthatalongtothehedgefund.Asaresult,whentheinvestmentprovedafailure,R2suedonthegroundsthatproperdisclosurewasnotmade.
Althoughasettlementofthecaseprecludedacourtopinion,therearelessonstoheed,panelistssaid.“Itteachesusthatasbetweenthepartiestoatransaction,intheactualcaseR2andJeffries,theexistenceofa
big-boyletter…isn’tashieldtoliability,”saidWeisfelner.
“Theconceptisthepotentialfraudinthemarketplace.Jeffries,havingtaken,ineffect,taintedbondsandputthemoutinthemarketplacewithouttellingpeoplethattheywerecomingfrompeoplewhohadmaterialnonpublicinformation,ineffectwasdefraudingthemarket.Ithinkthatwasthetheory,atleast,ofthelawsuit,”headded.
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“Thereisoftenatensionbetweentakinganactiveroleinarestructuring…andmaintainingtheabilitytotrade.”
Edward Weisfelner
Glenn Siegel
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1� DistresseD InvestIng report ApriL 2008
[Dechert’s]Siegeladded,“Thepositionis,andthisisthepositiontheSECtakes,thatthefactthatthereistradinggoingonwithmaterialnonpublicinformationdistortsthepricingonthebondsandthattherearepeopleouttherewhoaresellingandmakingmoneyonthefactthattheyknowsomethingthatsomebodyelsedoesn’tknow.
“And,thatbyitselfisenoughtogiverisetoasecuritieslawviolation,andthefactthatthecounterpartytothatindividualtradehaswaiveditthroughabig-boyletterdoesn’tsolvethe
problembecausethosetradesareoutthereinthemarketplace.Theysetthepriceofthebondsandthey’renotbasedoncorrectinformation.That’sthepositionthatthecommissionistakingthesedays.Howoftenthey’regoingtodoanythingaboutit,Idon’tknow,”hesaid.
Tradersaredefinitelycaughtinthemiddle,accordingtopanelistMatthewCarterofUBSInvestmentBank.“It’stoughtodisseminateifyoutransactwithabigboyandselliton.Typically,whatweliketodoispassthebigboyon.But,sayyoubuy$10millionfromsomebodyandstartpiecingitoff,atwhatpointcanyouclearlysaythatthesebondsaren’ttainted?
“Essentially,itmakesme,eventhoughIdon’tknowanything,havetopassonthebigboysall
thetime,whichpeoplereallydon’twanttotakeon.Itprettymuchwilltakeme,asamarketmaker,outofthesituation.So,wetendtotrytoavoiddealingwiththese.”
Areethicalwallsenough?Anotherissueofconcernfordistresseddebtinvestorsisthatoftradingbehindso-calledethicalwalls.IntheFederatedDepartmentStoresbankruptcy,negotiationsamongthecreditorscommittee,somelargeholdersandtheUnitedStatesTrusteeresultedinanorderbeingenteredthatallowedtradingaslongasan“ethicalwall”wassetupbetweenthetradingunitandthemembersofthecreditorscommitteeinthatparticularinstance.Theselargeinvestorswantedtoprotecttheirabilitytocontinue
buyingandsellingsecuritiesondirectionoftheirclientseventhoughthefirmswererepresentedonthecommittee.
“Theproblemwiththisisthatitworksforverylargefinancialinstitutionsthatcansegregatetheirtradingand,forlackofabetterword,theirfiduciaryfunctionwithinthesameinstitution,”saidSiegel.“It’snotquiteaseffectiveifit’sinvolvingasmallhedgefundwherethereareonlyafewpeopleinvolved.”
Ethicalwallsimposeotherproblems,too.“It’sanexpensivepropositionintermsofdemonstratingcomplianceonaperiodicbasiswiththeofficeoftheU.S.Trustee,”notedWeisfelner,adding,“Thenotionthattheguyonthefarendofthetradingplatformwhositsonthecommitteedoesn’ttalktotheguyontheotherfarendofthetradingplatformwho’sbuyingandsellingsecuritiessometimestakesalittlebitofsuspensionofdisbelief.”
