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  • DistresseD InvestIng report ApriL 2008

    HigHligHts from tmAs And tHe deAls 2008 distressed

    investing ConferenCe

    DistresseD investing r e p o r t

    ApriL 2008 VoLume 1 issue 1

    HAppy DAys for DistresseD Debt inVestorsOppOrtunItIesand rIsksare great, yet experts warn that thIngs cOuld get cOmplIcated

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    http://www.turnaround.orghttp://www.thedeal.com

  • DistresseD InvestIng report ApriL 2008

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    Its 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 TMAs and The Deals 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, acunningham@thedeal.com or Joseph Karel at 312.242.6039, jkarel@turnaround.org.

    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 Opportunitiesandrisksaregreat,yetexpertswarnthatthings couldgetcomplicatedastheeconomystruggles

    6 The Why And How Of Turnarounds KeynoterJerryYorksaysacommittedmanagementteamthat takesthelongviewcanovercomethefailureofpoorstrategyand execution

    8 Experts Advise Patience And Caution For Distressed Debt Investors Thebetterdealswilllikelycomealonglater,butthatdoesnt meaninvestorsshouldntstartshoppingnow

    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 Chinas New Bankruptcy Law Opens Possibilities WhileamoreWesternlegalcodewillhelpopenmarkets,cultural differencesmakeimplementationaslowprocess

    http://www.thedeal.comhttp://www.turnaround.org

  • DistresseD InvestIng report ApriL 2008

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    HAppy DAys for DistresseD Debt inVestors in 2008 opportunitiesand risksare great, yet experts warn that things could get complicated as the economy struggles

    Whatadifferenceayearmakes!Whenthedistresseddebtinvestmentcommunitygatheredinearly2007forthefirstannualDistressedInvestingConference,talkcenteredonhowtheamazingamountofliquidityinthemarketswasmakingittoughtoearnabuck.

    Atthisyearsevent,againco-producedbytheTurnaroundManagementAssociationandTheDeal,youcouldalmosthearthemorethan500participantshummingthetuneHappyDaysAreHereAgain.Lastsummerssubprimemortgagecrisisturnedoffthecreditspigotandchangedthegame.

    Evenhealthycompaniesarehavingtroublegettingfinanced,notedMarcLeder,SunCapitalPartnersInc.,andthetroubledcompaniesreallycantgetfinancedatall,orwithalotofdifficulty..But,weveseenthisbefore.Thishappenedbackin2001,evenlate2000,andthewayIandmycolleagueswhoinvestindistressedcompaniesrespondedandreactedisthroughstructuringthedealsdifferently.Inalotofdealsoverthelasttwo,three,fouryearsinagoodfinancingenvironment,

    wewouldgointoanydealandwedbeanall-cashbuyer,knowingwecouldgetthird-partyfinancingafterclosing.

    Thatsnolongertheprocess.LedertoldthoseattendingapaneldiscussionthatSunCapitalisworkingonmanydealsnowinwhichlendersareoverleveragedandthecompanyis

    underperforming.Itwasntagreatcompany,anditshouldnthavehadthiskindofleveragedcapitalstructuretobeginwith.They[lenders]knowthereisnochancetheyregoingtobetakenoutofthedeal.So,whattheyrelookingtodoistobringsomeoneintoprovidenewcapital.

    Inalotofdealswedidin01,existinglendersstayedinplace.Wewouldinvestequityintothecompanytoprovideliquidity.Wewouldtakealargemajorityownershipposition.Therewouldbenoimpairmenttoanycreditors,nowrite-offs,maybesomeloweringofinterestratesbutthewholestructureofthe

    dealhaschangedfromacontrolledsaleforcashtoanequityinvestmenttorecapitalizeacompanythatnevershouldhavebeensoleveragedtobeginwith.

    Collateralizedloanobligations(CLOs)tookabackseatfollowingthesummercrisis,andnontraditionalinvestors,suchashedgefundsanddistresseddebtfunds,assumedadominantroleinthemarkets.Oneofthethingswesawlastfallafterthemarketdidcorrect,explainedMattGerdes,managingdirectorofFreeportFinancial,wassome[price]stabilizationassomeoftherelativevalueplayers,thenontraditionalinvestors,high-yieldhedgefundscrossedoverandprovidedsomesupport,seeingalotofvaluethererelativetotheircoreassetclasses.Henoted,however,thatstabilizationwasshort-lived,ashigh-yieldspreadshavewidened.

    TherecessionmaybeaspoilerManyexpertsspeakingattheconferencewarnedthatthecurrentrecessioncouldholdsomesurprisesthisyearandnext,andurgedinvestorstotreadcarefully.SeveralspeakersnotedthatMoodysInvestorsServicepredictedthattheglobaldefaultrateonhigh-yield,high-riskbondswilljumpmorethanfivefoldbythecloseof2008becauseofaweakereconomy.

    TheMoodysreportalsoexpectedthedefaultratetoreach5percentin2009,whichcomparestothe26-yearlowrateof0.9percentpostedatthecloseof2007.Theratingsagencyalsonotedthatthepercentageofissuerswithdebttradingatdistressedlevelsatthebeginningof2008was11.5percent,thehighestlevelsinceJuly2003.Ayearearlier,theratewas4.2percent.

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    troubledcompaniesreallycantgetfinancedatall,orwithalotofdifficulty.But,weveseenthisbefore.

    Ihavebeenpreachingpatienceandcaution.

    Marc Leder

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    DistresseD InvestIng report ApriL 2008

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    Thesizeofloansthatmayfacetroublewasalsoaworryamongexpertsspeakingattheconference.Ifyoulookattheaveragesizeofwhataleveragedloanlookedlikein2007,itwasgoingfor$1billion,explainedJimJeffries,managingdirector,WachoviaSecuritiesInc.Ifyougobacktothebeginningofthelastcyclein2001,itwasaround$350million,maybe$400million.So,wereatleastthreetimesbiggerbasedonthatstat.

