😎What to Make of the Credit Cycle: Pros Say Part II.😎
Lots of open questions but many restructuring pros expect next year to be busy.
Last Wednesday in “😎What to Make of the Credit Cycle: Pros Say😎,” we asked a number of restructuring lawyers, bankers and advisors the following: “What has been the most surprising theme/situation you've followed and/or experienced since the pandemic hit?” The answers were illuminating and our panel showed why they’re “pros.”
This week we return with a second question:
PETITION: What are the big themes you'll be watching in 2021?
Here is what our panel of pros had to say:
“How will a Biden presidency impact the ability for E&P, oilfield service companies, and coal companies to obtain access to financing? Will creditors seek to effectuate business combinations as part of a restructuring transaction rather than waiting for the standalone transaction to be completed? Will commercial lenders be willing to serve as owners/operators of assets in a challenged distressed M&A environment? Will companies that levered up their capital structures while facing the challenges of COVID and shutdowns be able to operate within restrictive loan agreements, or will the borrowed debt be “the rat moving through the snake”? Who will “brag” about effectuating the fastest prepack while clients continue to not care about this record?” — David Meyer, Vinson & Elkins LLP
“More sponsors are getting their a$$ kicked by lending clients who are willing to exercise pledge documents and replace boards, leaving the Masters of the Universe masters of their own domain and their wallpaper equity. Sponsor firms are retaliating by trying to booby trap org docs to make the board moves harder to accomplish. Most of their moves are untested and probably unenforceable. But In the meantime, bankruptcy courts have to deal with debtors even if the old board wasn’t authorized to commence the filing. Also everyone will be watching TriMark and similar litigation to see which law firm is responsible for the dirtiest trick that results in a court invoking the doctrine of good faith. NYDJ famously lost this fight, but the Architects are hiding behind loopholes deliberately left in the documents. Senior secured lending has turned into junk bonds. Except for pricing.” — Randall Klein, Goldberg Kohn
“From a deal perspective, the “phantom” debt of unpaid rents, unpaid interest, and stretched vendors. It’s a distributed form of 2009’s “amend and pretend.” I’m surprised by how much the system has already absorbed, and curious how much more it can take.
Personally, I’m curious to see how far we revert back to full-time travel on engagements. I think we’ve all proven that work get done remotely, and that the inefficiency of zoom meetings and conference calls may not be meaningfully worse than the inefficiency and cost of flying teams of people all over the country every week. I’m starting to worry about my Delta status…” — Jon Tibus, Alvarez & Marsal
“The wave is coming! There is no doubt that in Q1 or Q2, maybe Q3, there will be a wave of bankruptcies that hits the restructuring industry like the final scene of Point Break at Bells Beach. Right? In all seriousness though, despite an outwardly health economy, there are many Band-Aids holding it together right now (e.g., stimulus money, eternal hope there will be more stimulus money, courts allowing tenants not to pay rent and borrowers not to service their debt, etc.). Despite all of this, the pandemic rolls on, we are still half a year from a widely available vaccine, and businesses are closing again. I do think that the restructuring industry should be ready to get inside the barrel and ride this coming wave of bankruptcies in 2021.” — Chris Ward, Polsinelli
“The Georgia Senate Runoffs – single party or split control of the White House and the Senate will have a significant impact on the business climate and therefore the restructuring space as a whole, in the very near term the outcome in Georgia will impact additional fiscal stimulus and over the next several years the trajectory for regulation and tax policy; U.S. Rig Counts and The Resolve of OPEC Members to Stick With New Production Quotas – higher prices should bring higher production in the U.S., while the cartel is facing enormous pressure to increase production given that petrodollars sustain many member state economies, my guess is that discipline fails over the first half of the year with improving news around vaccines resulting in WTI and Brent prices ultimately ending lower next year; Cruise Ship Sailing and Occupancy – we will know that the pandemic is over, at least psychologically, when Americans start cruising again in meaningful numbers; and The University of Richmond Men’s Basketball Team – they beat Kentucky in their house, can anything stop the Spiders in 2021?!” — Colin Adams, M-III Partners
“I expect that 2021 will be the year of macro-economic themes. When will the economy truly begin coming back? Will it be a V- or U- or W-shaped recovery? Many companies were able to tap the capital markets in 2020 to extend their liquidity runway, and the speed of economic recovery will determine whether that runway is sufficient. And there may be industries that never fully recover. It will be interesting to see if the lock-downs and work-from-home psyche have permanently shifted consumer demand in areas like travel, hospitality or commercial real estate.” — Darren Klein, Davis Polk & Wardwell LLP
“The huge amounts of debt put onto balance sheets … without real regard to leverage ratios. We now see corporate debt at levels not seen since the financial crisis.” — William Derrough, Moelis & Company
“The PETITION crew loves “yield baby yield” and it IS catchy. It seems a safe bet that intercreditor drama is far from over and we can expect fresh bursts of creativity in 2021. Companies, their trade partners and employees can be winners or losers as these situations play out and many will place a premium on good advice to navigate successfully.
