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DistresseD InvestIng report maY 2009

HigHligHts from tmA’s And tHe deAl’s 2009 distressed

investing ConferenCe

DistresseD investing r e p o r t

maY 2009 Volume 1 issue 3

squeeze in or squeeze outdistressed investing Amid A finAnCiAl Crisis

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Turnaround Management Association �Dedicated to Corporate Renewal

Æ

2 DistresseD InvestIng report maY 2009


W e are pleased to present highlights of the 2009 Distressed Investing Conference, a third annual event

co-produced by the Turnaround Management Association and The Deal on January 21-23, 2009 at the Bellagio in Las Vegas. This event linked close to 500 corporate renewal professionals and corporate dealmakers in an unrivalled opportunity to exchange ideas and hear the latest trends on distressed investing from leading experts in the field.

This report will give you a glimpse of some of the most pressing concerns and opportunities facing the restructuring industry during a time of dramatic change in the rules of engagement in corporate lending. Get a behind-the-scenes look at credit default swaps, the consumer sector, trends in debtor-in-possession financing, and the impact of the credit crunch on debt and equity financings, along with other hot topics in the distressed arena.

Mark your calendar now to attend the Fourth Annual Distressed Investing Conference next January for more insights on the dynamic world of corporate restructuring and finance.

Kevin WorthPresident and CEOThe Deal LLC

linda Delgadillo, Cae Executive Director Turnaround Management Association

Contents

3 The Change of the Game Thefinancialcrisishasrewrittentherulesofdistressed investing.Sowheredotheopportunitieslie?

6 The Radnor Case Study: Avictoryforsecuredlenderseverywhere?

8 Credit Default Swaps: Rouletteorriskmanagement?

11 Busted Distressed Financings: Whathappenswhentherugispulled?

13 Bright Stars Among Dark Clouds Leadersindistressedinvestingstrategize

16 Crisis in Consumer Confidence Airlines,andgaming,andretail.Ohmy!

17 Distressed Investing Conference Photos

19 Funding the Process TrendsinDIPfinancing

21 The Deal Pipeline’s Bankruptcy League Tables

Highlights from TMA’s and The Deal’s 2009 Distressed Investing Conference

President & CEO, The Deal LLC: Kevin WorthExecutive Director, TMA: Linda M. Delgadillo, CAEVP, Marketing, The Deal LLC: Allan Cunningham

Director of Fund Development, TMA: Joseph KarelManager, Marketing & Communications, The Deal LLC: Marielena Santana

Associate Art Director, The Deal LLC: Linda PengWriter: Dan Slater

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



tHe CHanGe oF tHe Gamethe financial crisis has rewritten the rules of distressed investing. so where do the opportunities lie?

Twoyearsago,atthe2007DistressedInvestingConference,thedistressed investing market was robust: the leveraged-loan andhigh-yielddebtmarketsweresettingnewrecords;thesecond-lienmarketwaswayup;andnonbankingentitiesaccountedforthema-jorityofnewissues.Itwas,byallestimations,anissuer’smarket:lotsofliquidity,easyloantermsandlowdefaultrates.

In fact, thingsweregoingsowell thatsomesoundedacau-tious note. Speaking at the 2007 conference, Scott J. Davido,executivevicepresident,chieffinancialofficerandchiefrestruc-turingofficerofCalpineCorp.,saidthemarketwasexperiencing“irrationalexuberance.”“Andthisiscreatingsomeveryinterest-ingdynamics—most good, butnot all good,” he said. “The fun-damentalpoint is thatwhenyouhavetoomanydollarschasingtoofewdeals,yougetalotofgravity-defyingthings.”Lenders,henoted,werecompetingforyourbusiness.

Wastheretoomuchmoney in themarket?Woulddefaultfi-nallygoup?Whatwouldthatdotoliquidity?Wastherestillmoneytobemade?

Tobeunderstatedaboutit,2009findsusindifferenttimes,withsome of those questions now at least partially answered. At thisyear’sconference,CerberusCapitalManagementLP’sKevinCrosssaid,“Thedistressedfinancingmarketsthemselvesaredistressed.”

Similarly,MarkThomas, a partner inWinston&Strawn’s re-structuring and insolvency group, who moderated the panel onbustedfinancings,jokedthat,thesedays,he’dtakeanyfinancing—bustedornot.“Andifitbusts,we’lldealwithitafterthefact.”

Atthe“DistressedInvestmentFundFounders”panel,themod-erator,DavidResnick,whoheadsRothschild’sglobalrestructuringadvisorybusiness,kickedoffthediscussionwithanoutlookfor2009.“Withoutquestion,2009willbeachallengingenvironmentfor all investors, especially those focused on turnarounds andcompanieswithfinancialdifficulties,”hesaid.Resnickexplainedthat,inpastyears,investorscouldconcentrateoncompanies’op-

eratingchallenges,assuredoffinancingforadeal.Now,however,as the financingmarkets suffer, the situation ismore complex.“Lenders are guarding their capital carefully, and the terms onwhichtheyprovideit,withrespecttobothcostsandcovenants,areextraordinarilyhigh.”

Yet,it’snotallgloomanddoom.BothCrossandResnickbelievethere’svaluetobefoundinthedistressedmarkets.Crossaddedthatwhilemostdistressed lendersare lookingat thesecondarymarket,theprimarymarketisfullofopportunitiesandlendersareunderwritingusinguniquestructures.Similarly,Resnicksaid:“Inthe past, this environment is one inwhich distressed investorshavemadeseriousmoney.”Hesaid thatadefault rateof 15.1%,whichisMoody’spredictionfor2009,“meansmanytargets”.

The crisis of consumer confidence has battered the busi-nessesofnearlyeveryconsumersector—fromairlinestogamingtohospitalitytoretailandcasualdining—andtimesaregoingtogetworsebeforetheygetbetter,accordingtomanyofthosewhospokeattheconference.

Sowherewilltheopportunitiesbe?Consumerindustries?

CONTINUED >

Keynote speaker Harvey Pitt, former SEC chairman & CEO of Kalorama Partners LLC, shares his top 10 lessons to learn from the financial crisis


Perhaps,butwatchoutforretail.RonaldGreenspan,aseniormanagingdirectorinFTIConsulting’scorporatefinancepractice,remarkedthatthere’svirtually“zerofranchisevalue”inalmostalloftherecentbankruptcyfilingsintheretailsector.