    ComplexcovenantsandliensThedealsnotonlywerebig,buttheyalsowerecomplicatedinstructure.Weseeadifferentcreatureintheleveragedloan

    market,thatofcovenantliteandsecondlien,SeanLynch,directorofcreditandco-manageroftheSutterhigh-yieldfixed-incometeamatWellsCapitalManagement,toldtheaudienceattendingapaneldiscussionthathemoderated.Obviously,secondliensdidnotexistatallinthe2000timeandcovenant

    lite,asweallknow,hasexpandedtoatleastone-fifthportionofthemarket.

    Thesemegadealshaveinvolvedadiversecastofinvestors,whichmayposeanotherprobleminaturnaroundorrestructuringscenario.Weredealingwithcapitalstructuresnowthathavebecomemuchmorehighlycomplexwiththeintroductionofalotofdifferentlenders,whichchangesthedynamicthataturnaroundmanagerneedstogothrough,notesJeffZappone,CTP,seniormanagingdirectorofConway,MacKenzie&DunleavyInc.,adding,Idsaytheturnaroundandworkoutthatweclassicallyhaddoneinyearspastisgoneanditsnevergoingtocomeback.

    Creditorsmayfacenewtroubles.Inapaneldiscussionthatfocusedonrecentcourtcasesandsettlementsinvolvingcreditorswhosatoncreditorcommitteesandalsotradedinthesecuritiesofthecompanyinquestion,listenerslearnedthatitmaynotbewiseforsellersofdistresseddebttoassumethatabig-boyletterisprotectionenoughfrompost-salelawsuits.Suchlettersaregenerallyprovidedbysellerswhohavenonpublicknowledgeaboutacompanytobuyerswhoagreethattheyarebigboysandunderstandthesituation.n

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  • DistresseD InvestIng report ApriL 2008

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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

    Notingthataturnaroundissortoftheflipsideofdistressedinvesting,JerryYork,CEOofHarwintonCapitalLLC,aprivateinvestmentcompany,andkeynotespeakeratthesecondannualDistressedInvestingConference,describedwhatheviewedasthereasonscompaniesfailandthemosteffectivewaystorescuethem.

    BasinghisremarksonhispersonalexperiencewithturnaroundsituationsatChryslerCorp.,IBM,AppleandTycoInternational,Yorkreferredtothewrongstrategyorbusinessmodelandpoorexecutionasthesymptomsofadiseasethatconsistsofpoorgovernance,aculturethattoleratespoorperformance,inadequatemanagementandamajorshiftinindustryconditions.

    Pre-turnaroundconditionsYorkdissectedthepre-turnaroundconditionofthefourcompanies.Regardingstrategyissues,hesaid,Chryslerhadanoverallgoodstrategy.IBMswasseverelyflawed.Appleessentiallyhadnostrategy,andTycoswasprettygoodbutexcessivelyrisky.Intermsofthebusinessmodel,bothChryslerandIBMweretooslowandcostly.Applehadseriousdistributionproblems,andTycowastoocostlybecauseoftheredundanciesthatexistedinthebackofficeandmanufacturingareas.

    Occasionally,Chryslerhaddonereasonablywell,buthadbeenleftvastlybehindinpassengercars,hadhugemarketsharelosses.IBMwasbehindineverythingvirtually,exceptmainframesandasmall,atthattime,servicesbusinessthatwasstillsmallerthanEDSatthatpoint.Applehadmajormanufacturingfootprintissues,andTycowasoperationallysubpar.

    YorktermedthepreturnaroundboardsofChryslerandIBMasstrongandindependent,butchidedthemanagementoftheautomakerforlackofteamworkandthetechnologycompanysleadershipforinflexibility.YorkwasCFOofChryslerandjoinedIBMin1993asCFOunderLouGerstner.

    ApplesboardseemedunabletomovethecompanyforwarddespiteadepthofSiliconValleyexpertise,anditsmanagementunderGilAmelioclearlylackedthepassionfortheMacplatformthatyouneedwhenyoureasmallplayercomparedtoabiggorillalikeMicrosoft.YorkbecameanAppledirectorin1997afterSteveJobsrejoinedthecompany.AsforTyco,acompanyhedescribedasasingle-leggedstrategyacquisitionmachine,itsdirectorswereinaweoftheCEOanddidnotaskseriousquestionsofhim,hesaid.Yorkjoinedthatboardin2002afterthecompanywasincrisis.

    Japanesecompetitionwastheindustrychangethathurt

    Chrysler,hesaid,whileatIBMitwasthetitanicindustrychangestakingplaceintheITspaceintheearly1990s.MicrosoftsmarketdominationwastheissueforApple,butTycowaslargelyverywell-positionedasset-wise.

    TurnaroundresultsAllfourturnaroundsdeliveredontheirpromises.AtChrysler,Yorktermedthesuccessspectacular.Thesharepricebottomedoutin1990,91atabout$9,andin1993whenthatparticularturnaroundhadbeensuccessfullycompleted,thestockwasat$45.Daimler-Benz,whichpurchasedChryslerin1998,totallyscrewedupthatacquisition,Yorksaid.Thereisnoreasonthatcouldnothaveworkedout,andworkedoutbeautifully.NotingthatChryslerisnowinitsthirdmajorrestructuringofthepast15years,YorksaiditwasbecausetheyhadnotadequatelyaddressedtheircompetitivedisadvantagesagainstAsiancarmakers.

    IBMisanothersuccessstory.Thestockbottomedoutat$10onasplitadjustedbasisin1993anditsat$103currentlythey[IBM]haveexhibitedtheabilitytochangeandnotjustwaituntiltheygetincrisisagain,henoted.

    YorkattributedApplesturnaroundtoSteveJobssrefocusonbetterproductdesignandproductinnovation,particularlythehugelypopulariPhone.Thethingsittingonyourdeskdoesnothavetobeanuglygrayorbeigebox.Itcanbeanattractiveindustrialdesign.Interestingly,Dellisnowstartingtoemulatethat10yearslater.Bytheway,MichaelDellin1997saidthatAppleshouldnotbeturnedaroundandtodayApplesmarketcapisgreaterthanDellsbyasubstantialamount.