TheprosandconsofcommitteeserviceDistresseddebtinvestors,therefore,woulddowelltoremainabreastofissuesregardingserviceoncreditorcommittees.“Theissuethatfacesthecreditorconstituencyiswhetherornottheywanttoopttoserveonanofficialcommittee,theviewbeingthatservingonacommitteeaffordsyouanopportunitytoinfluencetheoutcome,assistinnegotiations,andotherwisebeheretolookoutforyourinvestment,”Weisfelnersaid.
“Thereisasignificantcost,however,inservingonacommitteeandthatistheinability,atleastaccordingtotheruleswe’vebeentalkingabout,tobuyorsellsecuritiesorotherwiseprofitfromyourpositionasamemberofthecommittee,”headded.
Manymayfeelthatoptingtoserveonadhoccommittees,asopposedtoformalcommittees,solvestheproblem,butpanelistsdisagreed.“Thereisoftenatensionbetweentakinganactiveroleinarestructuring…andmaintainingtheabilitytotrade,”saidWeisfelner.“It’salmostinevitablethatonceyougettoacertainstageintheproceeding,whereultimatedecisionsoncuttingadealhavetobemade,that,ineffect,membersofadhoccommitteeshavetojumpoverthefenceandbecomerestricted.”n
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“…theexistenceofabig-boyletter…isn’tashieldtoliability.”
Matthew Carter
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Clos: doWn but not outClos have proven to be a solid asset class that will survive the current market turmoil
Whilecollateralizedloanobligations(CLOs)maynolongerdominatetheleveragedcapitalmarkets,theirvastholdingscontinuetomakethemapresence,
accordingtomembersofthepanel,CLOs,CreditDerivativesandSWAPS—WhatTheyAre,WhereThey’veBeenandHowThey’llImpacttheNextWaveofRestructurings,moderatedbyJeffMarwil,partnerofWinston&StrawnLLP.
“CLOs…historicallyhavebeenaverystablemarketwithlowdefaultrates,eventhroughcreditdownturns,”saidRobertContreras,managingdirectoranddeputygeneralcounselforDeerfieldCapitalManagementLLC.“Thatisdemonstratedbytheverylimitednumberofdowngradesbytheratingagencies—only98downgradesacrossapproximately6,000tranches.”
ExpressingtheopinionthatinthecurrentmarketCLOsare“thebabythat’sbeentossedoutwiththebathwater,”GregoryCooper,founderandmanagingdirectorofDenaliCapitalLLC,defendedtheassetclass,too.“TheratingagenciestakeaverystrongviewpointandstancewhenstructuringaCLO.Wehavealotofdifferentcovenants,ifyouwill,thatwehavetomaintain,suchasspread,weightedaverageratingfactor.They’restructuredto
thepointwheretherearemandatorydiversificationtriggersbuiltin.It’sdifferentfromCDOs[collateralizeddebtobligations].ACDOisbasicallyabunchofmortgagesfromonegeographicarea.Theygotblownoutofproportionandthey’vekindoflosttheirway.”
FellowpanelistMattGerdes,managingdirectorofFreeportFinancial,notedthatliquidityisanissuerightnowforCLOs.“TheCLOassetclassisasolidassetclass.There’salotofcapital
that’sbeeninvestedthereoverthelastseveralyearsandthatcapitalislong-termcapitalthat’sperformingwellforitsequityholdersanditsdebtholders.
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“Theissuereallyisliquiditytofundfuturegrowthinthemarket.So,alotoftheCLOassetmanagershavebeenfrozenbythelargeinvestmentbanksandmoneycenterbanksthatprovidewarehousefinancing,justgiventhevolatilityinthemarketandthelackofatakeoutofthosewarehouselinesdowntheroad.”
TheperfectstormTheCLOmarketfindsitselfinturmoil,accordingtoCooper,becauseof“aperfectstormthatshowedhowinterconnecteda
lotofcapitalmarketsare.”Insummarizingtheeventsofthepastyear,Coopersaid,“ThereasontheCLOmarkethasbeenhurtthewayithasbeenisbecausewhenthesubprimemarketstartedtocometofruitioninJuly,itcausedtheinvestorbasefortheCLOliabilitiestoliterallydryupovernight.And,whenthathappened,anyinvestorsthatwereleftwererequiringwiderspreads.”
