(Bloomberg) -- David Nemecek and Scott Greenberg spent countless hours across the table from each other this year, battling over the fine print buried deep in junk-rated companies’ debt documents.
Kirkland & Ellis’s Nemecek was representing companies in distress. Greenberg, from rival law firm Gibson Dunn & Crutcher, was on the other side, banding together investors owed billions of dollars to form so-called cooperation groups and fighting attempts to short-change them in a turnaround.
The two, both 47, are at the forefront of an elite group of white-shoe lawyers and Wall Street advisers who are reshaping a major corner of finance by changing up the playbook for companies struggling with crushing debt.
These debt workouts are part of the world of liability management, a small, aggressive and thus far male-dominated corner of corporate finance with big implications for both private equity firms and debt investors. The shift has been hastened by financial tactics with names like uptiering, drop-downing and double-dipping that shuffle assets away from the reach of existing creditors when a company runs into trouble.
The line of business is certainly lucrative. Boutique investment banks PJT Partners Inc., Evercore Inc. and Lazard Inc. each cited such workouts as a driver of revenue this year. Top partners at firms like Kirkland and Gibson Dunn are known to bill more than $2,000 per hour, according to bankruptcy disclosures, though their rates for out-of-court workouts are not public.
Below are some of the key players whose names surfaced time and time again in our reporting this year, and who agreed to share with Bloomberg their thoughts on the new landscape for credit. These are the contract cowboys remaking the rules for debt — and changing what it means to lend money to American companies.
A partner in Kirkland’s debt finance practice, Nemecek in the past two years supercharged the firm’s use of the complex maneuvers essential to these new kinds of workouts.
They’ve become a crucial part of the toolkit of private equity sponsors, who have realized that loose credit agreements — and armies of lawyers and advisers — are one way to get their companies to the other side of high interest rates without having to surrender control to creditors. The fixes don’t always work to prevent a bankruptcy, but that isn’t necessarily the point. To the companies and their backers, it’s about securing some time.
“You’re buying an option on recovery,” said Nemecek. “And it’s all about how the market values that option.”
Scott Greenberg, Gibson Dunn & Crutcher
Greenberg, global chair of the firm’s business restructuring and reorganization practice, advised creditors to companies including Del Monte Foods Inc., AMC Entertainment Holdings Inc., and package carrier LaserShip Inc. this year.
Typically, the funds that help broker a deal are able to get better terms in exchange for their participation, allowing the largest firms to come out well ahead of other investors. But Greenberg notes that any focus on disparate outcomes among investors may miss the main point: that private-equity owners are the ultimate beneficiaries.
“The biggest lenders are going to drive the outcomes and therefore do best,” he said. “But candidly, the private-equity sponsors are the big winners in these transactions.”
Josh Abramson and Jamie Baird, PJT Partners Inc
PJT Partners’ global head of restructuring, Steve Zelin, steered Apollo Global Management-owned Caesars Entertainment through an epic restructuring between 2015 and 2017 that helped set the mold for the kinds of creative asset shifting seen today. In the latest era of boundary-pushing deals, his lieutenants Josh Abramson, 41, and Jamie Baird, 46, are largely taking up the baton.
Their projects often include tweaks to prior deal structures that help satisfy all parties needed for plan approval. This year, their work for software company GoTo Group Inc. helped set a precedent for tiered exchanges, whereby an in-group of investors steering talks gets a higher cents-per-dollar recovery and a wider select group gets slightly less. Those taken by surprise by the whole thing, as always, got the lowest recovery of all.
Abramson and Baird suggested there are new twists in store that will build on the creative maneuvers making up today’s corporate playbooks. “There is a limit to how much innovation one can introduce to the market,” Baird said. “But we are not running out of options.”
Tyler Cowan, Lazard Inc.
Tyler Cowan, global head of restructuring at Lazard, worked on behalf of both companies and creditors this year as fights over massive debt piles escalated. He’s been advising Altice France SA in its negotiations with lenders, and when Dish Network Corp. floated a massive loss for bondholders in order to facilitate a DirecTV merger, he was on creditors’ side as they spurned the offer and tanked a bid to create the largest pay-TV provider in the US.
The protracted standoff demonstrated just how large and organized groups of creditors have become since the days of the infamous deal for J. Crew Group Inc., which in 2016 moved its valuable intellectual property away from existing creditors in order to raise more cash. Lazard advised J. Crew at the time. Since then, the strategies have evolved, according to Cowan.
“It’s a game of whack-a-mole,” said Cowan, 43. “Once you plug one leak, you’re just going to find another.”