We’ll be holding our collective breaths to see how vaccine rollout, decisions on more stimulus and the transition will impact us in 2021. We certainly believe disruption is the new normal in any event. And the ability to react to it is a commercial capability we believe companies will need to thrive, and in some cases survive.” — Pilar Tarry, AlixPartners
“Feasibility, particularly in troubled industries. How many reorganized debtors will wind up back in chapter 11 because their business never recovered in this uncertain environment?
Will the Southern District of Texas continue to dominate as a favored forum for filings and what impact will it have on discussions about bankruptcy venue? It doesn’t seem like the 117th Congress will be any more receptive to Elizabeth Warren’s venue bill than the 116th was, but you never know.
Puerto Rico. How will the new composition of the Financial Oversight and Management Board shape the direction of the title III debtors’ restructurings?
Expansion of the SBRA? I’d like to see the SBRA debt cap raised to $20 million on a temporary basis to see how it works out (no pun intended).” — Rachel Albanese, DLA Piper LLP
“Commercial banks for the first time in my 30 year career in the restructuring industry staffed up in Q2 expecting a distressed credit surge that hasn’t happened. At some point in 2021, the flood gates should open as the pandemic has reeked economic havoc on many industries.” — Dan Dooley, MorrisAnderson
“Hospitality and lodging, both because there will be a lot of restructuring in this sector and because I need a vacation.” — Sean O’Neal, Cleary Gottlieb Steen & Hamilton LLP
“O&G support, C-band spectrum auctions, offshore oil” — Michael Healy, FTI Consulting
“The big, looming question is: What’s next? With COVID at unprecedented levels and a new administration on the way in, there’s palpable uncertainty when we look forward to next year. Lots of questions come to mind: Will return expectations of private investors that acted quickly to deploy dry powder to struggling companies in 2020 be met? If not, how will such investors react? Will private investors continue funding companies as the COVID pandemic persists? Will there be an uptick of zombie companies as a result of short-term liquidity solutions implemented in 2020? And what will the new administration do with respect to relief for particularly hard-hit industries (airlines, hospitality), as well as municipalities?
Other trends we’re taking note of include CLOs taking more assertive approaches, as well as the proliferation of restructurings centered around creditor vs. creditor tactics. We see some CLOs acting less passively and being more proactive, even aggressive, as they leverage their size and protect themselves in restructurings – not just by forming ad hoc groups and retaining advisors, but by pushing for alternative transactions, opposing restructuring transactions, and formulating post-reorg capital structures suited for them. And much like everyone else, we anticipate that majority/minority creditor transactions will continue; though at some point, courts may impose some line-drawing.” — Andrew Parlen, Paul Weiss Rifkind Wharton & Garrison LLP
“Other than whether society can actually recover from 2020? Other than whether we find ourselves in a constitutional crisis that no one (except for producers of House of Cards, Season 5) could have predicted? I suppose the real question is whether—after the world (hopefully) benefits from broad vaccine distribution—certain impacted industries can return to pre-2020 normalcy. Will commercial real estate be forever impacted from WFH trends, or will we all return to our dark and lonely high-rise offices? Will the travel industry be forever plagued by “virtual” conventions and the ability to Zoom across the world without the need for an $8,000 last-minute international plane ticket, or will we crave face-to-face meetings again? Will we continue to cram 12 attorneys into a poorly-ventilated conference room for a half-day deposition, or will we no longer stand around picking on 7-hour old sandwiches, and continue to depose witnesses from our home offices, sans pants? Will these industries come roaring back from pent-up demand, or have we simply propped the economy up with 2x4’s? Will the Petition Newsletter continue to be relevant, or will it fade away into obscurity a la LexisNexis? These are the critical questions for 2021, which promises to be the most pivotal year in the last 12 months.” — Daniel Simon, DLA Piper LLP
“Markets seem to be equating a widely available COVID vaccine with a return to pre-pandemic normalcy by 2H21 but I have real doubts about that premise. Many Americans consistently say they won’t be returning to their pre-COVID lifestyles any time soon, if ever. That would be a setup for market disappointment and corporate underperformance relative to some lofty expectations for 2021. Certain industry sectors that have been ravaged by pandemic will take years to recover, and even then may not get back to pre-pandemic levels. These dislocations will last for several years.”— Michael Eisenband, FTI Consulting Inc.