“I thinkwhat thismassivedowncycle isdoing iscompletingwhat I’vealwaysdescribedas theWal-MartizationofAmerica,”saidGreenspan.“Thatthereisonlygoingtobeoneortwodomi-nantplayersandifyou’renotoneofthosedominantplayersyou’regoingtohaveaverydifficulttimesurvivingintheWal-Martage.”Headded:“Ifyou’renotthattophorseorthesecondhorseit’sgo-ingtobealiquidationdayratherthanarestructuring.”

Greenspansaidthatmall-basedretailers“areupagainstanalmost impossible situation” because their fixed costs are sohigh.“Whentherevenuestartstoshrinkandthemarginsstarttoshrinkandyou’restillintherepaying$60,$80,$100or$200a foot for your space, your fixed overhead costs are going todriveyouout,”hesaid.

It’sofcoursenosurprisethat,inthistimeofheavyfilings,in-vestorsaretakingacloselookattheDIPfinancingmarket.TheDIP—ordebtor-in-possessionfinancing—markethastakenahit

since last year’sdecisionbyGeneralElectricCo. largely tohaltlendingtocompaniesinbankruptcy-courtprotectionornearit.

So,now,thequestionbecomes:AsthedemandforDIPloansgoesupinthecomingyear,wherearethoseloansgoingtocomefrom,giventhelackofmarketdepthandtheconstraintsfacedbyailingfinancialinstitutions?

KevinPhillips,fromtherestructuringgroupofBancofAmer-icaSecurities-MerrillLynch,saidthat,giventhenumberoftra-ditionallenderswhohavebeenoutofthemarketinthelastyear,offensiveDIPlending—suchaswhentheDIPlendermakestheloan with the goal of acquiring the debtor or assets from thedebtor—isattractivefroma“risk-rewardperspective.”

TiffanyKosch,apanelistfromBaysideCapital,a$3billiondis-tressed investment fund, provided theperspective of the fundsandsponsorswhenitcomestotheDIPmarket.Shesaid:“PeoplelikeBaysidewill be active in themarket because thenext bestalternativeforbusinesseswillbetoliquidate.Andthatwillbeun-attractive in termsofa recovery in themarketplace.So Iwouldanticipatethatyou’llfindalotofnontraditionallenderswhohavecapitaltobeparticipatinginwhatistrulyaverygoodrisk-reward,properlystructured.”

Retail,anyone?n


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Conference attendees hear insights on the distressed investing market

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tHe raDnor Case stuDY: A viCtory for seCured lenders everywHere?“It’s rarelyagood thing tobean investor in theprecedent-set-tingcaseinbankruptcy,”saidJoseFelicianoofClearlakeCapitalGroup.“SoIhavethatdistinction.”

Feliciano,whousedtobeatprivateequityfirmTennenbaumCapital Partners when it invested in Radnor Holdings Corp., amanufactureroffoamcontainersandspecialtychemicalsthatul-timatelyfiledforChapter11bankruptcyin2006,spokeonapanelaboutthelandmarkcase.

AsFelicianoexplained,theRadnorinvestmentlookedgoodforTennenbaumwhenitbeganitsduediligenceofthecompanyinthesummerof2005.Atthetime,hesaid,packagingcompanieswereexperiencingdecliningmarginsasaresultofincreasingoilandresinpricesthat,insomecases,theywereunabletopassontotheircus-tomers.However,againstthatbackdrop,Radnorhadseveralnewproductsthatitwasintheprocessofintroducingtothemarket.

SoonafterTennenbaummadeitsinvestmentinRadnorinthethird quarter of 2005 and became the largest secured creditorinthecompany,disasterstruck.HurricaneKatrinaandHurricaneRitahittheGulf,disruptingthepetrochemicalsectorand“creat-ing havoc” in themarkets for resin and natural gas, aswell asotherimportantinputsforRadnorproducts.

FelicianoexplainedwhatRadnor’sbalancesheetlookedlikeatthetime:a$60millionrevolverledbyNationalCity,about$25mil-lionofothersecureddebtandsome$25millionofdebtataEurope-ansubsidiary.AftertheTennenbauminvestment,therewasabout$120millionofseniorsecureddebtandabout$135millionofunse-cureddebt,whichFelicianocalled“averykeyaspectofthecase.”

Throughout2006,TennenbaumhelpedRadnormanageitsli-quidity,changemanagementandreducecosts—movesthatFeli-cianocharacterizedastypicalforthiskindofinvestment.Tennen-baumbroughtinadvisoryfirmAlvarez&Marsaltohelpmanagethe company; but then, according to Feliciano, things changed.“Allofasuddenwewentfromapproximately$5to$10millionofliquidity to an over-advanced situation,” he said. “That precipi-tatedthebankruptcy.”

That’swhenthingsgotmessy.Tennenbaumfiledthecompanyforbankruptcyin2006,consentingtothedebtor-in-possessionfacility and an accelerated time frame for a Section 363 bank-ruptcysale.A363saleallowsabankruptcytrusteeorDIPtosellthebankruptcyestate’sassets“freeandclearofanyinterest insuchproperty.” Since competing interests in the property neednot be resolved as a condition to the sale, the “free and clear”provisionprovidesameansforthedebtortoconsummatethesalefairlyquickly.

StanfordSpringelofAlvarez&Marsalspokeonbehalfofthedebtor-company. “From a company perspective,” he explained,“it was extraordinarily important that we have a stalking horsebidder”—afterLehmanBrothersHoldingsInc.triedtorunasale

process—“becausewewererunningonfumes,evenafterSilverPointcame in[onthedebtor’sside].Wewantedourcustomerstoknowthatweweregoingtosurviveandwantedourvendorstocontinuetosupplyus.Itwasreallyimportanttosendasignaltothemarketplacethatweweregoingtobealong-termplayer.Be-cause,otherwise,therewasn’tgoingtobeanythingforanybody.”

