Exclusive Q&A on Bankruptcy and Restucturing with Van Durrer
Posted: 4th November 2015 12:16Have there been any recent regulatory changes or interesting developments?
In June, a federal judge in the Southern District of New York issued a final ruling on the merits in favor of bondholders who had alleged that certain proposed out-of-court restructurings that involved changes to non-payment terms of governing bond indentures violated the TIA, affirming the bondholders' theory that these changes affected the practical ability of a bondholder to recover payment on its bonds. (Marblegate Asset Mgmt. v. Educ. Mgmt. Corp., No. 14 CIV 8584 (KPF), 2015 WL 3867643 (S.D.N.Y June 23, 2015)). Shortly thereafter, the bankruptcy court in Illinois overseeing the ongoing Caesars Entertainment Operating Co. ("CEOC") bankruptcy refused to stay similar bondholder litigation against CEOC's parent company, Caesars Entertainment Corporation ("CEC"), during the pendency of CEOC's bankruptcy case. (Caesars Entertainment Operating Co., Inc., et al. v. BOKF, N.A., et al., No. 15-A-149 (ABG) (Bankr. N.D. Ill. July 22, 2015)). As a result, bondholders who are dissatisfied with the proposed CEOC restructuring remain free to pursue litigation theories against CEC to reinstate a parent guarantee of certain CEOC debt and, in light of the favorable Marblegate opinion, the potential exposure to both CEOC and CEC may be substantial. Going forward, these two opinions make out-of-court restructurings more difficult to achieve absent near unanimous support from bondholders, and underscore the importance of engaging with creditor constituencies early in order to mitigate the potential impact of disruptive litigation during a bankruptcy process.
Are there any key trends or interesting strategies currently being implemented?
We have seen a pickup in the market for distressed M&A activity in approximately the last nine months. Interested investors continue to seek out proprietary deals in the market. Proprietary deals are opportunities in which the investor has an existing relationship or position in the target’s capital stack. This makes the investor a natural partner for the target and enables both parties to engage in a potential transaction with less exposure to the market and therefore less competition. This creates at least three advantages. First, because the players have an existing relationship, they can transact earlier in the life cycle of distress, allowing for more flexibility. Second, although such transactions must ultimately be exposed to a market test or competition, the investor will likely enjoy some advantage relative to others in the market. Lastly, it is sometimes possible to avoid a competitive process altogether.
Which industries offer the best restructuring opportunities for investors and advisors?
The oil and gas industry has been experiencing significant weakness in recent months due to a significant dip in commodity prices, with a number of high-profile bankruptcy filings (Milagro Oil & Gas, Endeavour International Corp., and Quicksilver Resources Inc.) during 2015 so far. In addition, international shipping companies are facing an industry-wide downturn which is noted by some as the worst since the 1980s, leading to a number of bankruptcy filings in the United States in 2014 and 2015 (Excel Maritime Carriers, Nautilus Holdings Ltd., Winland Ocean Shipping Corp.) and divestiture of non-core assets in the shipping space by other conglomerate entities, as Hyundai Group did in 2014. Finally, specialty apparel manufacturers and retailers continue to face challenges, with mall retailers in particular (The Wet Seal, Inc., Deb Stores Holding LLC, dELiA*s, Inc., Cache Inc.) suffering from increased competition in brick-and-mortar locations and consumer shifts to online retailers.
How would you assist a company on the verge of declaring bankruptcy?
The most important advice that we provide companies in distress is that chapter 11 is not a solution in and of itself; it is only the means to an end. That end should be a transaction that will maximize value for the company. Although restructuring (including a formal insolvency process) is a foreign concept to many management teams, once the company understands that they are working toward a transaction in a restructuring, they are able to quickly process the task and drive toward a positive outcome. It is likewise important to assist management in understanding what options remain available and to develop a timeline along which management can plan achievable goals.
Can you detail the different debt restructuring options and processes?
Most everyone is familiar with chapter 11 as a restructuring tool. Fewer people appreciate that within chapter 11 there are several different species of restructurings. For instance, there is the chapter 11 plan process, which, unfortunately, is less and less utilized except in cases of prepackaged or prearranged cases. A prepackaged bankruptcy is where votes are actually solicited prepetition, typically among small groups of holders or involving publicly traded debt. A prearranged bankruptcy is where a critical mass of holders of one or more classes of debt has agreed to support a chapter 11 plan, but no formal solicitation has taken place. Chapter 11 asset sales under section 363 of the Bankruptcy Code have become more commonplace, and those sales are typically followed by liquidating plans, conversion of the case to chapter 7 or a structured dismissal. Less utilized is the assignment for the benefit of creditors, which is actually widely used in California.
In an ideal world what would you like to see implemented or changed?
In January of 2015, the American Bankruptcy Institute Commission for the Study of Chapter 11 Reform issued its final report and recommendations. Many of the suggestions there would result in positive change in the conduct of chapter 11 cases. Some of the innovations included special rules for small to medium size enterprises (for example, less than $50 million in assets or liabilities) whereby the barriers to entry for chapter 11 (largely costs) could be avoided or mitigated. Over a period of many years, revisions to the Bankruptcy Code have limited judicial discretion. Many judges believe that such discretion is important to a healthy rehabilitation system. The U.S. has long enjoyed the most rehabilitation-friendly system, worldwide, and the Commission’s recommendations would go a long way to restoring that originally contemplated public policy.