“More government cash and consumer confidence. Beginning in January 2021, as a new presidential administration begins and a new Congress is sworn in, it will remain to be seen whether the U.S. government will act swiftly to pass legislation that supplies the private sector with any needed capital. Of course, this will depend on whether the country is faced with sweeping shutdowns and, equally as important, whether consumer confidence and willingness to spend increases. Some say that without either additional government cash or drastic increased consumer spending, many companies that were hit hard by COVID-19 in 2020 may suffer the fate of those that had to undergo a comprehensive restructuring.” — George Klidonas, Latham & Watkins LLP
“Just how many problems can management creatively cram into "pandemic-related" to try and squeeze their disaster into the 15% of corporate failures that are caused by purely external events, rather than something that management could have foreseen and acted upon? Trying to not look dumb when explaining how you ran your company into the ground isn't easy - here it's become almost comical.” — Ted Gavin, Gavin/Solmonese
“Lender on lender violence. Also, the role of the private capital (private equity/funds/private credit) in future restructuring and whether this results in more or less formal/in-court restructurings. Will be interesting to see how long the “yield baby yield” market lasts ….” — Adam Paul, Mayer Brown LLP
PETITION: We need to start making “Yield baby yield” gear.
“…how lender on lender aggression plays out in the courts and in future transactions; emergence of alternatives to bankruptcy for zombie companies; which COVID changes for how we work are here to stay; pressure on distressed companies to better manage the economic gulf between executives and rank and file employees (in and out of court), retail Chapter 22s, anything travel related and where it goes from here.” — Sarah Borders, King & Spalding LLP
“The pandemic accentuated differences between winners and losers, and exposed which businesses did not have enough liquidity for survival. But in the face of depleted stimulus, second waves, and another round of lockdowns, every company in America must begin 2021 by again asking itself the same question it did in 2020: how long before we run out of cash? The answer will depend upon how quickly businesses can adapt to unpredictable consumer behaviors and prolonged COVID-19 exposure.
Companies may continue to file for chapter 11 to put themselves into a self-induced coma, and attempt to suspend the bankruptcy case until the pandemic subsides. Hibernation certainly may sound counterintuitive to the widely prevailing desire to use chapter 11 for speed, but if the borrower has sufficient liquidity, sponsors might actually find a dance partner with junior creditors who together can seek refuge in chapter 11 and wait for value recovery as a defensive mechanism until the fulcrum shifts.
Lenders also may deploy more corporate governance tools to protect themselves against a potential sponsor double-cross, including the appointment of independent directors with super voting powers to the boards of troubled portfolio company borrowers, as well as the issuance of a golden share with special rights to block a chapter 11 filing.” — Vincent Indelicato, Proskauer Rose LLP
“The continuing disruption in the healthcare space. The pandemic has only served to accelerate many of the healthcare trends that we saw before. We will be watching to see: i) who will exploit the disruption and capitalize on the opportunities in how and where healthcare is delivered; ii) how continued technological advancements will improve access to, and quality of, care; and iii) whether Boards and Management of rural and community hospitals, which were failing at an alarming rate before the pandemic, will adapt to survive, or fall on their sword of stubbornness to maintain the status quo.” — Steven Korf, ToneyKorf
“We are tracking at least four important 2021 themes. First, I wonder if either the courts or the new-issue market will ever say “enough is enough” on increasingly aggressive documentation, or if the trend towards loose documents will continue unabated.
Second, we are tracking the pace of economic recovery. It remains unclear whether COVID-hit sectors (transportation, energy, gaming, leisure, etc.) will bounce back quickly enough post-vaccine to be able to keep the music playing or will contribute to a wave of delayed restructurings. Many of these companies were already over-leveraged in 2020 when they sought short-term covenant and liquidity relief.
Third, I wonder if the high yield and leveraged loan markets will continue to facilitate a constantly moving maturity wall, and whether boards and management teams will continue to spend time managing over-leveraged balance sheets instead of being fully focused on running their businesses. In short, will 2021 be a year where we finally see rationalization of leverage in the markets?
Finally, as I have said in other forums, we continue to witness the rise of the institutional investor. As CLOs and more traditional money managers have grown in terms of both assets and restructuring expertise, they no longer exit the processes but in some cases are leading or meaningful constituents in workouts. As these investors continue to raise more flexible capital and rework their infrastructures to take advantage of more opportunities, I think we will see the big getting bigger in the high yield and distressed markets.”— Damian Schaible, Davis Polk & Wardwell LLP
“Stimulus. How much/in what form/if any at all? The government's actions in 2020 (express and implied) prodded leniency and risky bets from the lending community: how long can that continue? That leniency has avoided the existential crises for most, but many of those balance sheets will require attention in the near future. It won't just be financial maneuvering: we have been primed for disruption. Which borrowers have been displaced from their core markets as a result of changing commercial behaviors?” — Lance Gurley, Stephens Inc.