AmitPatelofGoldman,Sachs&Co.,whoatthetimewaswithHoulihanLokey,whichwasadvisingTennenbaum,toldtheaudi-encethatthesalesprocess,whichLehmanwasbroughtintorun,wasverydifficultduetoaquestionofvaluation.Also,theboard,asSpringelnoted,wasconvincedthatthesaleprocesswouldre-sultinnorecoveryforunsecuredcreditors.IttriedtodefeatthesaleoftheassetstoTennenbaumthroughalawsuitarguingthatitwasattemptingatakeoverofthecompanythroughitsloansandthelenderwantedtoobtainownershipofRadnor’sassetsatde-pressedvalues,leavingnorecovery.

TheDelawarejudgeruledforTennenbaumoneveryclaim,andTennenbaumwonthe363auctionandboughtthecompany.Sincetheendof2006, thecompanyhasbeen inthemidstofa turn-around.The judgealso ruled thatsinceFeliciano resigned fromtheboardas soonas thesaleprocessbeganand it looked likeTennenbaumwasgoingtobeabidder,Tennenbaumwasnotaninsider—andthustherewasnoconflict—justbecauseFeliciano,anemployeeofTennenbaum,hadoncesatontheboard.

Latham&WatkinsattorneyJoeAthanas,whomoderatedthepanelbutwasuninvolvedinthecase,calledRadnor“ahugevic-toryforsecuredlenderseverywhere.”

WouldFelicianodoitoveragain?Probablynot.Loan-to-ownisn’tastronginvestmentmodel,hesaid.“Extendingloansatparwiththeideathatthecompanyisgoingtodoworsethanyouex-pectedsoyoucangettobealuckyownerdoesnotseemtobeagreatstrategy.”n

Panelists look on as Jose Feliciano recalls the Radnor filing


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CreDit DeFault sWaps: roulette or risk mAnAgement? BeforeLehmanBrothersHoldingsInc.wentbellyup,andbeforetheTroubledAssetReliefProgram(TARP)gavethemediaanop-portunity toposition the taxpayeragainst thosewho fueled theexcessesofWallStreet,creditdefaultswaps(CDS)werebeingblamedforhelpingtocreatethefinancialcrisis.

Indeed, in October 2008, CBS’s “60 Minutes” ran two piecesoncreditdefaultswaps—theinstrumentsthathavebeencalled“fi-nancialweaponsofmassdestruction”byWarrenBuffett,andwhichmanysayenabledthemortgagecrisis.Ontheshow,SteveKroftchar-acterizedcreditdefaultswapsas“sidebetsontheperformanceoftheU.S.mortgagemarketsandthesolvencyonsomeofthebiggestfinancialinstitutionsintheworld.”Hecontinued:“It’saformoflegal-izedgamblingthatallowsyoutowageronfinancialoutcomeswithouteverhavingtoactuallybuythestocksandbondsandmortgages.”

Notsurprisingly,coverageofthe“60Minutes”episodestookcenterstageatthepanelentitled“CreditDefaultSwaps:RouletteorRiskManagement.”ThepanelwasmoderatedbyDavidHavens,amanagingdirectorwiththecreditflowtradingdeskatUBS.TheotherpanelistswereJeffreyFittsofAlvarez&MarsalandEdWe-isfelner,alawyerwhorunsthebankruptcyandrestructuringde-partmentforBrownRudnick.

Havensremarkedthatthe“60Minutes”episodeshave“vilified

CDSsandmadethemouttobeaverynefariousthingthat’sdriventhemarketsdown.”

HavenswentontoexplainCDSas“creditinsurance,”butthenqualifiedit.“It’snotinsurancethoughbecausebanksandbrokersandhedgefundsaren’tallowedtotrafficininsurance....Butitlooks,feelsandsmellsalotlikeinsurance.”

Astotherolethatcreditdefaultswapsplayedinbringingdownthefinancialsystem,Weisfelnerwasabitmorecircumspect.“I’mnotcertaintowhatdegreeourfinancialwoescanbetracedbacktoCDSs....ButIthinkit’ssortofsymptomaticoftheproblemandthatisgreed.”

Soarecreditdefaultswapsrouletteorriskmanagement?Arethey good for companies that issuedebt?Howabout for thosewhoholdbondsinfinancialinstitutions?

The panelists gave a much more favorable spin than “60Minutes”—butnotbymuch.Weisfelnersaid:“Hedgingisalwaysagoodpartofriskmanagement.Canyouimagineairlinesthatdidn’thedgethepriceofjetfuel?Theywouldhavefailedalotmoreandalotsooner.Theconceptofriskmanagementisawonderfulthing—it’smomandapplepie.”

CONTINUED >

Weisfelner, Fitts and Havens share a lively debate on credit default swaps



Thenheadded,tongue-in-cheek:“It’swhenthe leverageas-sociatedwithitoutstripsallthebenefitofbeingabletomanagetheriskthatguyslikeusgettomakeafortune.”

Havens,themoderator,agreed.“Itcrossedthebridgefrombe-ingariskmanagementhedgingtooltoatoolofspeculation,anditgrewinaviralanduncontrolledmanner.”

So given the havoc that credit default swaps havewrought,thequestionforthepanelistsbecame:Whatneedstobedone?Havenslaidoutafive-pointprescriptionforwhatmusthappen:

•Major cathartic institutional failures:“We’reprobablylargelythroughthatprocessnow,”hesaid.

•Robust two-sided markets in distressed assets: “I thinkwewereheadinginthatdirectionwiththeoriginalTARPprogram,whichgavepeoplesomesenseofconfidencethattherewasgo-ing tobeabuyerof last resortof troubledassets.”Headded:“Hopefullywe’llbegintoseeaclearingpriceforthesetroubledassets,whichisgoingtobeabsolutelyvitaltotheresurrectionofthemarkets.”

•Enduring and holistic government intervention: “Weneed toknowwhattheregulatoryregimeisgoingtobelikeforcreditde-

faultswapsinthefuture.”• Home price stability: “Hopefully it’s by year-end 2009, but

morerealisticallyit’s2010.”•A return to lending:“Weneedtoseebankswillinglylendingto

oneanother,whichisgoingtobepartoftheclearingprocessofalltheseproblematicassets.”n

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BusteD DistresseD FinanCinGs:

wHAt HAppens wHen tHe rug is pulled?Forthosewhokeepacloseeyeonbustedexitfinancings,com-paniessuchasUnitedRentals Inc.andHuntsman-Hexionhavecome to symbolize the latest era ofM&A-related litigation.Notsurprisingly, mention of these cases led off the panel entitled“BustedDistressedFinancings:TheImpactoftheCreditCrunchonDebtandEquityExitFinancings.”