Thiscausedinvestmentbanksthatwerewarehousingdeals
inanticipationoffutureCLOclosingstofindthemselveswithbillionsofdollarsinassetssittingontheirbalancesheetsandfewoptionsformovingthemon.“Thereareleveragedbuyoutsthatsponsorscommittedtoearlierin2007,andthey’vereflectedmultiplesthatareone,two,insomecasesthree,timeshigherthanwhatthecompanydeservedtobegettingitfor,”Coopersaid,“andthebankshadcommittedfinancing,insomecaseswithnocovenants,withspreadsthatare150to250basispointsoutofmarket.”
Privateequityfirmshavebeencaughtinthesqueeze,too.“You’vegotallthisprivateequitymoneythat’sbeenraised,needsahome,buttheycan’tgettheirdealsunderwritten,”Coopersaid,“So,theyhavetogobackandrestructuretheirdeals,theirpurchaseagreements,withthesellers.Inalotofcasestheyhavetorenegotiate,andittakesawhile….So,alotofdealsjustgettakenoutofthemarketplace,whichisagoodthingforthePEgroupsbecausetheycan’tgetthemfinancednowanyway.”
PEfirmsalsofindthemselvesstrugglingtofinancetheneedsoftheirportfoliocompaniesandmayfindthemselvesinunfamiliarworkoutterritoryasaresult.“Privateequityfirmsenjoyedthe
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“It’snotefficient,butthereisamarkettogetthingsdone.”
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excessliquiditythatwascreatedbyalltheseCLOmanagerswhocameintothebusinessinthelasttwoyears,”Coopernoted.“They’renotgoingtolikeitwhenadealdoeshaveanissueandtheyfindoutthatthereare110lendersinthedealandthey
probablyknowfourorfiveofthem….The[workout]landscape,theplayingfield,isgoingtobecompletelydifferentthiscyclebecauseyouhavedifferentplayers.Youhavemoreinstitutionalinvestorsasopposedtothelastcycle,inwhichyouhadmorebanks,regionalbanksandcommercialfinancecompanies.”
Theonebrightspotcitedbythepanelistswasinfinancingforsmalldeals.[FreeportFinancial’s]Gerdesnotedthathisfirmhasbeendoingdealsunder$125million.“Alotofthefinancecompaniesarestillactivelylending,andonaclubbasis,combiningregionalbanks,financecompanies,whathaveyou.
There’senoughcapitaltogetsomeofthesethingsdone.”
Theoutlookforlargecapstructuredproductsislessoptimisticbecauseofhighercapitalrequirementsandtighterterms.“You’renotgoingtosee[playout]theoldadage‘thethreeofusandaBloombergcouldgetstartedinthisbusiness,’whichyousawasrecentlyasJanuary2007,”Coopersaid.“Scaleisgoingtomatter.Ithinkeverystructuringagentouttherewilltellyouthattheuniverseofmanagersthatcangetnewdealsdoneisprobably20or30differentmanagers.”
Where’sthemoneynow?Withlendersreluctanttofinanceorrefinanceacquisitionsandloans,wherecanborrowersturn?“Fromourperspectiveinthemiddlemarket,”saysGerdes,“Ithinkthereisamarket.It’snotefficient,butthereisamarkettogetthingsdone.”
Cooperagreed.“Themarketsareopen….Thereisalotofmoneyoverseas,alotofpocketsofmoneyintheStatesthatwanttogetputtoworkintheloanassetclass.Itisanattractiveassetclass,andwe’reinacyclicalbusiness.”Thelessonofthecurrentsituation,accordingtoCooper,is“youjustdon’tturnaloanintoabondovernight,whichisreallywhathappenedoverthelast18months.Seniorsecuredloansbecamesecuredbondswithnocovenants.”n
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“…theuniverseofmanagersthatcangetnewdealsdoneisprobably20or30differentmanagers.”