Supply chain disruption. Domestic production has been severely curtailed and challenges in China and other manufacturing centers are not fully understood.
Real Estate. The combination of work from home and retail disruption will drive demand down and vacancies up during 2021.
Home and auto defaults. If recovery does not really happen until mid-2021, likely more layoffs which could drive defaults in both home and auto financing spaces. There may be more hidden debt than we think which more people simply can’t pay back. Also fascinated to see what happens to office space as noted above.
New Buyers. How will many traditional PE firms look for value/vulture opportunities? In addition, landlords, particularly the majors, have played an increasingly active role in restructurings to preserve their tenant base. Smaller landlords, many of whom have limited flexibility due to their own financing arrangements, have shown less willingness to paper creative solutions, but held off on punitive action. As we move into 2021 and hopefully the subsiding of COVID, we’ll be watching the major landlords to see if they continue to deploy capital or retreat back to their traditional business model, and the smaller landlords, many of whom may face their own balance sheet challenges.
Overlapping Capital Structures. The lender vs. lender arms race continues to ramp up new super priority issuances priming existing tranches both in and out of court. Creative capital structure solutions are finding ways for companies and sponsors to bridge the COVID winter, often while preserving equity value. We’ll be watching these situations closely. In the event where a fulsome restructuring does come to bear, these increasingly complex and overlapping capital structures will create new challenges in aligning stakeholders and creating consent. — Bob Duffy, Berkeley Research Group
“As if the PETITION hasn’t hit this enough, airlines! And really any travel-tangential industry, including OEM suppliers, cruise companies, visa services, end-of-market auto dealers, etc.” — Cristine Schwarzman, Ropes & Gray LLP
Want to add your view to the discussion?
📉Charts of the (Mid)-Week📉
Speaking of airlines, some European Cleary Gottlieb lawyers provided the following graphic summary of airline bankruptcy activity in 2020:
🎁Resources & Gifts🎁
We have updated our compilation of a$$-kicking resources covering restructuring, tech, finance, investing, economics and disruption. You can find the full compilation here.
We’re in gift giving mode and so we figured we’d make some gift recommendations to our community. Here are some things we love:
First, PETITION obviously. Duh.
Second, we’re very much into all things political and after consuming a variety of books related to the Trump presidency, we figured we’d go back in time with the book saving Mom and Pop book stores all over the country: “A Promised Land,” by former President Barack Obama. If audiobooks are more your thing, it’s merely a 29 hour listen. Yup: ONLY 29 hours. We are about halfway through and so far so good.
And third, we, like you all, have been cooking a ton lately and we are obsessed with the Our Place “Always Pan” that you may or may not have recently seen advertised on CNBC. Use our code and get $20 off. Among the PETITION team, we have nearly a handful of them already.
And now some community picks:
Davis Polk & Wardwell LLP’s Damian Schaible recommended: (i) this sweater which makes sense for advisors and investors who’ve been trapped working on energy restructurings, (ii) the Garmin multi-sport GPS Smartwatch, (iii) the ōura ring, (iv) the Gaiam Evolve Balancing Board, (v) Via Seating Special Edition Swopper Stool, and (vi) the Powerbeats Pro.
And, finally, Polsinelli PC’s Chris Ward loves his VariDesk Standing Desk Riser.
We hope these tools help make your WFH existence better. Cheers!
Josh Baker (Vice President) joined Tortola Advisors LLC from Alvarez & Marsal LLC.
Joshua Brody (Partner) joined Gibson Dunn & Crutcher LLP from Jones Day.
Keith Woffard (Partner) joined White & Case LLP from Ropes & Gray LLP.
Maurice Horwitz (Director, Restructuring Senior Counsel) joined Hudson Advisors LP from AIG.
Michael Lipsky (Portfolio Manager) joined Mariner Investment Group LLC from Knighthead Capital Management LLC.
Mike Hume (Chief Technology Officer) joined Omni Agent Solutions.
Stephen Moeller-Sally (Partner) joined White & Case LLP from Ropes & Gray LLP.
Tom Park (Managing Director) joined Portage Point Partners in Los Angeles.
Andrew Mordkoff on his promotion to partner at Willkie Farr & Gallagher LLP.
Dania Slim on her promotion to partner at Pillsbury Winthrop Shaw Pittman LLP.
Lisa Donahue of AlixPartners LLP on winning The Beard Group’s Harvey R. Miller Outstanding Achievement Award in the field of restructuring.
Michael Handler on his promotion to partner at King & Spalding LLP.
Michael Klein on his promotion to partner at Cooley LLP.
All of the honorees selected for induction as Fellows in the 32nd Class of The American Bankruptcy College. 👏🏼
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