Themoderator,MarkThomas,apartnerinWinston&Strawn’srestructuringandinsolvencygroup,explainedthatthepanelwouldprovideanoverviewofcontractualdisputesthathavearisenfrombusteddistressedfinancings, aswell as thecontractprinciplesthatariseinthecontextofterminatedM&Adeals.

Yet,itwasnotlostonThomasthatthefocusofthepanel—as itwasoriginallyconceived—perhapsfailedtorecognizethetimeswe’re living in.“Hadweknownseveralmonthsagowhatwouldhavetranspired,weprobablywould’vechangedthetitleof this panel,” he said. “Several months ago it seemed like agreatideatotalkaboutbustedexitfinancings.…[But]whenwe

metoverthepastweek,wereallycametotheconclusionthat,geez,we’ll takeanyfinancing.Andif itbusts,we’lldealwith itafterthefact.”

Sowhatarethemajorissuesthatcomeupwhenadealgoesbust?AccordingtoThomasCalifanoofDLAPiperitallgoesbacktothosecontractissuesthatfirst-yearlawstudentswrestlewith:material adverse changes (otherwise known as MAC clauses);breachofrepresentationsorwarranties;andfailuretofulfillcon-ditionsprecedenttoclosing.

Thepaneliststhenturnedtothestateoflitigationsurround-ingtheseissues.Abigquestionforthepanelistswaswhatlitiga-tionstrategythenonbreachingpartyshouldutilizeintheeventofabreach:Doyousueformoneydamagesordoyousueforspecificperformance?JeffreyZaponeofConwayMacKenzieInc.saidspecificperformance—aremedyinwhichthenonbreaching

CONTINUED >

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partyasksthecourttocompelthecounterpartytoconsummatethemerger—despiteitslowchanceofsuccess,seemstobewaytogo.“Ithinktheheadlineisthatspecificperformanceisaverydifficultremedytoobtain,”hesaid.“It’saveryhighburden.Butitseemstothebestwaytoproceedinthesecircumstances.”

Take the case of United Rentals Inc. vs. RAM Holdings, a2007caseinwhichCerberusCapitalManagement,L.P.allegedlybreacheditsagreementtopurchaseURI.AsWinston&Strawn’sThomas explained it, RAM attempted to terminate the mergeragreement and tendered a$100million termination fee.UnitedRentalssuedinDelawaretoobtainspecificperformance—to, ineffect,compelRAM—theholdingcompany—todothedeal.

“Thejudge,”explainedThomas,“basicallysaid,youknow,thiscontract is pretty poorly written, and it’s very ambiguous, andthereforeI’mnotgoingtograntyou,UnitedRentals,specificper-formancewhentheplainprovisionprovidesthere’saterminationrightifyouwalkaway.”

Inotherwords,basedonthelitigationlandscape,thebreach-ingpartyappearstohavetheupperhandifitdecidestopaythe

terminationfeeandwalkaway.However,doesthatmeanit’sad-visabletodoso?Whataboutreputationdamage?

Atleasttwoofthepanelistsbelievethat,intoday’senviron-ment,thenotionofbailingoutofadealandtakingreputationalriskis,asoneofthespeakersputit,“notirrelevant,butit’slessrelevant.”

“Reputationalriskisonething,”agreedThomas,“buttodayit’smoreaboutsurvival.”

JonathanRosenthal ofSaybrookCapital said that today it’sall about opportunities—and opportunity costs—for the inves-tor.“Weshouldn’tmissthinkingabouttheopportunitysetfortheinvestor,”hesaid.“Asthecompanydeclinesinperformance,theinvestmentbeginstolooklessinterestingincomparisontootherinvestments.AndsotheinclinationistoleanhardonthoseMACs,becauseinthisenvironmentthey’veprobablycreatedMACsthatyoucandriveatruckthrough.Thebankersandlawyersaregoingtofightthat....Butthefactthat[thecontract]hassomeouts,that’sjusttherealityoftheday.”

The takeaway?Suing for specificperformancemightbe thebestoptionforthenonbreachingparty,but,givenrecentcases,thatdoesn’tmeanitwillsucceed.n

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BriGHt stars amonG DarK ClouDsleAders in distressed investing strAtegizeItwasn’tallgloomanddoomatthe“DistressedInvestmentFundFounders”panel,butitsurebeganthatway.

Themoderator,DavidResnick,theheadofRothschild’sglobalrestructuringadvisorybusiness,kickedoffthediscussionwithanoutlookfor2009.

“Withoutquestion,2009willbeachallengingenvironmentforallinvestors,”hesaid,“especiallythosefocusedonturnaroundsandcompanieswithfinancialdifficulties.”Resnickexplainedthat,inpastyears,investorscouldconcentrateoncompanies’operat-ingchallenges,assuredoffinancing foradeal;butnow,as thefinancingmarketssuffer,thesituationismorecomplex.“Lendersareguardingtheircapitalcarefully,andthetermsonwhichtheyprovideit,withrespecttobothcostsandcovenants,areextraor-dinarilyhigh.”

Sowhatdotheseadmittedlygloomydaysmeanfordistressedinvestors? “In thepast,”Resnick said, “this environment is one

inwhichdistressedinvestorshavemadeseriousmoney.”Hesaidthatadefaultrateof15.1%,whichisMoody’spredictionfor2009,“meansmanytargets.”

With that happy introduction, David Shapiro, a co-founderofKPSCapitalPartners,tookthemicrophone.Shapiroremem-beredthedaysofoldfordistressedinvestors:“Wewouldgointoacompany,lockitupwithaletterofintentfairlyquickly,getex-clusivity,dotheduediligence,bringthefinancingsourcealongwithus,andclose. Itallseemedsoorderlyandneat.Unfortu-nately,thosedaysareover.”

Ascompaniesweaken,Shapirosaidthat,atatimewhenthere’satemptationtofocusonlycapitalstructure,it’simportanttoem-phasizeduediligence,toturnthefocusbacktolookingatwhatagivencompanyactuallydoesandhowadistressedinvestorcanmakeitbetter.