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China’seffortstomodernizeitsbankruptcylawsareahopefulsignfordistresseddebtinvestors,buttheyarebabystepsthatwon’ttranslateintoeasydealsanytime
soon,accordingtomembersofthepanel,DistressedInvestingintheMiddleKingdom,moderatedbyGeorgeKelakos,managingdirector,KelakosAdvisorsLLC.
TheEnterpriseBankruptcyLaw,whichtookeffectonJanuary1,2007,incorporatesmanybankruptcyandreorganizationconceptsfoundintheUnitedStatesbutisoftenlackingimportantimplementationdetails.
Nevertheless,whilenotingthatuntilnowtheonlyoptionforforeignersinChinawaspurchasingnonperformingloans,HelenaHuang,aHongKong-basedpartneratKirkland&EllisLLC,pointedouttwopotentialopportunitiesaffordedbythenewlaw.Firstisthatitofferstheabilityofthedebtorortheadministratortosellsubstantiallyallofabankruptcompany’sassetsinbankruptcyand,secondly,itincludestheabilityofthedebtororadministratortoborrowintheordinarycourseofoperatingthebusiness.
“InthepastcoupleofmonthswhenIwasinChinatalkingtosomeofthejudgesandrestructuringprofessionals,”Huangsaid,“IcouldsensethattheChineserestructuringcommunityisveryinterestedinthis,althoughtheydon’tknowexactlyhowtoimplementit.”
CulturalbarriersremainChanginglawsisonething;changingculturalattitudesisquiteanother.“ThenewbankruptcylawinmyviewdoesnotandwillnotdoonethingandthatistochangethetraditionalculturalattitudeoftheChineseagainstbankruptcy,”saidAlanTang,whoheadsuptheRestructuringGroupofGrantThorntoninHongKong.
FrankMack,CTP,ofConway,MacKenzie&DunleavyInc.concurred.“InChinathereisabigemphasisonculturalissuesasopposedtointheUnitedStates,wherewehaveafocusonaframeworkoflawsandpractices.InChinayouhave5,000yearsofhistory,whichisnoteasytobreak.”
Tangnoted,however,thatthe2007lawemphasizesrestructuring,whichthepredecessor1986lawdidnot.“Thenewlawextendsthescopefromthestate-ownedenterprisestobasicallyalltypesofbusinesses,includingforeigninvestmententerprisesinChina,”Tangexplained.“Undertheoldlaw,only
thestate-ownedenterpriseswereallowedtobebankrupt.Butnowunderthenewlawallenterprisesaresubjecttothislaw.And,asIsaid,theemphasisisonrestructuringand,therefore,theopportunitiesarehuge.”
TheadventofrestructuringwaswelcomedbypanelistPhilGrovesofDACManagementLLC,thefirstforeignbuyerinChinaofnonperformingloansfromtheassetmanagementcompanies.“Undertheoldrules,thegovernmenthadgreatpowertodirectandoverseethebankruptcyprocess,sooneoftheeffectsofthenewlaw,althoughwehaven’tseenitinpractice,isthatthegovernmentcan’tdothatwilly-nillyanymore.”
Thischangewillbebeneficial.“Itmakesitalotmoreinteresting
fortherestructuringprofessionalsandthebuyersthatwenowhaveanotherwaytoexitourloansotherthanjustchasingpeoplearoundwithastick,sotospeak,”Grovessaid.
“Intheearlyyears,”herecalled,“almostallofthevalueofthecollateralwasrealestate.So,theonlytypeofrestructuringyoumightgetwasthatyoumightendupwithsomepropertyorabuildingorahotel.But,we’restartingtoseealotmoredebtorscomingtousnowsaying,‘Whydon’twerestructure?Wehavethisnewbankruptcylaw.’Theyhavenoideawhatitmeans.Theyjustknowit’soutthere,soyou’regoingtoseealotmorerestructuringwork,Ithink.”