    Tycosturnaround,whilesuccessful,hasnotbeenplayedout,

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    Jerry York, CEO, Harwinton Capital LLC

  • DistresseD InvestIng report ApriL 2008

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    accordingtoYork.Thiswasacompanyinseverecrisisandwehadahugecredibilityrebuildingjobtodo.IwentontheboardinNovemberof2002.Iwasthesecondnewdirectorandfivemonthsafterthat,theboardhadbeenchanged100percent.LastcountIsawofthetop200executivesinthecompany,190werefromoutsidethecompany.So,wedidwhatwehadtodotogetourcredibilityback.

    Partofthestrategywasjusttosaytoalloftheorganizations,Nomoreacquisitions.Runwhatyouhave,straightenitout,maximizethereturntotheshareholders,andletsseehowwellyoucandothat,herecalled.Thebenefitsofthedecisiontobreakupthecompany,whichtookeffectlastyear,areunknown.ItstooearlyinthegametoseehowwellthatsgoingtoworkoutbecausetwoofthethreemanagementteamsofthenewpiecesarenewtoWallStreet,andWallStreetisgoingtotakeabitofawait-and-seeattitudetoseehowthesenewmanagementteamsdo,Yorksaid.

    TheelementsofsuccessSeniormanagementwithpassionanddeterminationistheessentialingredientforasuccessfulturnaround,accordingtoYork.Youvegottohavesomebodywhohaslookedatthesituationandsaid,Itisabsolutely,vitallynecessarythatwetake

    drasticaction.Therearenosacredcows,nothingisoffthetable,andweregoingtodowhateverwehavetodotofixthisplace.

    Communicationisvital.Youvegottosellittothetroops.Youvegottocontinuouslybeouttherecommunicatingwhatweredoingandwhyweredoingit,hesaid.Symbolicgesturescount,too.Thetopdogshavetosettheexample,Yorksaid,Youcanthaveascrumptiouslyappointedexecutivediningroom,limousinesallovertheplace.Tonesettersareveryimportant.

    Finally,Yorkpraisedthebenefitsofbenchmarking.Itsincredibletheamountofinformationyoucangetyourhandson,ifyoureallyworkatit,hesaid.AtIBMwehad12initiatives.Wetrackedallofthesemonthly.Wetiedthemtothefinancialstatementssothatyoucouldntclaimcostreductionsinthisareabut,bytheway,costsarerisingoverhere.And,ofcourse,measureandreportitfrequently.

    Onepointthatisoftenignored,accordingtoYork,isthatturnaroundsarelikesuccessfuldiets:long-termsuccessrequiresconstantvigilance.Turnaroundscannotbeconsideredone-timeeventsandmustbefollowedbycontinuousimprovementapproachesandhighlevelsofstrategicadaptability.Ifyoudontdothat,thenyourejustgoingtogofromonecrisistoanotheronetoanotherone.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 doesnt mean investors shouldnt start shopping now.

    Thecurrentclimateinthecreditmarketsandtheaccompanyingeconomicslowdownhavechangedthepsychologyofthedistressedinvestmentmarket,primarilybecausepredictingthebottomhasbecomemoredifficult,accordingtoourexperts.

    Thisisamarketplacethathasmadeincrediblecorrectionsinveryshortperiodsoftime,saidDavidMatlinofMatlinPatterson,whilespeakingonapanelofdistressedfundfounders.Thepsychologyhastotallychanged.Themantrathatyouresupposedtobuyinthedips,Ithink,hascompletelyunraveledafterthesubprimedebacle.

    Patiencewaswellregardedasastrategyinthisenvironment,sincegoodcompanieswithbadbalancesheetswontstarttoappearuntillaterinthedowncycle.Thebestdealswevedonehavebeeninvestmentsmadelateinarecessionaryperiodorcrisisperiod,saidMichaelPsaros,KPSCapitalPartnersLP.

    Wehavefoundthatitistheworstcompaniesintheirrespectiveindustriesthatarethefirstonestogetsick.And,thebestcompaniesintheirrespectiveindustriesarethelastonestocapitulate.So,wereverycontenttojustsitandlettheopportunitiescometous,headded.

    Psaros,therefore,cautionedinvestorsagainstoverenthusiasmforbuyingadistressedcompanysdebtduringthebeginningofaneconomicdownturn.Inparticular,henotedthattraditionalmiddle-marketleveraged-buyout(LBO)metricsaredifficulttoapplytoaverydistressed,underperformingcompanyoroneoperatinginbankruptcy,andasaresult,traditionalLBOfundsmustbewary.

    OpportunitiesexistOpportunitiesnonethelesspresentthemselves.Psaros,whosefirmfocusesonmanufacturing,saidthatsectorssuchasautopartswillbehardhit,butsincehisfirmhassolidportfoliocompaniesinautoparts,weregoingtobuildthemoutbecausenowisthetimetobuy.

    MarkK.HoldsworthofTenenbaumCapitalPartnersLLCconcurred,notingthatsomeofhisfirmsolderportfoliocompaniesarenowpoisedforgrowth.Wehaveveryhealthybusinesseswithgreatbalancesheets,soImtellingmymanagersthatnowmightbethetimetopickoffsomeweakercompetitorsanddosomeacquisitions.

    HealsopredictedthatEuropeancompaniesthatboughtNorthAmericanmanufacturingdivisionsorsubsidiariesathighpricesandfailedtomakeagooftheseinvestmentsareanxioustosellnow,creatinganotheropportunity.

    OperationstakeonnewimportanceThedistresseddebtinvestmentindustryin2008isfardifferentfromthatof2001-02,anotherdifficulteconomicperiod,ourpanelistsnoted.TennebaumsHoldsworthdescribedtheindustryduringtheearlypartofthedecadeasalmostkindofacottageindustry,muchsmaller.Wehadsophisticatedwell-knownplayersbackthen,butitwasreallyaspecializednichewithinthealternativeassetspace.Todayitsmuchmoremainstream.

    Theresultisamorecompetitivemarketplacewithmajorplayersanddeeperpockets.Tobeabletosnagthebestdeals,therefore,itsessentialtodifferentiateyourselfasaninvestor,andourpanelistsbelievedthatastrongtrackrecordofoperatingportfoliocompaniesisessentialindoingthat.

