The 2024 Distressed Investing Conference

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Welcome to the 108th Pari Passu newsletter,

Today, I have a very special edition for you—a recap of the 31st Annual Distressed Investing Conference.

Featuring star-studded panels and covering topics ranging from private credit and liability management to cross-border restructuring developments, this conference was a survey of the past, present, and future of restructuring from diverse—and sometimes clashing— perspectives of the lawyers, bankers, investors, and judges who lead this industry. 

The ticket to attend to the conference cost over $1,000 so a special thank you to all of you for reading and to our sponsors that enable us to share this amazing content for free!

Table of Contents

• Liability Management Overview

• Restructuring Roundtable - Health Of The Industry

• Private Credit Restructuring - Joining The Club

• Liability Management in a Changing Environment

• Bankruptcy Litigation - Go Wesco Young Man

• Will We Ever Go Shopping / Officing Again?

• The Return of the Capital R Restructuring?

• Recognition, Releases, Torts in Cross-Border

• Annual Distressed Investors’ Roundtable

• Conclusion

Liability Management Overview

Liability management (LM), also referred to as liability management exercises and liability management transactions (LME or LMT) was a constant thread throughout many of the panel discussions below. It is worth defining before we move on to conference content. 

Despite being frequently used in an out-of-court context, LME is a broad term that includes out-of-court and in-court solutions for distressed companies to address near-term debt maturities or reduce their debt load. On one side of the spectrum, companies can pursue less aggressive, consensual out-of-court restructurings such as debt repurchases, equitization, amending terms and extending maturity dates, exchange offers, and asset sales. Unable to boost profitability even with cost-cutting, companies like WeWork first explored out-of-court solutions to reduce $1.5bn of debt, raise $1bn of new capital, and push back maturity walls. Yet even with these efforts, WeWork’s inability to negotiate their $13.3bn lease liabilities forced them to file Chapter 11. While out-of-court solutions are prioritized for most borrowers to avoid hefty costs, in-court solutions still bring considerable value for certain capital structures and business models – a big topic for one of the panels.   

However, in the low interest-rate environment, credit docs have become loose enough for borrowers and sponsors to push for aggressive LMEs to deleverage and raise extra capital. Usually, these come at the cost of pitting creditors against each other to fight for limited recoveries. Ever since J.Crew launched its famous asset drop-down in 2017, the market has seen different variations: uptier exchanges as seen in Envision and Serta Simmons, double-dips as seen in At Home, and pari-plus financings as seen in Trinseo. Not surprisingly, as borrowers continue to suffer from low liquidity, companies like Spirit Airlines have even explored triple-dips, which still have open-ended questions on how they will be executed and treated in-court. As credit docs are still loose while borrowers and sponsors are still willing to find creative approaches to address highly leveraged capital structures, the conversation around LMEs continues.

Restructuring Roundtable - Health Of The Industry

• David Griffiths, Partner, Weil, Gotshal & Manges LLP (Moderator) - View Bio​

• John E. Luth, Chm., Pres. & CEO, Seabury Capital Group LLC - View Bio

• Angelo Rufino, Partner, Bain Capital, LP - View Bio

• Michael Turkel, Assistant General Counsel, Elliott - View Bio

• Eric W. Kaup, Executive Vice President, Co-Chief Commercial Officer & Special Counsel, Hilco Global - View Bio

Representing different special situations funds, this investor-heavy panel touched on sectors with the most attractive opportunities in distress: tech, aviation, real estate, EV, and telecom. More restructuring solutions have shifted from in-court to out-of-court LMEs, encouraging creditors to participate early in cooperation agreements, which we’ve covered here. Middle-market companies have also found it more costly to file for Chapter 11, making LMEs the more economical option. Interestingly, a company’s capital structure post-LME would look much more complicated than post-reorg – if a 1L tranche is split into four smaller tranches, where would each piece trade?

However, distressed opportunities are still found across different industries, specifically legacy business models. From Bain’s perspective, their approach to distressed investing has been more sporadic as the distressed companies represent only ~15% of their special situations portfolio. Ideally, Bain wants to invest in high-quality businesses in sectors with long-term growth during a cyclical downturn, like airlines during COVID-19. With more distressed deals done in locked-up drawdown structures where investors can access capital whenever they need, investors can follow through a company’s lifecycle and shift across the industry value chain. Since LMEs can turn hostile and time-consuming, Bain has also preferred interacting with other creditors, including CLOs involved in restructuring (stay tuned for a future write-up on this), so that they can add operational value for a potential turnaround.