OneofthemainstumblingblockstoinvestinginChinaistheamountofbureaucracyinherentinthesystem.“Oneoftheworstthings,”saidTang,“istheinfluence,ifnottheintervention,ofthegovernment….Therearedifferentlevelsofgovernment–provincial,central–andthentherearealsodifferentdepartmentsanddivisionswithingovernment.
“It’ssometimesconfusing,ifnotfrustrating,foroverseasinvestorsnegotiatingwiththeChinesetofindoutthattherealdecisionmakerisnotsittingacrossthetable.You’vegottogothroughalotoftheseroundsofmeetingsbeforeyoureallygetclosetothetruedecisionmaker.”
CHinA’s neW bAnKruptCy lAW opens possibilitiesWhile a more Western legal code will help open markets, cultural differences make implementation a slow process
CONTINUED >
“…theemphasisisonrestructuringand,therefore,theopportunitiesarehuge.”
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Event Sponsors
Capital Markets
TMA and The Deal thank the sponsors of the 2008 Distressed Investing Conference
Platinum Sponsor Gold Sponsors
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�� DistresseD InvestIng report ApriL 2008
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TheimportanceofbusinessrelationshipswhenoperatinginChinacannotbeunderestimated.Grovesdescribedhowhisfirmusesdifferentattorneysineachcityinwhichitwantstodobusiness.“Whenyouenteranewcitytobuythings,findtheattorneyswhoarerelatedtothejudgesandthemayorandwhoknowthesellersverywell…becausealmostyourentireacquisition,restructuringandsaleprocessisgoingtobedictatedbyhowwellyourattorneysknoweveryone,”hesaid,addingthathewasnotimplyingthattherewasanythingillegalgoingon.“It’salljustheavilyrelationshipdriven,”heexplained.
CourtsbecomemoresophisticatedThecourts,ofcourse,willplayasignificantroleasbankruptcyandrestructuringbecomemorewidelyused,butthequalityofjudgeshandlingthesecasesacrossChinavaries.“IfyougotoChina,you’regoingtoseeahugedisparityamongthequalificationofjudges,”Huangsaid,notingthatjudgesinlargercitieslikeBeijingandShanghaialsohandlecommercialmattersandsoaremoresophisticatedaboutbusinesstransactions.Judgesinsmallercities,however,arenotsoconversantwithbusinesslawsand
“wouldnotmakeadecisionuntiltheygetsomekindofOKfromthelocalgovernmentorrelevantagency,”sheadded.
“But,Iactuallyseethesituationimprovingandchangingdaybyday,”Huangsaid,“andIknowthateversincetheadoptionofthisnewbankruptcylaw,theSupremeCourtofChinaandthecourtsatvariouslevelshavehostedmanyseminarsandtrainingsessionsforjudges.”ShealsosawasapositivesignthefactthattheSupremeCourthasactivelysolicitedopinionsfromrestructuringexpertsworldwideinanefforttodevelopimplementationrules.
“Ihavealotofhopeforthedetailedimplementationrules,”saidHuang,“andIcanseethatalotoflittleissuespeoplearetalkingaboutmayshowupinthedetailedimplementation,whichcouldhelpalotintherealpractice.”
Perhaps[ConwayMacKenzie&Dunleavy’s]Mackhadthebestadvicewhenhesaid,“ThingsmoveveryslowlyinChina…soyouhavetohavepatientmoney.”n
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�� DistresseD InvestIng report ApriL 2008
Abu DhAbi investment Authority • AccorD FinAnciAl • AccuvAl AssociAtes incorporAteD • Acorn cApitAl Group llc • ADveq mAnAGement us., inc. • AeG pArtners llc
Akin Gump strAuss hAuer & FelD llp • Alessio pArtners, inc. • AlGon Group • AlixpArtners • AlliAnce mAnAGement inc. • AlvArez & mArsAl • AmericAn cApitAl strAteGies
the AnDerson Group • AnDrews kurth llp • AnGelo GorDon & co. • Aon, inc. • Apex FunDAmentAl pArtners llc • Atwell,curtis & brooks, ltD.