Shapiroalsopreachedtheimportanceofpatience.ExplainingwhyKPSwasreluctanttododealsin2008,hesaid:“Ourperspec-tivehasalwaysbeenthat,atthefront-endofadownturn,you’regoingtoseealotoftemptingtransactions,butyouprobablyoughttogetoutofthewayandletsomebodyelsedothosedeals.”

Then Shapiro drilled down on the all-important topic of fi-nancing,drawingadistinctionbetween“volunteer” lendersandwhathereferredtoas“hostage”or“resident”lenders.“Theideaofbringing inavolunteer lenderandhaving themwalk throughtheoldschool transactionprocesswithyou is justnotgoing tohappenanymore,”hesaid.“Butifyouhaveabankgroupthatisresidentinthecompanytoday,yourbestchanceistoworkwiththatbankgroupandcomeupwithsomewayofrestructuringthefacilitythattheresidentbanksalreadyhave.”

Thatmaybebecauseofthechangingnatureofbankrelation-ships.Bringingagoodrestructuringadviser inearly iscrucial,hesaid,because“inthisenvironment,youwilldiequickly.Banksaremerciless.There’snosuchthingasarelationshipanymore.I’ve been in this business for 20 years and felt very proud ofhavingcultivateddozensofgoodbankingrelationships.They’reworthlesstoday.Everybody’slookingoutforthemselves.Banksare taking every opportunity they can to re-price or renegoti-atedeals.”Shapiroadded,somewhatominously,“Youhavenofriendsoutthere.”

VeteraninvestorMikeHeisley,theco-founderandprincipalofStonyLanePartners,soundedamuchmoreupbeatnote.Heisleysaidhebelievesthat“greatfortunesaremadeduringtimesofwarandinternaldysfunction.”However,headded,“I’mnotsosurethathavingalotofcapitaltoemployrightnowisahugeasset,because

CONTINUED >David Shapiro of KPS Capital Partners




itmightnotnecessarilybethesolutiontoyourproblem.”The panelists agreed that having a management team that

knowshowtoguideacompanythroughtoughtimeslikethesecan,indeed,solvemanyproblems.“Thereisaworldofdifference,”saidHeisley, “betweensomeone thatcanmanageadistressedcom-panyandsomebodythatcanmanageacompany.”

Shapiro elaborated. He said one must have a managementteamthat’sactuallyseentoughtimesbeforesoitwon’tadoptthepostureofadeer-in-the-headlights.“Tome,though,asalender,oneof thebiggestchallenges ishavingaprivateequity fundasaninvestorwhohasnoexperienceinarecession.Overthe lastfiveyears,theprivateequityfundshavebeenlivingthroughgo-go times.Manyof thepartnersareatanagewhere they reallyhaven’tbeenthrougharecession.”Privateequityfundsareoften“clueless”astohowtoimplementaturnaroundplan,hesaid.

Interestingly, Shapiro’s skepticism of private equity inves-torsparalleledaviewofferedatthe2007DistressedInvestingConference.There,ScottJ.Davido,thenexecutivevicepresi-dent, chief financial officer and chief restructuring officer ofCalpine Corp., said that the easy capital available during thedaysofoldmeantthatanewclassofdistressed investorhadenteredthemarket.

“You see a lot of people playing in the distressed investingspace just because they’re looking for places to put money towork,”Davidosaidback in2007.“Insituationsthatwouldhavescaredthelivingdaylightsoutofmoretraditionalinvestorsade-cadeago,peoplenowembrace these investmentsevenwithoutalotofdistressedexperience—orevenwithoutalotof industryexperienceinsomecases.”

The 2009 panel concluded with the moderator, DavidResnick,askingthespeakerswhichindustrieswillseethemostactivityin2009.

Heisleyurgedinvestorstolookatthoseindustries“whichhaveaninherentviabilitythatgoesbeyondthecycle”—suchascom-modities, andcompanies thathave largeamountsofmoney in-vestedininfrastructure,liketheoilandsteelindustries.“Therea-sonforthat,”explainedHeisley,“isthatnobodyknowswherethebottomisinthismarket.Soyoubetterbeinvestinginindustrieswhichhaveaninherentviability,thatyouknowwillcomeoutontheotherside.Becauseifitgoesdeepenough,therearegoingtobealotofcompaniesthatdon’tcomeoutontheotherside.”n

< PREVIOUS

Conference attendees meet, greet and share their thoughts

Siskin, Cross, Shaprio, Heisley and Resnick; a cross-section of accomplished investors


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Crisis in Consumer ConFiDenCe Airlines, And gAming, And retAil. oH my!Thecrisisofconsumerconfidencehasbatteredthebusinessesof nearly every consumer sector—and times are going to getworsebeforetheygetbetter,accordingtothosewhospokeonthepanel “Crisis inConsumerConfidence:WhereWill theOp-portunitiesBe?”

Themoderator,HollyEtlin,amanagingdirectorofAlixPartners,where she provides restructuring and reorganization services,saidthat,overthe60dayspriortotheJanuaryconference,con-sumercreditbegantofallforthefirsttimeinmanyyears.More-over,thepanelistsagreedthat,whenitcomestotheshort-termoutlookforthedistressedconsumersectorandwhethertherearedealstobedoneintheconsumerspace,thereissimplynomoneytofinancemostdeals.

Taketheairlineindustry.MichaelCox,amanagingdirectorandpartneratSeaburyGroupwho’sworkedonmajorairlinerestruc-turingsboth intheU.S.andabroadoverthe last20years,said“themoneyoutthereforairlinesnowisvery,verytight.”Hesaidthequestionisnotwhethertherewillbeanairlineindustry,buthowbigitwillbeandwhowillbetheplayersinit.

Domestically,theairlinesectoris“intheeyeofthehurricanerightnow,”accordingtoCox.TheriseinfuelpriceshurtU.S.air-linesmorethantheirEuropeanandAsiancounterpartsbecause,saidCox,oilispricedindollars,socountrieswithhighcurrenciesasoflastsummer—i.e.EuropeandAsia—werelessimpactedbyhighfuelprices.(Thoughsomeofthatpain,addedCox,wasoffsetlastfallwhenmanydomesticairlinesreducedstaff,movedtodropcapacityandoffloadedplanes.)