    Tobereallydifferentiatedinthismarket,Ithinkyouhavetobepreparedtoownandoperateabusiness,saidHoldsworth.Ifyoureprovidingarescuefinancing,sometimesthosegosouthandyouendupowningthebusiness.Sometimes,youreaccumulatingbondsintheopenmarketandyouendupowningthebusiness,perhapsbydesign.So,youhavetobereadyforthat.

    Operatingadistressedbusinessisnopicnic.Ourpanelistsnotedthatsuccessrestsonselectingsolidmanagementanddesigningappropriatecompensationprogramsforthem,implementingeffectivecostcutting,andlearningtoworkasateamwithotherowners.

    Ivenoticedthatthedealsaresobig,thecompaniesaresobig,andtheamountofdistresseddebtinthebalancesheetsofthesecompaniesissobigthatitsgoingtobehardforanyonefirmtoendupinarealpositionofcontrol.So,wehavetolearntogetalongwitheverybody,saidHoldsworth.

    MarkLederofSunCapitalPartners,Inc.offeredthisadviceaboutoperatingcompanies.ThetwomostimportantlessonsIvelearnedovermanyyearsandmanydealsisthatwhenyouve

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  • DistresseD InvestIng report ApriL 2008

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    gotastrugglingcompany,youcannotmovetooquickly,butyoucanabsolutelymovetooslowly.

    Hedgefundsinvestorsmaybeatadisadvantagewhenplansgoawryandtheyendupasowners.Idontseethehedgefundshavingtheabilityandthepeopletositandworkonmorethanoneofthesedealsintheirportfolioatatime,notedMatlinofMatlinPatterson.Ithinktheresgoingtobealotofopportunity.

    ForeigninvestmentsandinvestorsPanelistsdidnotviewEuropeandAsiaatpresentasstrongmarketsfordistresseddebtinvestors,particularlybecauseofthedifferentlegalandfinancialsystems.AswelookoutinAsia,itsveryquiet,saidMatlinUntilChinameaningfullyslowsdown,theyrenotgoingtopulldownSoutheastAsiawiththem.WellseewhathappensaftertheOlympics.HenotedthatAustraliaisstartingtohiccup,andhethoughtthat2009mayopenopportunitiesinEuropeasthoseeconomiesslowdowninresponsetotheUnitedStatespicture.

    HoldsworthalsosawpossibilitiesgrowingforinvestinginEurope,butcautionedthatlawsandcreditorrightsareverydifferentfromthoseoftheUnitedStates.Ifyouregoingtogooverthere,

    youdbetterdoyourhomeworkandyourresearchonthelawsbecauseyoucanfindyourselfinsomeprettystickysituationswithnowayout,henoted.

    Yet,panelistspointedoutthatforeigninvestorshavenotbeentimidaboutmakingalternativeinvestmentshereinU.Sfinancialfirms.AnexamplecitedwastheKuwaitiinvestmentinCitigroupinJanuary.TheUnitedStatestodayisthemostsophisticatedfinancialmarketintheworld,saidHoldsworth,particularlywithrespecttoalternativeinvestmentproductslikeprivateequityanddistresseddebtinvesting.So,itsanopportunitytogetafrontrowseatintermsofseeinghowitsdone.

    Foreignersarenottheonlyonesseekinganeducation.Youregoingtocontinuetoseestatepensionsandendowmentsalsomakinginvestmentsinfirms,againforalotofthesamereasons:thelearningprocess,accesstothefinancialminds,and,obviously,profit,Holdsworthadded.

    Theranksoflimitedpartnersareexpectedtoremainvirtuallyunchanged,accordingtoourpanelists,allofwhomreportedfewdefectionsamongLPs.Theresanextraordinarilyhighlevelofre-uppingbyLPs,saidLederofSunCapital.Wetendtolosebetweenzero,oneandtwoLPsperfund.So,wereintheneighborhoodof99percentre-upping.n

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  • 11 DistresseD InvestIng report ApriL 2008

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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)hasgivenwaytohedgefunds,high-yieldfundsanddistressedfunds.ThisinfusionofnewbuyersfollowingthesubprimecrisisofJuly2007helpedtostabilizethemarketforcompaniesseekingfinancing,butwillthatlastastheeconomycontinuestoslow?

    Youhadanewsetofbuyersstepup,whichwerethehedgefundsandothernontraditionalleveragedloanbuyers,explainsSeanLynch,directorofcreditandco-manageroftheSutterhigh-yieldfixed-incometeamatWellsCapitalManagement,whomoderatedapanelentitled,LeveragedCapitalMarkets:WhatsHot,WhatsNot?

    Thathelpedtostaveofftheamountofdefaultsandtheabilitytotakedowndebtforinstitutionalbanksthatstillhaddealsontheirbooks.Lynch,however,seestroubleahead.Overtime,weshouldseethedefaultratepickupquitesignificantly,headds.

    CovenantliteloansAccordingtothepanelists,anewwrinklethatmayaffectpredictedworkoutsandrestructuringsisthenewandmorecomplexstructuresnowinplay.Weseeadifferentcreatureintheleveragedloanmarket,thatofcovenantliteandthesecondlien,saysLynch.Obviously,secondliensdidnotexistatallinthe2000timeandcovenantlite,asweallknow,hasexpandedtoatleastaone-fifthportionofthemarket.

    Lackingtraditionalfinancialtriggers,covenantliteloansmayleadtosituationsinwhichlendersareunawareofacompanys

    distressuntiltoolate.Ifyouretheownerofanasset,saysJimJeffries,managingdirectorofWachoviaSecurities,youmaybeinasituationwhereyourfirstchancetohaveadiscussionaboutthecreditisreallyasitshitaliquiditycrunchandisclosetohittingthewall.Thatsvastlydifferentfromthelastcycle,inwhichthereweremaintenancecovenantsthathadteethandyou

    couldgetbacktothetable,resetyourself,andagreeordisagreewiththeplanbasedonwherethebusinesswasheaded.

    Workoutsrestontheperceptionthatacompanystillhasvalue,andourpanelistsbelievethenewstructuresmayaffectthatnegatively.Ourruleofthumbisthatyoullgetonehopefulbiteattheapplefromaprivateequitysourcetoprotect,preserve,anddefendtheirinvestment,saysEdwardSiskin,executivemanagingdirectorofCrystalCapital.Theproblemisthatifyouredownattheendoftheline,wherethereisntanymoreperceivedvalue,sometimestheyhavetobecrazytoputupthemoney.Thewholerecovery,Ithink,andworkoutstrategyiscompromised.