AurorA mAnAGement pArtners AurorA resurGence • bAin & compAny • bAin corporAte renewAl Group • bAker & mckenzie llp • bAllArD spAhr AnDrews & inGersoll llp
bAnk oF AmericA business creDit bAnkers ADvocAte Group • bArnes & thornburG llp • bArrier ADvisors inc. • bAysiDe cApitAl • bDo seiDmAn llp
berenson AnD compAny llc • binGhAm mccutchen llp • blAnk rome llp • bmc Group • bownebrAcewell & GuiliAni llp • briDGe AssociAtes llc • briDGe FinAnce Group llc
broADwAy ADvisors llc • brookFielD Asset mAnAGement • brown Gibbons lAnG & compAny • brown ruDnick berlAck isrAels llp • bryAn cAve llp
burGunDy Asset mAnAGement ltD. • burns & levinson llp • cApes sokol GooDmAn & sArAchAn pc • cApitAl crossinG • cApitAlsource FinAnce llc
cArl mArks ADvisory Group llc • cArvAl investors • cb richArD ellis • ceDAr croFt consultinG ltD. • ceDArwooD AssociAtes llc • century services (usA) inc.
cerberus cApitAl chicAGo llc • chAse business creDit • cit commerciAl FinAnce • citibAnk • citic usA holDinG inc. • cleAr thinkinG Group • cleArbiD cApitAl
coFFin & AssociAtes • cohen seltzer inc risk mAnAGement & insurAnce • columbiA business school • columbiA lAw school • the comvest Group
cooley GoDwArD kronish llp • countrywiDe home loAns • creo cApitAl pArtners • crG pArtners llc • crowe chizek • crystAl cApitAl • cushmAn wAkeFielD
DAc mAnAGement, llc • DAy pitney llp • the DeAl llc • Dechert llp • DeerFielD cApitAl mAnAGement llc • Deloitte FinAnciAl ADvisory services llp • DenAli cApitAl llc
DieDrich von soosten & co. inc. • DlA piper uk llp • DlA piper us llp • DollAr FinAnciAl Group • Dominion pAciFic Group • Donlin recAno & compAny • Dorsey & whitney llp
DrinkerbiDDleGArDnercArton • DuFF & phelps, llc • e.h. winston & AssociAtes • em ADvisors • emerAlD technoloGy vAluAtions llc • epiq systems inc.
executive sounDinG boArD AssociAtes inc. • FAeGre & benson llp • FArber FinAnciAl GroupFeDerAl reserve bAnk oF chicAGo • Fennemore crAiG • FGi FinAnce
the Finley Group inc. • First AmericAn title insurAnce compAny oF ny • Firstcity crestone llc • FirstliGht FinAnciAl corporAtion
Focus mAnAGement Group llc • Fortress investment Group • Freeborn & peters llp • Freeport FinAnciAl • FrieD FrAnk hArris shriver & JAcobson • Fti consultinG inc.
FulbriGht & JAworski llp • G.e.m. Auction, ApprAisAl AnD liquiDAtion Group • GArnet cApitAl ADvisors, llc • GArrison investment Group
GAvin AnDerson & compAny • Gb merchAnt pArtners • Ge commerciAl FinAnce8 • Ge commerciAl FinAnce - bAnk loAn Group • Ge corporAte FinAnciAl services • Ge equity
Ge GlobAl sponsor FinAnce • Gemini pArtners inc. • Getzler henrich & AssociAtes llc • GolDmAn sAchs & co. • Goulston & storrs, p.c. • GrAnt thornton • GreAt AmericAn Group
GreenberG trAuriG llp • Gryphon investors • Gtc nutrition • hAckmAn cApitAl pArtners llc • hAhn & hessen llp • hArris, JerniGAn & Geno • hAynes AnD boone, llp
heAlth cApitAl investors, inc. • heenAn blAikie llp • the hilco orGAnizAtion • hollAnD & kniGht llp • holme roberts & owen llp • houlihAn lokey howArD & zukin • hsbc bAnk usA
hunt speciAl situAtions Group lp • huron consultinG Group • icon cApitAl • imperiAl cApitAl llc • inDustriAl opportunity pArtners • inG cApitAl, llc • insiGht equity
JAGer smith pc • JeFFeries • John lees & AssociAtes limiteD • Jones DAy • kAtten muchin rosenmAn • keArney & phelAn • keen consultAnts