Fromaviation, the panelmoved on to the retail sector. Etlinaskedthepanelwhichcompanieswillbeabletorestructuresuc-cessfullyandwhy?

RonaldGreenspan,aseniormanagingdirectorinFTIConsulting’scorporatefinancepractice, said it’s amazing that there is virtually“zerofranchisevalue”inalmostalloftherecentfilingsintheretailsector—fromLinensN’ThingstoMervynstoCircuitCityandLevitt.

“I thinkwhat thismassivedowncycle isdoing iscompletingwhat I’vealwaysdescribedas theWal-MartizationofAmerica,”saidGreenspan.“Thatthereisonlygoingtobeoneortwodomi-nantplayersandifyou’renotoneofthosedominantplayersyou’regoingtohaveaverydifficulttimesurvivingintheWal-Martage.”Headded:“Ifyou’renotthattophorseorthesecondhorseit’sgo-ingtobealiquidationdayratherthanarestructuring.”

Greenspansaidthatmall-basedretailers“areupagainstanalmost impossible situation” because their fixed costs are sohigh.“Whentherevenuestartstoshrinkandthemarginsstarttoshrinkandyou’restillintherepaying$60,$80,$100or$200a foot for your space, your fixed overhead costs are going todriveyouout,”hesaid.

Noconsumersectorisimmune,itseems—noteventheonethatprovidesthebackdropforthedistressedinvestingconference.

EdwardWeisfelner,thechairmanofBrownRudnickLLP’sbank-ruptcyandfinancedepartment,saidthereareveryfewcasinosonthestripthataren’tintrouble.Hesaidwhilecostsstaywheretheyare,spending-per-customerisdown.Bothsmokingbansandhighgaspricesarekeepinggamblersathome.Financingisinbadshape,too.“Thedebtthatgotpiledontodoacquisitionsisatickingtimebombandthere’snomoneytorefinance,”hesaid.

Casualdiningisalsotakingabighit.Etlin,themoderator,ob-servedthattheaveragerestaurantbillhasdeclined30%aspeoplearecuttingbackonalcohol,appetizersanddesserts.

Greenspanprovidedsomeinsightintowhat’sgoingon.Hesaidthepremiumliquorsarebeingswitchedoutforso-calledstandardbrands,andpeoplearetendingtooptforthespecialsratherthanbuyinghigher-marginitemslikesteakandlobsters.Smokingbanshurt casinos and restaurants alike because not only do ticketpricesgodown,butcustomerstendnottolingerasmuchwhenthey’renotdrinking.

“WhatisreallygoneiswhatIdescribeasthesillymoney,”con-cludedGreenspan.“Thepeoplewhowereeatingoutfournightsaweekbecausetheyhadjustpulled$100,000outoftheirhouserefiorbecausetheyhadavery largebonusorbecausetheythoughttheyhadequityhereorthere.Now,peoplearegoingtobefeelingpoorerforalongtime.Theconsumerhad$5trillionofnetworthwipedout—abouthalfoutoftheirhomeequityandhalfoutoftheirmarketequity.It’sgoingtotakealongtimeforthattorecover.”n

Holly Etlin of AlixPartners




Biff F. Ruttenberg, CTP, of Atlas Partners LLC asks a question after Pitt’s keynote speech

Conference attendees trade business cards in between panels

Attendees network during the cocktail reception

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FunDinG tHe proCess trends in dip finAnCingThe credit crunchmeansmany things tomany entities, but forcompaniescontemplatingbankruptcyandlookingfordebtor-in-possessionandexitfinancing, itmeanstheycan’tfindthecashneededtogetthroughtheprocess.

Themarketforso-calledDIPloans—ordebtor-in-possessionfinancing—hastakenahugehitsincelastyear’sdecisionbyGen-eralElectricCo.largelytohaltlendingtocompaniesinbankrupt-cy-courtprotectionornearit.

“Itisastruggle,arealstruggletofindDIPfinancing,”JonathanHenes,bankruptcyattorneyatKirkland&EllistoldtheWallStreetJournal inOctober. “In theolddays, likeearly2007, thebankswoulddoanoriginationandsyndicationmodel,wherehedgefundsand[loanfunds]wouldgobbleupthoseloans,buttheydon’thavethecapital.Theyareout.”

SoitwasnosurprisethatattendeesoftheDistressedInvest-ingConference piled in to hear the panel entitled “Funding theProcess:TrendsinDIPFinancing.”AmongthefivepanelistswasDavidGozdecki,whoworksintherestructuringfinancegroupofGECapitalandfocusesonDIPandexitfinancings.

MichaelFixler,amanagingdirectorofCM&DCapitalAdvisorswhomoderatedthepanel,commencedbytickingofftheindustriesthatdominatedtheDIPmarketin2007and2008:manufacturing,automotive,consumerhouseholdproducts,realestateandretail.Hesaidthat,goingforward in2009,the industriesthatrequireDIPfinancingwon’tchangemuch.Yet,thequestionremains:AsthedemandforDIPloansgoesupinthecomingyear,wherearethose loansgoingtocomefrom,giventhe lackofmarketdepthandtheconstraintsfacedbyailingfinancialinstitutions?

GE’sGozdecki said that, in2009,heexpects tosee “muchlessontheunderwritingside”andmoreonofthe“clubfacilitytypestructure.”

On thequestionofwhere the capitalmay come from,KevinPhillips,fromtherestructuringgroupofBancofAmericaSecuri-ties-MerrillLynchsaidthat,giventhenumberoftraditionallend-erswhohavebeenoutofthemarketinthelastyear,offensiveDIPlendingisattractivefroma“risk-rewardperspective.”(OffensiveDIPlendinginvolvesaDIPlenderseekingtomakeaprofitwiththeleastamountofrisk,includingsituationsinwhichtheDIPlenderismakingtheloanwiththegoalofacquiringthedebtororassetsfromthedebtor.Thisstrategycanbeeffectivewherethedebtorisoutofmoneyandhasnoothersourceoffunds.)