A main theme was how the ‘tranching’ within distressed has created clear winners and losers. Competition among investors for returns has been the most common in capital structures of companies backed by high-quality assets. The problem is too many lenders are offering cheap capital to companies that simply do not even read the term sheets, driving down returns. However, Elliot views that getting deeper into messier situations can reward investors with higher returns, whether that be securing a first-in tranche before cooperation agreements or taking advantage of cooperation agreements. There is no singular playbook -- even investing in lower-quality businesses can generate significant returns. For example, Latin American airlines are high-risk businesses subject to economic growth and labor unions with ~30% of the cost structure tied to natural resources like oil. If investors find the right entry point as the industry rebounds and the business reduces leverage, they’ll be able to absorb much of the remaining cash flows.

But even in a competitive industry, firms like Hilco with a debt financing business have found their niche in offering businesses ABL loans, which are safer for investors as they are backed by inventory and receivables. As a liquidator, they’ve also retained control over Pitney Bowe’s e-commerce subsidiary which was generating negative profits. A speedy wind-down of the subsidiary in Chapter 11 from selling key assets minimized disruptions and boosted the stock up by 40%. 

Private Credit Restructuring - Joining The Club

• David HilLMEan, Partner, Proskauer Rose LLP (Moderator)​ - View Bio

• Kevin O'Neill, Director, KKR - View Bio

• Austin Witt, Partner, Kirkland & Ellis - View Bio

• Michele Kovatchis, Senior Managing Director, Antares Capital - View Bio

Pluralsight, the restructuring deal of the year, left many open-ended yet critical questions: will LMEs enter private credit deals in the future? Will private credit lenders request stricter covenants to prevent another Pluralsight?

The panel kicked off by highlighting the significant growth trajectory of the private credit market, projected to expand from $1.7 trillion today to eventually $40 trillion. As a quick recap of the popularity of private credit, the asset class has been replacing traditional bank lending as banks shifted away from middle-market to large corporate borrowers under stricter regulations. The public market has been dominated by large-cap companies that benefit from flexible capital like private credit for rapid expansion. An increase in private equity buyout activity has also been supported by private credit funding. In addition, lower beta, cyclicality, and default rates have encouraged traditional PE platforms to develop an in-house private credit platform.

Key word: relationships. Compared to the more transaction-based broadly syndicated loan (BSL) market, private credit lenders, especially in the middle-market, are much more incentivized to preserve relationships with a sponsor whom they provide financing for 5-6 deals. In private credit, the smaller groups of 4-5 lenders make it easier to reach a restructuring solution out-of-court, minimizing the problem of holdouts in the fragmented BSL market. Since there aren’t many smaller lenders to take advantage of, it would be harder to execute LMEs involving lender-on-lender violence in private credit. Despite loose credit documents and PE sponsors being obligated to satisfy their limited partners (the investors in the PE funds), sponsors value their private credit relationships, so they are less willing to engage in LMEs. The level of risk aversion of private credit lenders is so high that they are unwilling to do deals with sponsors who even raise the idea of changing positions in capital structures. Finally, lenders in private credit are not exposed to volatile loan pricing compared to the BSL market, where lenders use LMEs to minimize losses in their positions. However, the panelists still carefully qualified these statements that there could still be “some” LMEs in larger private credit deals.

Another pressing question was: given that tight liquidity is the source of most recent distressed situations, who will provide extra financing, and where should a sponsor’s rescue capital come in the capital structure? As a lender, ideally, the sponsor injects more capital junior to their initial investment but senior to other existing lenders. To prevent sponsors from gaining too much voting control and protect their secured positions, creditors would also have to contribute to preserving liquidity such as converting to PIK interest, a form of non-cash interest. Ultimately, a sponsor’s preferred position in the capital structure comes down to their view on the company’s option value, quality of the collateral, and requirements for lender consent in credit docs. However, in the high interest rate environment of the past years, more sponsors have started to hand creditors control over the companies to minimize further losses in their equity investments.

Liability Management in a Changing Environment

• ​​​Damian Schaible, Partner, Davis Polk & Wardwell LLP - View Bio

• John Sobolewski, Partner, Wachtell, Lipton, Rosen & Katz - View Bio

• David M. Nemecek, Partner, Kirkland & Ellis LLP - View Bio

• Josh Abramson, Partner, PJT Partners Inc. - View Bio

• Daniel Flores, Partner, GoldenTree Asset Management - View Bio

With an array of perspectives represented by this panel, from sell-side (creditor-side and debtor-side law and restructuring banking) to buy-side credit, this discussion on the present and future of liability management exercises was both insightful and, at times, contentious. The discussion began by distinguishing liability management (LM) 1.0 and 2.0, with LM 1.0 consisting of infamous non-pro rata transactions such as drop-downs (e.g.  J. Crew) and up-tiers (e.g. Serta Simmons), and 2.0 focused more on transaction design through cooperation agreements (e.g. Altice France) [see 99th edition for more on cooperation agreements]. The shift may be attributed to two major drivers: 

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