the reAl estAte Division oF kpmG corporAte FinAnce llc • kelAkos ADvisors llc • kelleher & AssociAtes • kestrel consultinG llc • kirklAnD & ellis llp
klee, tuchin, boGDAnoFF & stern llp • klehr, hArrison, hArvey, brAnzburG & ellers, llp • kpAc solutions llc • kpmG (AustrAliA) • kpmG corporAte FinAnce llc
kps cApitAl pArtners lp • kurtzmAn cArson consultAnts llc • kutAk rock llp • lAminAr Direct cApitAl the De shAw Group • lAmm rubenstone llc • lAnDsbAnki
the lAsAlle network • lAurelton Group llc • lAzArD miDDle mArket • lbc creDit pArtners inc. • the lenDer’s Group inc • leucADiA nAtionAl corporAtion
levine leichtmAn cApitAl pArtners • lewis AnD rocA llp • locke lorD bissell & liDDell llp • loeb & loeb llp • loeb equipment & ApprAisAl compAny
lonGroAD Asset mAnAGement llc • lonGuevue cApitAl • louGhlin meGhJi + compAny • lsq FunDinG Group • mAcquArie securities (usA) inc.
mAnAGeD Assets internAtionAl llc • mAnninG & nApier ADvisors • mArlin equity pArtners
mAtlin pAtterson GlobAl ADvisors llc • mcDermott will & emery llp • mcDonAlD hopkins llc • mcGuirewooDs llp • meDicAl cApitAl corp.
melville cApitAl liFe settlements • the meriDiAn Group • merrill lynch cApitAl • mesirow FinAnciAl consultinG • mesirow FinAnciAl inc.
mesirow insurAnce services, inc. • miller buckFire & co., llc • miller thomson llp • moGliA ADvisors • monomoy cApitAl pArtners • monroe cApitAl llc • morGAn stAnley
morris AnDerson & AssociAtes ltD. • morris nichols Arsht & tunnell • much shelist • munGer tolles & olson llp • myers & co. • nAchmAnhAysbrownstein inc.
nAtionAl city speciAl situAtions Group • new streAm cApitAl • nixon peAboDy llp • north centrAl equity llc • northern heAlthcAre cApitAl llc
northwestern university kelloGG school oF mAnAGement • oceAn Avenue ADvisors, llc • o’keeFe & AssociAtes consultinG • orix usA corporAtion
otterbourG, steinDler, houston & rosen, p.c. • pAchulski stAnG ziehl & Jones • pArAGon FinAnciAl Group, inc. • phoenix cApitAl resources
pillsbury winthrop shAw pittmAn, llp • plAtinum FunDinG Group • pliAnt corporAtion • pnc business creDit • presiDentiAl FinAnciAl corporAtion • proskAuer rose llp
proviDence cApitAl • qorvAl llc • quinn pAciFic • r2 ADvisors llc • rAlly cApitAl services, llc • rbs Greenwich cApitAl • rcs reAl estAte ADvisors
rebeccA o. FruchtmAn lAw oFFices • republic FinAnciAl corporAtion • richter consultinG inc. • robert w bAirD & co. inc. • rosenthAl & rosenthAl
rothschilD • rr Donnelley • rsm mcGlADrey • rsm richter • sAFe hArbor AssociAtes llc • sAk mAnAGement services llc • sAlAns • sb cApitAl Group llc
schonbrAun mccAnn Group • the seAport Group, llc • seDGwick Detert morAn & ArnolD llp • sei investments • sentinel cApitAl pArtners • seyFArth shAw
sFw cApitAl pArtners, llc • sheArmAn & sterlinG llp • sheppArD mullin richter & hAmpton llp • siGnAture cApitAl pArtners llc • silver point cApitAl
silver point FinAnce • sirote & permutt pc • skADDen, Arps, slAte, meAGher & Flom llp • solutions in prActice llc • sommer bArnArD pc
southwest usA bAnk • sprinG street cApitAl llc • stAirwAy cApitAl • stAnDArD & poor’s leverAGeD commentAry & DAtA • steel city cApitAl FunDinG, llc
steptoe & Johnson llp • stevens & lee pc • stoll keenon oGDen • stony lAne pArtners & heico Acq. • stony lAne pArtners, l.p. • stutmAn treister & GlAtt pc
summit investment mAnAGement • sun cApitAl pArtners inc • superior cApitAl pArtners llc • suryA cApitAl llc • svb cApitAl • tAtum llc