TiffanyKosch,apanelistfromBaysideCapital,a$3billiondis-tressed investment fund, provided theperspective of the fundsandsponsors.Shequalifiedheranswerbysayingthatwhatfundslike Baysidewill be able to dowill be “directly driven” bywhatpeoplelikeGozdeckiandPhillipsaredoingatGEandBofA.“Butwe’llpickupthepiecesaroundthem,”shesaid.“If it’suglyand

it’scomplicatedand it’sdifficult, thenthat’sforus.”Sheadded:“PeoplelikeBaysidewillbeactiveinthemarketbecausethenextbestalternativeforbusinesseswillbetoliquidate.Andthatwillbeunattractiveintermsofarecoveryinthemarketplace.SoIwouldanticipatethatyou’llfindalotofnontraditionallenderswhohavecapitaltobeparticipatinginwhatistrulyaverygoodrisk-reward,properlystructured.”

BrettBarragate,afinancingpartnerwithJonesDay,providedthelawyer’sview.“Ifyou’reinthepositionofrepresentingadebtororpotentialdebtorandyou’reworkingwiththeinvestmentbanksizingandfinancing,youpiecetogetherasmanyofyourexistinglendersasyoucandragalongwithyou,andthenyouhavetolookfor thatmissingpiece. Itcouldbeaprivateequitysponsor thatwas involved in thedeal.That’sgoing tobeapotentialway forsponsorstorecoversomeofthelostvalueincompanies.”

Twoofthepaneliststhenremindedthecrowdthat ifallelsefails, there’salways thegovernment—the lender thatFixler, themoderator,called“theultimatelenderoflastrecourse.”n

David Gozdecki of GE Commercial Finance


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The Deal Pipeline’s Bankruptcy League Tables Ranked by new assignments gained within active bankruptcy cases for the fourth quarter of 2008