    DiverseworkoutinterestsAnotherissueaffectingfutureworkoutsisthenumberoflendersinvolvedinthesestructures.Weredealingwithcapitalstructuresnowthathavebecomemuchmorehighlycomplex

    withtheintroductionofalotofdifferentlenders,whichchangesthedynamicthataturnaroundmanagerneedstogothrough,notesJeffZappone,CTP,seniormanagingdirectorofConway,MacKenzie&DunleavyInc.,adding,Idsaytheturnaroundandworkoutthatweclassicallyhaddoneinyearspastisgoneanditsnevergoingtocomeback.

    CLOsareseenasbringingsimilarproblemstotroubledcompaniesinthefuture.Mybiggestfearasasecondlienlender,saysSiskin,isthediversityandthenumberofCLOsthatareinthecredit.So,whenyouneedarestructuringdone,asimpleamendmentdone,tryingtogetallofthevotestogetherinaquickperiodoftimesometimesisanightmare.

    Howwillprivateequityfirmsthatfindthemselvesinthesesituationsbehave?ThefundsforBlackstoneandKKRoranyPEfirmthatnowhasCLOsoutstanding,wehaventseenthat

    CONTINUED >

    Theturnaroundandworkoutthatweclassicallyhaddoneinyearspastisgoneanditsnevergoingtocomeback.

    Youmaybeinasituationwhereyourfirstchancetohaveadiscussionaboutthecreditisreallyasitshitaliquiditycrunch.

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    1 DistresseD InvestIng report ApriL 2008

    theyvehadtodothisyet,butwilltheirgoalsbethesameasthoseoftheotherlendersinthegroup?wondersRobPolenberg,researchanalystatStandard&PoorsLeveragedCommentaryandData.Aretheyinittoownthecompanyontheotherside?Aretheygoingtomaketherestructuringorthebankruptcyorwhateverprocesstheyregoingtogothroughmoredifficult?Nobodyknows.

    Thesizeofsomeofthecompaniesthatmayfindthemselvesinthesecomplicatedsituationsisanotherworry.Ifyoulookattheaveragesizeofwhataleveragedloanlookedlikein2007,itwasgoingfor$1billion,theaverage-sizedfacility,explainsJeffriesofWachovia.Ifyougobacktothebeginningofthelastcyclein2001,itwasaround$350million,maybe$400million.So,wereatleastthreetimesbiggerbasedonthatstat.

    And,youvegotmultitudesmoreinvestorsinvolvedinthesecredits.Ithinkthatinsomerespectsitllcreateawonderfulopportunityforsomepeoplebecausethestructuredvehiclesmaygetinasituationwheretheyreforsellers,andthatwillcreatesometechnicalsupply-and-demandproblemsinthemarketwhereyoucanfindrealvalue,heconcludes.

    Opportunitiesfor2009Therearealwayswaystoturnlemonsintolemonade,andourdistressedinvestingexpertsseeopportunitiesincertainmanufacturingsectors,suchasautomotiveparts,andtheretailsector,whichexperiencedalacklusterholidayshoppingseasonin2007.Yourebasicallylookingattransportation,distribution,consumerproducts,saysZappone.Weknowwhatsgoingoninthehomebuildingsectornow...andthoseofuswithexperienceinautomotiveknowweregoingtoseealotofhighactivityandhighdistress.But,youknow,withthatyoualsoseealotofopportunitiesinthemarketplace.

    Thecompanieswhobasicallygottheirdealsdoneandgotthemdoneearly,whohaveenoughliquiditytowithstandthedownturnandareoperatingefficientlyaregoingtobeopportunisticbuyers

    inthemarketplace.Whenthiswholethingshakesout,therearegoingtobesomemuchstrongercompanies.But,theresgoingtobeaperiodofseveredistresswithinthesebasiceconomiesandold-schoolindustries,includingretailandconsumerproducts,heconcludes.

    Whileconcurringwiththeoutlookforthesebasicindustries,[Crystals]Siskincautionedaboutcompaniesdependentonrawmaterialssuchasbasicmetals,resinandoil-price-related

    materialsbecauseoftheinabilitytopassalongcostincreasesquicklytoconsumers.IfyousellcarpettoHomeDepotorLowes,hesays,theyrenotgoingtoaccept20percentincreasesinprice,eventhoughyourrawmaterialcostsmighthavegoneuptwicethat.So,youreallycantbuyintoEBITDAgrowth,and,quitefrankly,maybeweshouldtakethosemodelsdownbecauseofthetimelagofpassingthosecoststoyourcustomer.

    Whilecertainsectorslikeretail,automotiveandrealestatewilllikelyfounderintheyearahead,institutionalinvestorshavelearnedthevalueofdiversification.Inthelastcycle,yousawthattelecomwas15percentofpeoplesholdings,saysZappone.Rightnow,theresnosectorthatholdsover10percentinanybodysspecificholdings.So,IthinkthatbecauseofdiversificationthereissomeinsulationintermsofhowsteepitwillhitatleasttheCLOsandsomeinstitutionalinvestors.n

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    1 DistresseD InvestIng report mArcH 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,debtholdersmustbecarefulaboutservingoncreditorcommitteesbecauserecentcourtdecisionsandlawsuitsettlementsappeartoplacecommitteemembershipinconflictwithtradingactivities,accordingtomembersofapaneldiscussionentitled,DistressedDebtTradinginVolatileMarkets.

    Inthepast,manytradersbelievedthatbig-boylettersofferedprotectioninthesecases.Inexplainingthepurposeoftheseletters,EdwardWeisfelnerofthelawfirmBrownRudnicksaid,

    TheconceptisthatifIvebeenexposedtomaterialnonpublicinformationbyvirtueofhavingbeenaninsiderorhavingparticipatedinsomecommitteefunction,eitherofficialorunofficial,thetheoryisthatIcansellmybondssolongasthesellerunderstandsandevidencesthathesabigboy.Inotherwords,heunderstandthatIwasprivytomaterial

    nonpublicinformation,heunderstandsIknowalotmoreabouttheinvestmentthanheevercould,and,nevertheless,hespreparedasabigboytoenterintothetransactionImofferinghimatthepricethatweveagreedupon.