tennenbAum cApitAl pArtners, llc • textron FinAnciAl • thilmAn Filippini/hrh • thrivent FinAnciAl For lutherAns • tiGner executive consultinG
tmb inDustries llc • trAmmell crow compAny • treADstone cApitAl mAnAGement • trenwith Group llc • tucker ArensberG pc • u.s. bAnkruptcy court
ubs investment bAnk • universAl equity Group • university mAnAGement AssociAtes & consultAnts corp. • university oF Detroit mercy
vArnum riDDerinG schmiDt & howlett • veDDer price, p.c. • versA cApitAl mAnAGement, inc. • vorys, sAter, seymour AnD peAse llp • voyAGer cApitAl
wAchoviA cApitAl mArkets llc • wAchoviA securities • weil GotschAl & mAnGes llp • wells cApitAl mAnAGement • wells FArGo business creDit inc.
wells FArGo Foothill • wells FArGo retAil FinAnce • the weston compAny llc • williAm blAir & compAny llc • winston & strAwn llp
womble cArlyle sAnDriDGe & rice pllc • wooDsiDe cApitAl mAnAGement llc • wynnchurch cApitAl ltD. • xroADs solutions Group • yAntek consultinG Group inc.
thAnks to All the compAnies thAt AtternDeD the 2008 DistresseD investinG conFerence
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SkaddenSkadden, Arps, Slate, Meagher & Flom LLP
& Affiliates
Corporate
Restructuring
Skadden’s worldwide corporate restructuring practice has played a key role in some of the most widely
publicized matters involving troubled companies. From retail and telecommunications, to steel and energy,
these reorganizations were representative of an expansive array of global industries and included nonju-
dicial debt restructurings, acquisitions, financings and related matters, and in chapter 11 reorganization cases,
“prepackaged” and “prearranged” reorganizations. With 13 strategically located international offices, Skadden
has participated in the increased frequency of cross-border restructurings by representing companies, acquirers
and creditors in numerous transactional matters throughout Asia, Australia, Europe and the Middle East.
Skadden has advised on some of the most widely publicized recent chapter 11 cases, including acting as lead
counsel for Birch Telecom, Inc.; Chart Industries, Inc.; The Delaco Company; Delphi Corporation; First
Virtual Communications, Inc.; Friedman’s Inc.; GenTek, Inc.; Hayes Lemmerz International, Inc.;
Haynes International, Inc.; Interstate Bakeries Corporation; IT Group, Inc.; Kmart Corporation; NTL
Incorporated and its affiliates; Orius Corp.; Polaroid Corporation (now known as Primary PDC, Inc.); RCN
Corporation; Refco Inc.; Safety-Kleen Services, Inc.; Service Merchandise Co., Inc.; SLI Inc.; Tokheim
Corporation; Ultimate Electronics; US Airways Group, Inc. and Winn-Dixie Stores, Inc.. We have acted
as special counsel in numerous prominent reorganization cases, including on behalf of Enron Corp., Genuity,
Inc., Ingersoll International, Mirant Corporation, National Steel Corporation, Owens Corning, and The
Warnaco Group, Inc. Skadden has also advised on a number of major financial restructurings outside of bankruptcy
reorganization or insolvency cases, including those matters for Alamosa PCS Holdings, Inc., Evergreen
International Aviation, Fairfield Manufacturing Company, Gemini Industries, Inc., HealthSouth
Corporation, Intergen (North America), Inc., Reliant Resources, Inc., Rural Cellular Communications
and Xerox Corporation.
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