TOPBANKRUPTCYLAWYERS

Rank LawyeR Law fiRm no. of active assignments

TOPCRISISMANAGEMENTPROFESSIONALS

Rank aDviseR fiRm no. of active assignments

TOPINVESTMENTBANKERS


TOPNON-INVESTMENTBANKERS


1 Leanse, Thomas KattenMuchinRosenmanLLP 416

2 Pollack, David BallardSpahrAndrews&IngersollLLP 355

3 Bahr, Biner White&CaseLLP 325

4 Huben, Brian KattenMuchinRosenmanLLP 240

5 Carr, James KelleyDrye&WarrenLLP 239

1 Glass, Ronald GlassRatnerAdvisory&CapitalGroupLLC 54

2 Shandler, Chad TraxiLLC 24

3 Schnelling, Anthony BridgeAssociatesLLC 22

4 Eisenband, Michael FTIConsultingInc. 20

5 Ratner, Ian GlassRatnerAdvisory&CapitalGroupLLC 17

1 Casas, Edward NavigantCapitalAdvisorsLLC 16

2 Feltman, James MesirowFinancialHoldingsInc. 12

2 Luria, Neil NavigantCapitalAdvisorsLLC 12

3 Lattig, Larry MesirowFinancialHoldingsInc. 10

1 Carson, Jonathan A. KurtzmanCarsonConsultantsLLC 157

1 Kurtzman, Eric S. KurtzmanCarsonConsultantsLLC 157

2 McElhinney, Daniel C. EpiqBankruptcySolutionsLLC 131

3 Salter, Peter DeloitteToucheTohmatsu 119

4 Feil, Tinamarie BMCGroupInc. 95

Source: The Deal Pipeline, http://pipeline.thedeal.com


Thanks To all The companies ThaT aTTended The 2009 disTressed invesTing conference77 Enterprises LLC • A S K Financial • Accord Financial Inc. • Accretive Solutions • AccuVal Associates Incorporated • AIC Ventures LP • Akin, Gump, Strauss, Hauer & Feld LLP • AlixPartners, LLP • Allegiance Capital • Allen Group Capital Advisors • Alliance Management Inc. • Alvarez & Marsal • American Management Advisors Inc. • Amherst Partners LLC • Apex Financial, LLC • Archon Group, LP • Arent Fox LLP • ASK Financial LLP • Atlas Partners LLC • Atwell Curtis & Brooks Ltd • Aurora Resurgence Fund • Balmoral Advisors LLC • Banc of America Merrill Lynch • Bank First • Bank of America Business Capital • Barclays Capital • Barrier Advisors Inc. • Bascom Portfolio Advisors • Bayside Capital • BDO Consulting Corporate Advisors LLC • BDO Dunwoody Limited • BFL Associates • Big Lots Capital Inc. • Bingham McCutchen LLP • Black Canyon Capital • Black Eagle Partners • Blake Cassels & Graydon LLP • Bloomberg News • Blue Wolf Capital Management • BMC Group • Bridge Associates LLC • Broadlands Financial Group LLC • Broadpoint Capital • Brookfield Asset Management LLC • Brown Gibbons Lang & Company • Brown Rudnick, LLP • Bryan Cave LLP • Brynwood Partners • Burns & Levinson LLP • Business Capital • Candlewood Partners LLC • Carl Marks Advisory Group LLC • CarVal Investors • Cassels Brock & Blackwell LLP • Cedarwood Associates LLC • Centurion Credit Management • Cerberus Capital Management LP • Chanin Capital Partners • Chase Bank • Citibank • Clear Thinking Group • Clearlake Capital Group • Cloyses Partners LLC • CLT Financial Solutions • CM&D Capital Advisors LLC • Cohn Whitesell & Goldberg LLP • Columbia Business School • Columbia Law School • Conway MacKenzie, Inc. • Cooley Godward Kronish LLP • Corporate Funding • Creo Capital Partners • CRG Partners Group, LLC • Crum & Forster • Crystal Capital Fund Management LP • D.E. Shaw & Co. • Day Pitney LLP • Debtwire • DeFalco Auctioneers and Consultants, DeFalco Real Estate Group • Deloitte Financial Advisory Services LLP • Dept of Finance National Taiwan University • DISH Network • DLA Piper US LLP • Donlin Recano & Company • Dresner Partners • Dunne Investments Inc. • Electronics Diversified • Elm City Partners LLC • Eos Partners • EPIQ Systems Inc. • Executive Sounding Board Associates Inc. • Federal Reserve Bank of Chicago • Fenix Management • Fennemore Craig • FGI Finance • FirstCity Crestone LLC • FocalPoint Partners LLC • Fortress Investment Group • Frandeli Group LLC • Friedman, Fleischer & Lowe • FTI Consulting Inc. • Fuel Break Capital Partners, LLCC • Fulbright & Jaworski LLP • GE Capital, GSF Special Situations Group • GE Commercial Finance • Generation Growth Capital • GESD Capital Partners • Getzler Henrich & Associates LLC • GF Management Inc. • Gibson, Dunn & Crutcher LLP • GlassRatner Advisory & Capital Group LLC • GMAC Commercial Finance, Structured Finance Division • Goldman Sachs & Co. • Gordon Brothers Merchant Partners • Goulston & Storrs PC • Grant Thornton LLP • Graue Mill Partners • Great American Group • Greenberg Traurig LLP • Greenwich Chemical Partners • Growth Capital Partners • Hahn & Hessen LLP • Harbour Group • Harvard Group International • HDUSA • Heenan Blaikie LLP • Heico Acquisitions • Hilco Merchant Resources LLC • Hilco Receivables, LLC • Holme Roberts & Owen LLP • Houlihan Lokey • Howard Industries • HSG Services Inc. • Huron Consulting Group • Hydra Professionals LLC • HYDRA Professionals, LLC • Independent Turnaround Executive • ING Capital LLC • Innovar Partners LLC • Insight Equity • International Financing Review • IntraLinks, Inc. • Jack Dennison Attorney at Law • James/United Management Partners • JC Jones & Associates LLC • JMB Capital • Joe Foster Real Estate Advisors • Jones Waldo Holbrook & McDonough • K2 Investment Management • Kachi Partners • Katten Muchin Rosenman LLP • Kearney & Phelan • Kellogg School of Management • Kirkland & Ellis LLP • Kirkland & Ellis LLP • KPS Capital Partners, LP • Kurt Salmon Associates • Kurtzman Carson Consultants • Kutak Rock LLP • Lake Pointe Partners LLC • Land South • Lawrence Morrison PC • Lazard Freres & Co. LLC • LBC Credit Partners Inc. • Levenfeld Pearlstein LLC • Levine Leichtman Capital Partners • Lincoln International LLC • Livingstone Partners • Locke Lord Bissell & Liddell LLP • Lockton Companies, LLC - Northeast • Loeb & Loeb LLP • Longroad Asset Management LLC • Loughlin Meghji & Company • Lovells LLP • M/C Venture Partners • Magnaprincipals LLC • MainStream Management • Manier & Herod • Margolin Winer & Evens LLP • Marlin Equity Partners • Marshall & Stevens, Inc. • McColl Partners LLC • McDonald Hopkins LLC • Melville Capital • Mesirow Financial Consulting LLC • Metrostamp • Midwest Inc. • Miller Johnson • Mohawk Machinery Inc. • Morgan Stanley Investment Management • MorrisAnderson • MSI Financial • NachmanHaysBrownstein Inc. • NatCity Investments, Special Situations Group • Nathaniel I. Land Consulting • National City Capital Markets, Investment Banking • NBD Solutions • Nera Economic Consulting • NRC Realty Advisors LLC • Oakley Consultants Inc. • Ocean Ridge Capital Advisors LLC • Odyssey Investment Partners • O’Keefe & Associates Consulting LLC • Opal Financial Group Inc. • Oppenheimer & Co. • ORIX USA Corporation • Osler Hoskin & Harcourt LLP • Otterbourg Steindler Houston & Rosen PC • Pachulski Stang Ziehl & Jones LLP • Pacific Biometrics Inc. • Pacific Pearl Group • Pandesa Corporation • Parker Hudson Rainer & Dobbs LLP • Partners for Market Leadership LLC • Perkins Coie LLP • Plante & Moran PLLC • Platinum Partners • PNC Business Credit • Presidential Healthcare Credit • Prime Locations LLC • Qorval LLC • Quest Turnaround Advisors LLC • r2 advisors, llc • Rabobank • Ramex Inc. • Ramius LLC • Reach360, M-Tec Corporation • Realty Income • Rebecca O Fruchtman Law Offices • Red Diamond Capital Inc. • Regions Business Capital • Renee Fellman & Associates • Renovo Capital, LLC • Republic Financial Corporation • Resilience Capital Partners • Reuters News • Riemer & Braunstein LLP • RJ Reuter Business Consulting • Robert W Baird & Co Inc. • Rodman & Renshaw, LLC • Rothschild Inc. • RR Donnelley • Saban Capital Group • Sager Company • Saul Ewing LLP • SB Capital Group LLC • SBZ Select Investments LLC • Scouler & Company LLC • SecondMarket • Sentinel Capital Partners • Seyfarth Shaw LLP • Shearman & Sterling • Skadden, Arps, Slate, Meagher & Flom LLP • Societe Generale • Sommer Barnard PC • Southwest USA Bank • Spevco, Inc. • Spring Street Capital LLC • Stevens & Lee PC • Stonehill Financial LLC • Strategic Warranty Services • Tactical Financial Consulting • Tara Jayde LLC • Tatum LLC • Taylor & Martin Inc. • The Anderson Group • The Atalon Group, LLC • The Blackstone Group • The Claro Group • The Finley Group Inc. • The Garden City Group Inc. • The Gores Group • The Heico Companies, LLC • The Hilco Organization • The Meridian Group • The New York Times • The Seabury Group • Tiger Global Management, LLC • Tower Three Partners • Treadstone Capital Partners LLC • Tucker Arensberg PC • U.S. Bankruptcy Court • UBS Investment Bank • Univ of Chicago Booth School of Business • University Management Associates, & Consultants Corp. • US Capital • USC Consulting Group LLC • Versa Capital Management Inc • Vinson&Elkins • V-Rooms™ Virtual Data Rooms • Wachovia Capital Finance • Wayzata Investment Partners • WCM Associates LLC • Weil, Gotshal & Manges LLP • Wells Fargo Business Credit Inc. • Wells Fargo Foothill • Western Asset Management Company • William Blair & Company LLC • Willis Group Holdings • Willis HRH • Windsor Park Management Company, Windsor Park Capital • Wingate Partners • Winston & Strawn LLP • Winston Asset Management Ltd • Wynnchurch Capital Ltd • Yantek Consulting Group Inc. • ZM Equity Partners, LLC

save the dateThe 2010

disTressed invesTing conferenceJanuary 27-29, 2010

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