Tom Lauria, White & Case
Tom Lauria, 64 and the global head of White & Case’s financial restructuring and insolvency practice, was central to the 2022 Carvana Co.’s creditor pact that helped usher in an era of ubiquitous cooperation agreements.
This year, Lauria’s biggest projects included Bausch Health Companies Inc. and satellite-television provider Dish. In both cases, he represented the companies as lenders created cooperation blocs so strong that asset sales that threatened to sidestep creditors’ claims and send proceeds directly to shareholders have so far sputtered or failed. Dish raised billions of dollars in financing along the way.
“Some wars can be won with hand grenades; others require nuclear weapons,” said Lauria of the consequence of thwarting deals that may have prevented future insolvency or bankruptcy. “Going nuclear when you only need a grenade is the wrong choice.”
Bill Derrough, Moelis & Co.
Bill Derrough, 59, global co-head of capital structure advisory at investment bank Moelis & Co., is even more blunt about his opinion of such creditor pacts.
“It’s like the final scene of Reservoir Dogs, where everyone is pointing a gun at each other, and you need at least two-thirds to agree to put the gun down,” he said, referring to the 1992 Quentin Tarantino crime thriller. That movie ends with most of the characters bleeding out on a warehouse floor.
Derrough’s group at Moelis this year led one of the first instances of a public company employing such credit-bending maneuvers, in which AMC Entertainment Holdings Inc. moved 175 theaters and related intellectual property into a subsidiary in order to exchange existing debt for new obligations backed by the shifted assets.
Damian Schaible, Davis Polk & Wardwell
Damian Schaible, the 48-year old co-head of the restructuring practice at Davis Polk, can trace the market’s shift through his own career. Five years ago, he spent 80% of his time working on Chapter 11 bankruptcies and the remainder on out-of-court workouts, he said. Now, the ratio is flipped.
When manufacturer GrafTech International Ltd. sought to shave off some debt and seek concessions from creditors, lenders advised by Davis Polk and PJT banded together and scored a deal that allowed all creditors, instead of some, to participate in a new loan and extension on existing debt. The willingness to align may be a window into investors’ belief that, in the long run, they are better off making friends instead of enemies.
However, it’s not always possible and “that’s challenging,” Schaible said. “Many of these institutions are repeat players on the investor side and the adviser side. At any given time, we’re working on three or four deals together, and an institution wants in and you may not be able to facilitate that.”
Jaisohn Im, Akin Gump Strauss Hauer & Feld
The year’s most complex transactions left a gulf between those included or not in deal planning. Jaisohn Im, 44, head of Akin’s finance team and a partner in the special situations and private credit practice, advised lenders to some of them, including the automobile and aerospace manufacturer Apex Tool Group LLC and Magenta Buyer LLC, the former McAfee Corp.’s cybersecurity unit.
Getting most creditors officially on board for the deals at varying levels of recovery has become increasingly important to sponsors, Im said.
Apex Tool Group’s deal was particularly notable for addressing debt that was only slightly distressed at 90 cents per dollar and exchanging them for less than those trading prices. It has been seen as the beginning of a wave of healthier companies or their private equity owners seeking deals that cut debt while preserving their ownership stakes and returns.
David Hilty, Houlihan Lokey Inc.
Houlihan Lokey’s co-head of financial restructuring David Hilty, 56, also works frequently for both borrowers and lenders.
Hilty offered some insight into the advantages of these debt deals even for those on the receiving end of painful haircuts.
“For creditors, part of the equation is: if I’m participating in a deal now, I’m limiting what kind of transactions can happen and take me by surprise in the future,” he said, since, as part of the deal, lenders get to add and reinforce protections for themselves in the new credit documents.
Ryan Preston Dahl, Ropes & Gray
Traditional corporate bankruptcies have fallen out of favor largely because of the time and money spent in court. Costs can vary depending on how much litigation is involved and how complex the restructuring is.
In proceedings lasting less than a year, Rite Aid Corp. racked up around $250 million in bankruptcy fees while WeWork’s cost around $75 million, according to court records.
“Lenders may not love it,” said Ryan Preston Dahl, the 45-year-old chair of the business restructuring practice group at Ropes & Gray who this year represented companies including DirecTV and Trinseo Plc. in negotiations with creditors. “But the alternative, in many cases, is a really expensive Chapter 11.”
--With assistance from Steven Church.
(Updates to add information on Dish financing in 20th paragraph. A previous version of the story was corrected to remove a reference to Dish from the David Hilty description.)
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