    Suchaletterwasthoughttoinsulatethesellerfromanylegalactionthebuyermaydecidetotakepost-sale,butrecentlegalactionshaveraisednewissues.Themoreinterestingquestion,Weisfelnercontinued,iswhetherornotfromtheperspectiveofthemarketplacetakenaswhole,andenforcementactionbytheSecuritiesandExchangeCommission,thebig-boyletterisgoingtoinsulatemefromFederalregulators.

    PanelmoderatorGlennSiegelofthebankruptcygroupofDechertLLPconcurred,notingthattheoreticallythebig-boylettermayworkinthecontextofatwo-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-boyletterisntashieldtoliability,saidWeisfelner.

    Theconceptisthepotentialfraudinthemarketplace.Jeffries,havingtaken,ineffect,taintedbondsandputthemoutinthemarketplacewithouttellingpeoplethattheywerecomingfrompeoplewhohadmaterialnonpublicinformation,ineffectwasdefraudingthemarket.Ithinkthatwasthetheory,atleast,ofthelawsuit,headded.

    CONTINUED >

    Thereisoftenatensionbetweentakinganactiveroleinarestructuringandmaintainingtheabilitytotrade.

    Edward Weisfelner

    Glenn Siegel

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    1 DistresseD InvestIng report ApriL 2008

    [Decherts]Siegeladded,Thepositionis,andthisisthepositiontheSECtakes,thatthefactthatthereistradinggoingonwithmaterialnonpublicinformationdistortsthepricingonthebondsandthattherearepeopleouttherewhoaresellingandmakingmoneyonthefactthattheyknowsomethingthatsomebodyelsedoesntknow.

    And,thatbyitselfisenoughtogiverisetoasecuritieslawviolation,andthefactthatthecounterpartytothatindividualtradehaswaiveditthroughabig-boyletterdoesntsolvethe

    problembecausethosetradesareoutthereinthemarketplace.Theysetthepriceofthebondsandtheyrenotbasedoncorrectinformation.Thatsthepositionthatthecommissionistakingthesedays.Howoftentheyregoingtodoanythingaboutit,Idontknow,hesaid.

    Tradersaredefinitelycaughtinthemiddle,accordingtopanelistMatthewCarterofUBSInvestmentBank.Itstoughtodisseminateifyoutransactwithabigboyandselliton.Typically,whatweliketodoispassthebigboyon.But,sayyoubuy$10millionfromsomebodyandstartpiecingitoff,atwhatpointcanyouclearlysaythatthesebondsarenttainted?

    Essentially,itmakesme,eventhoughIdontknowanything,havetopassonthebigboysall

    thetime,whichpeoplereallydontwanttotakeon.Itprettymuchwilltakeme,asamarketmaker,outofthesituation.So,wetendtotrytoavoiddealingwiththese.

    Areethicalwallsenough?Anotherissueofconcernfordistresseddebtinvestorsisthatoftradingbehindso-calledethicalwalls.IntheFederatedDepartmentStoresbankruptcy,negotiationsamongthecreditorscommittee,somelargeholdersandtheUnitedStatesTrusteeresultedinanorderbeingenteredthatallowedtradingaslongasanethicalwallwassetupbetweenthetradingunitandthemembersofthecreditorscommitteeinthatparticularinstance.Theselargeinvestorswantedtoprotecttheirabilitytocontinue

    buyingandsellingsecuritiesondirectionoftheirclientseventhoughthefirmswererepresentedonthecommittee.

    Theproblemwiththisisthatitworksforverylargefinancialinstitutionsthatcansegregatetheirtradingand,forlackofabetterword,theirfiduciaryfunctionwithinthesameinstitution,saidSiegel.Itsnotquiteaseffectiveifitsinvolvingasmallhedgefundwherethereareonlyafewpeopleinvolved.

    Ethicalwallsimposeotherproblems,too.ItsanexpensivepropositionintermsofdemonstratingcomplianceonaperiodicbasiswiththeofficeoftheU.S.Trustee,notedWeisfelner,adding,Thenotionthattheguyonthefarendofthetradingplatformwhositsonthecommitteedoesnttalktotheguyontheotherfarendofthetradingplatformwhosbuyingandsellingsecuritiessometimestakesalittlebitofsuspensionofdisbelief.

    TheprosandconsofcommitteeserviceDistresseddebtinvestors,therefore,woulddowelltoremainabreastofissuesregardingserviceoncreditorcommittees.Theissuethatfacesthecreditorconstituencyiswhetherornottheywanttoopttoserveonanofficialcommittee,theviewbeingthatservingonacommitteeaffordsyouanopportunitytoinfluencetheoutcome,assistinnegotiations,andotherwisebeheretolookoutforyourinvestment,Weisfelnersaid.

    Thereisasignificantcost,however,inservingonacommitteeandthatistheinability,atleastaccordingtotheruleswevebeentalkingabout,tobuyorsellsecuritiesorotherwiseprofitfromyourpositionasamemberofthecommittee,headded.

    Manymayfeelthatoptingtoserveonadhoccommittees,asopposedtoformalcommittees,solvestheproblem,butpanelistsdisagreed.Thereisoftenatensionbetweentakinganactiveroleinarestructuringandmaintainingtheabilitytotrade,saidWeisfelner.Itsalmostinevitablethatonceyougettoacertainstageintheproceeding,whereultimatedecisionsoncuttingadealhavetobemade,that,ineffect,membersofadhoccommitteeshavetojumpoverthefenceandbecomerestricted.n

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    theexistenceofabig-boyletterisntashieldtoliability.

    Matthew Carter

  • close print back < index > cover search viewclose print back < index > cover search view

    http://www.winston.com

  • 1 DistresseD InvestIng report ApriL 2008

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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,CreditDerivativesandSWAPSWhatTheyAre,WhereTheyveBeenandHowTheyllImpacttheNextWaveofRestructurings,moderatedbyJeffMarwil,partnerofWinston&StrawnLLP.