Over the last twelve months, we have seen increased polarization among major constituencies, with positions becoming entrenched relatively early in a complex reorganization case. The cost of this increasing contention can be measured both in litigation costs and in opportunity costs, as third parties may be reluctant to engage in what appears to be a litigious environment as an acquiror, financing source, or sponsor.
To what extent are troubled companies able to refinance and renegotiate existing debt structures in the current market? Are banks relatively supportive or have they reduced their appetite to extend a distressed situation?
Troubled companies are still generally able to take advantage of the liquidity available in the current market to refinance or renegotiate their debt structures. However, market participants continue to anticipate a possible rate increase from the Federal Reserve later this year or early next year.
What themes are you currently observing in terms of disputes and litigation in connection with the bankruptcy process? To what extent are bankruptcy-related disputes growing in complexity and, as a consequence, lengthening the process?
Bankruptcy litigation, just like non-bankruptcy litigation, can be an extremely costly and time-consuming process for a company. However, bankruptcy litigation is unique in two respects: first, a company going through a formal bankruptcy process demands tremendous focus and attention from its management team to undertake a financial or operational restructuring at a time when that same team is typically already operating in a stressed environment merely to continue operations. Second, bankruptcy litigation enhances speculation regarding whether the company will survive which speculation may further impede the overall progress of the restructuring. Therefore, even though bankruptcy litigation proceeds on an accelerated timetable relative to non-bankruptcy litigation, it is often more damaging and distracting for company management due to the contextual pressures imposed by the ongoing restructuring itself.
What are some of the common types of disputes dominating today’s bankruptcy proceedings? How can companies address these issues to achieve a successful restructuring?
Bankruptcy litigation is certainly on the rise as capital structures and therefore reorganizations become more complex, which has led to more contentious and adversarial cases. Issues of valuation are sometimes contested among constituents, particularly by constituents who may be at risks of great financial loss but whose advisors are required to be paid by the debtor. In addition, recent Trust Indenture Act opinions from the Southern District of New York may lead to increased litigation and incentivizing minority bondholders to challenge out-of-court restructurings, making it more difficult for debtors to engage in out-of-court restructurings.
What tactics are creditors regularly employing against insolvent debtors as they look to recover as much value as possible?
As creditors utilize broader and more aggressive strategies in attempts to recover value, it is likely that the focus on pre petition transactions, particularly transactions involving alleged insiders or affiliates. Preference and avoidance action will likely remain a focus in bankruptcy litigation. Furthermore, an increase in Trust Indenture Act litigation is likely to occur following the recent decisions in the Southern District of New York.
To what extent are dissatisfied creditors more likely to target D&Os in post-bankruptcy litigation? What are the typical claims being brought against D&Os?
Directors and officers face increasing scrutiny with respect to their independence and exercise of business judgment in decision-making with respect to major transactions. The timely formation of independent or special committees is a powerful technique to address such claims and allegations responsibly and efficiently. The use of this strategy also enables the company to evaluate proposed transactions involving arguably interested or affiliated parties while preserving, in most cases, business judgment review of director decision-making.
What advice would you offer to bankrupt debtors in terms of dealing with post-bankruptcy issues? How can companies in this position re-establish their reputation and revitalise their performance?
Bankruptcy administration is a costly and time-consuming distraction to any management team. Depending on the formulation of the reorganization plan, this administrative effort often does not conclude at “emergence” from bankruptcy. In order to minimize the impact on the day to day activities of the go-forward business, many practitioners recommend a liquidating trustee to address claims reconciliation, prosecution of avoidance actions and distributions so that company management can focus on running the business. The key challenge to using a liquidating trustee is to ensure (and convince creditors constituents) that the trustee will have sufficient funds to complete the post-bankruptcy administrative tasks. That said, this tool is highly effective to allow the company to exit bankruptcy cleanly and efficiently.
What do you consider to be the most important issues facing corporate bankruptcies in your region over the next 12 months? In today’s economic climate, are banks more or less likely to support struggling debtors?
Sufficient liquidity will remain the primary issue for corporate bankruptcies over the next year. Distressed companies need to continue to focus on sufficient advance planning to position financing and, ideally, a plan of action to carry the company through a chapter 11 process. Engaging major constituencies in advance remains a key requirement for potential debtors in order to maximize the potential for consensual resolutions, and to preserve value for all interested parties.
Van Durrer leads Skadden, Arps’ corporate restructuring practice in the western United States and advises clients in restructuring matters around the Pacific Rim. He regularly represents public and private companies, major secured creditors, official and unofficial committees of unsecured creditors, investors and asset-purchasers in troubled company M&A, financings and restructuring transactions, including out-of-court workouts and formal insolvency proceedings.
Van can contacted on +1.213.687.5200 or by email at email@example.com