    CLOshistoricallyhavebeenaverystablemarketwithlowdefaultrates,eventhroughcreditdownturns,saidRobertContreras,managingdirectoranddeputygeneralcounselforDeerfieldCapitalManagementLLC.Thatisdemonstratedbytheverylimitednumberofdowngradesbytheratingagenciesonly98downgradesacrossapproximately6,000tranches.

    ExpressingtheopinionthatinthecurrentmarketCLOsarethebabythatsbeentossedoutwiththebathwater,GregoryCooper,founderandmanagingdirectorofDenaliCapitalLLC,defendedtheassetclass,too.TheratingagenciestakeaverystrongviewpointandstancewhenstructuringaCLO.Wehavealotofdifferentcovenants,ifyouwill,thatwehavetomaintain,suchasspread,weightedaverageratingfactor.Theyrestructuredto

    thepointwheretherearemandatorydiversificationtriggersbuiltin.ItsdifferentfromCDOs[collateralizeddebtobligations].ACDOisbasicallyabunchofmortgagesfromonegeographicarea.Theygotblownoutofproportionandtheyvekindoflosttheirway.

    FellowpanelistMattGerdes,managingdirectorofFreeportFinancial,notedthatliquidityisanissuerightnowforCLOs.TheCLOassetclassisasolidassetclass.Theresalotofcapital

    thatsbeeninvestedthereoverthelastseveralyearsandthatcapitalislong-termcapitalthatsperformingwellforitsequityholdersanditsdebtholders.

    CONTINUED >

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  • 0 DistresseD InvestIng report ApriL 2008

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    Theissuereallyisliquiditytofundfuturegrowthinthemarket.So,alotoftheCLOassetmanagershavebeenfrozenbythelargeinvestmentbanksandmoneycenterbanksthatprovidewarehousefinancing,justgiventhevolatilityinthemarketandthelackofatakeoutofthosewarehouselinesdowntheroad.

    TheperfectstormTheCLOmarketfindsitselfinturmoil,accordingtoCooper,becauseofaperfectstormthatshowedhowinterconnecteda

    lotofcapitalmarketsare.Insummarizingtheeventsofthepastyear,Coopersaid,ThereasontheCLOmarkethasbeenhurtthewayithasbeenisbecausewhenthesubprimemarketstartedtocometofruitioninJuly,itcausedtheinvestorbasefortheCLOliabilitiestoliterallydryupovernight.And,whenthathappened,anyinvestorsthatwereleftwererequiringwiderspreads.

    Thiscausedinvestmentbanksthatwerewarehousingdeals

    inanticipationoffutureCLOclosingstofindthemselveswithbillionsofdollarsinassetssittingontheirbalancesheetsandfewoptionsformovingthemon.Thereareleveragedbuyoutsthatsponsorscommittedtoearlierin2007,andtheyvereflectedmultiplesthatareone,two,insomecasesthree,timeshigherthanwhatthecompanydeservedtobegettingitfor,Coopersaid,andthebankshadcommittedfinancing,insomecaseswithnocovenants,withspreadsthatare150to250basispointsoutofmarket.

    Privateequityfirmshavebeencaughtinthesqueeze,too.Youvegotallthisprivateequitymoneythatsbeenraised,needsahome,buttheycantgettheirdealsunderwritten,Coopersaid,So,theyhavetogobackandrestructuretheirdeals,theirpurchaseagreements,withthesellers.Inalotofcasestheyhavetorenegotiate,andittakesawhile.So,alotofdealsjustgettakenoutofthemarketplace,whichisagoodthingforthePEgroupsbecausetheycantgetthemfinancednowanyway.

    PEfirmsalsofindthemselvesstrugglingtofinancetheneedsoftheirportfoliocompaniesandmayfindthemselvesinunfamiliarworkoutterritoryasaresult.Privateequityfirmsenjoyedthe

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    Itsnotefficient,butthereisamarkettogetthingsdone.

    http://www.andrewskurth.com/bankruptcyrestructuring

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    http://www.garnetcapital.com

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    excessliquiditythatwascreatedbyalltheseCLOmanagerswhocameintothebusinessinthelasttwoyears,Coopernoted.Theyrenotgoingtolikeitwhenadealdoeshaveanissueandtheyfindoutthatthereare110lendersinthedealandthey

    probablyknowfourorfiveofthem.The[workout]landscape,theplayingfield,isgoingtobecompletelydifferentthiscyclebecauseyouhavedifferentplayers.Youhavemoreinstitutionalinvestorsasopposedtothelastcycle,inwhichyouhadmorebanks,regionalbanksandcommercialfinancecompanies.

    Theonebrightspotcitedbythepanelistswasinfinancingforsmalldeals.[FreeportFinancials]Gerdesnotedthathisfirmhasbeendoingdealsunder$125million.Alotofthefinancecompaniesarestillactivelylending,andonaclubbasis,combiningregionalbanks,financecompanies,whathaveyou.

    Theresenoughcapitaltogetsomeofthesethingsdone.

    Theoutlookforlargecapstructuredproductsislessoptimisticbecauseofhighercapitalrequirementsandtighterterms.Yourenotgoingtosee[playout]theoldadagethethreeofusandaBloombergcouldgetstartedinthisbusiness,whichyousawasrecentlyasJanuary2007,Coopersaid.Scaleisgoingtomatter.Ithinkeverystructuringagentouttherewilltellyouthattheuniverseofmanagersthatcangetnewdealsdoneisprobably20or30differentmanagers.

    Wheresthemoneynow?Withlendersreluctanttofinanceorrefinanceacquisitionsandloans,wherecanborrowersturn?Fromourperspectiveinthemiddlemarket,saysGerdes,Ithinkthereisamarket.Itsnotefficient,butthereisamarkettogetthingsdone.

    Cooperagreed.Themarketsareopen.Thereisalotofmoneyoverseas,alotofpocketsofmoneyintheStatesthatwanttogetputtoworkintheloanassetclass.Itisanattractiveassetclass,andwereinacyclicalbusiness.Thelessonofthecurrentsituation,accordingtoCooper,isyoujustdontturnaloanintoabondovernight,whichisreallywhathappenedoverthelast18months.Seniorsecuredloansbecamesecuredbondswithnocovenants.n

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    theuniverseofmanagersthatcangetnewdealsdoneisprobably20or30differentmanagers.

    http://www.merrillcorp.com/datasite

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    http://www.versafund.com

  • 4 DistresseD InvestIng report ApriL 2008

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    Chinaseffortstomodernizeitsbankruptcylawsareahopefulsignfordistresseddebtinvestors,buttheyarebabystepsthatwonttranslateintoeasydealsanytimesoon,accordingtomembersofthepanel,DistressedInvestingintheMiddleKingdom,moderatedbyGeorgeKelakos,managingdirector,KelakosAdvisorsLLC.

    TheEnterpriseBankruptcyLaw,whichtookeffectonJanuary1,2007,incorporatesmanybankruptcyandreorganizationconceptsfoundintheUnitedStatesbutisoftenlackingimportantimplementationdetails.

    Nevertheless,whilenotingthatuntilnowtheonlyoptionforforeignersinChinawaspurchasingnonperformingloans,HelenaHuang,aHongKong-basedpartneratKirkland&EllisLLC,pointedouttwopotentialopportunitiesaffordedbythenewlaw.Firstisthatitofferstheabilityofthedebtorortheadministratortosellsubstantiallyallofabankruptcompanysassetsinbankruptcyand,secondly,itincludestheabilityofthedebtororadministratortoborrowintheordinarycourseofoperatingthebusiness.

    InthepastcoupleofmonthswhenIwasinChinatalkingtosomeofthejudgesandrestructuringprofessionals,Huangsaid,IcouldsensethattheChineserestructuringcommunityisveryinterestedinthis,althoughtheydontknowexactlyhowtoimplementit.

    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,althoughwehaventseenitinpractice,isthatthegovernmentcantdothatwilly-nillyanymore.

    Thischangewillbebeneficial.Itmakesitalotmoreinteresting

    fortherestructuringprofessionalsandthebuyersthatwenowhaveanotherwaytoexitourloansotherthanjustchasingpeoplearoundwithastick,sotospeak,Grovessaid.

    Intheearlyyears,herecalled,almostallofthevalueofthecollateralwasrealestate.So,theonlytypeofrestructuringyoumightgetwasthatyoumightendupwithsomepropertyorabuildingorahotel.But,werestartingtoseealotmoredebtorscomingtousnowsaying,Whydontwerestructure?Wehavethisnewbankruptcylaw.Theyhavenoideawhatitmeans.Theyjustknowitsoutthere,soyouregoingtoseealotmorerestructuringwork,Ithink.

    OneofthemainstumblingblockstoinvestinginChinaistheamountofbureaucracyinherentinthesystem.Oneoftheworstthings,saidTang,istheinfluence,ifnottheintervention,ofthegovernment.Therearedifferentlevelsofgovernmentprovincial,centralandthentherearealsodifferentdepartmentsanddivisionswithingovernment.

    Itssometimesconfusing,ifnotfrustrating,foroverseasinvestorsnegotiatingwiththeChinesetofindoutthattherealdecisionmakerisnotsittingacrossthetable.Youvegottogothroughalotoftheseroundsofmeetingsbeforeyoureallygetclosetothetruedecisionmaker.

    CHinAs 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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    DistresseD InvestIng report ApriL 2008

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    TheimportanceofbusinessrelationshipswhenoperatinginChinacannotbeunderestimated.Grovesdescribedhowhisfirmusesdifferentattorneysineachcityinwhichitwantstodobusiness.Whenyouenteranewcitytobuythings,findtheattorneyswhoarerelatedtothejudgesandthemayorandwhoknowthesellersverywellbecausealmostyourentireacquisition,restructuringandsaleprocessisgoingtobedictatedbyhowwellyourattorneysknoweveryone,hesaid,addingthathewasnotimplyingthattherewasanythingillegalgoingon.Itsalljustheavilyrelationshipdriven,heexplained.

    CourtsbecomemoresophisticatedThecourts,ofcourse,willplayasignificantroleasbankruptcyandrestructuringbecomemorewidelyused,butthequalityofjudgeshandlingthesecasesacrossChinavaries.IfyougotoChina,youregoingtoseeahugedisparityamongthequalificationofjudges,Huangsaid,notingthatjudgesinlargercitieslikeBeijingandShanghaialsohandlecommercialmattersandsoaremoresophisticatedaboutbusinesstransactions.Judgesinsmallercities,however,arenotsoconversantwithbusinesslawsand

    wouldnotmakeadecisionuntiltheygetsomekindofOKfromthelocalgovernmentorrelevantagency,sheadded.

    But,Iactuallyseethesituationimprovingandchangingdaybyday,Huangsaid,andIknowthateversincetheadoptionofthisnewbankruptcylaw,theSupremeCourtofChinaandthecourtsatvariouslevelshavehostedmanyseminarsandtrainingsessionsforjudges.ShealsosawasapositivesignthefactthattheSupremeCourthasactivelysolicitedopinionsfromrestructuringexpertsworldwideinanefforttodevelopimplementationrules.

    Ihavealotofhopeforthedetailedimplementationrules,saidHuang,andIcanseethatalotoflittleissuespeoplearetalkingaboutmayshowupinthedetailedimplementation,whichcouldhelpalotintherealpractice.

    Perhaps[ConwayMacKenzie&Dunleavys]Mackhadthebestadvicewhenhesaid,ThingsmoveveryslowlyinChinasoyouhavetohavepatientmoney.n

    < PREVIOUS

    http://www.loeb.com

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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

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    cooley GoDwArD kronish llp countrywiDe home loAns creo cApitAl pArtners crG pArtners llc crowe chizek crystAl cApitAl cushmAn wAkeFielD

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    Ge GlobAl sponsor FinAnce Gemini pArtners inc. Getzler henrich & AssociAtes llc GolDmAn sAchs & co. Goulston & storrs, p.c. GrAnt thornton GreAt AmericAn Group

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    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 lenDers 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

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    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 okeeFe & 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

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    silver point FinAnce sirote & permutt pc skADDen, Arps, slAte, meAGher & Flom llp solutions in prActice llc sommer bArnArD pc

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    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

    Skaddens worldwide corporate restructuring practice has played a key role in some of the most widely

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