😎Notice of Appearance -- Mo Meghji, Founder of M3 Partners😎
This week we welcome Mohsin Meghji, the Founder of M3 Partners, a firm that providers performance improvement, turnaround and restructuring, transaction advisory, and interim management services. Mo has been at the forefront of a wide variety of high profile situations over the last several years and we’ve been hounding him for quite some time to join us for a Notice of Appearance. We’re very pleased that he’s finally agreed to do it. Enjoy.
PETITION: Whoa Boy. Where do we even start? We suppose we should go with the most obvious place as we sit here today which is cryptocurrency. Your firm got hired by the official committee of unsecured creditors in the Celsius Network LLC chapter 11 bankruptcy case. Talk to us about you and your team’s history with crypto and how you were able to secure this mandate? From there, please describe your philosophical approach to this complicated and extraordinary case? You’re in uncharted territory: how do you propose to navigate it?
Mo: We approached this case the same way we do any other potential assignment – if we were in their shoes, what is most critical for our client and how do we provide the best value proposition? We got up to speed quickly on the basic bankruptcy issues but, more importantly, we thought about what else our clients would need. We identified the issues of crypto control/security and ability to efficiently do the blockchain forensics/analytics with a trusted partner. In doing that, we spoke to a few firms and identified Elementus as someone who would make a strong partner as they have deep expertise in this area, are nimble and culturally aligned with our firm. Elementus has provided such services to major governmental entities and has strong credibility. We have recently aligned with Elementus to partner on future crypto focused projects as well.
Celsius is obviously a complicated situation and much has been written about the company’s past behavior, decisions, and broader industry change. From a philosophical approach, we are focused on 1) maximizing the recovery to the customers as much as possible in the form that they invested in (i.e. in cryptocurrency); and 2) how to do that as quickly as possible as the Chapter 11 process is incredibly expensive and being effectively funded out of customer assets. We quickly pushed to get up to speed with the issues, get the right governance in place and broadened and sped up the sale process to ensure ALL potential outcomes are under consideration including indications from third parties to assist in maximizing recovery to the customer base. The UCC has been instrumental in shifting the approach and speed of the case from a very typical sequential approach to a speedy multi-pronged approach.
The sale process is now well underway with indications due in late November, and I am confident that once we know how that shakes out, we will quickly align on a path forward for the asset value maximization piece of the case.
This will allow the assets to be returned to the customers’ control quickly, and separately a trust will be created to pursue various investigations, causes of action, individuals, etc. Litigation generally is expensive and particularly so in a Chapter 11 case like Celsius.
PETITION: As we recently discussed in “💥What's Going on with Sears? Part I.💥” and “🔥What’s Going on with Sears? Part II.🔥,” Sears FINALLY arrived at a resolution with Eddie Lampert and administrative claimants will finally be getting paid. This will pave the path for the company to finally satisfy certain elements of the bankruptcy code and emerge from chapter 11, years after plan confirmation. Talk to us about how this all unfolded in sordid detail please — how admin claimants ultimately got hung, the negotiations around a plan (and getting some admin claimants to defer payments), post-confirmation litigation, and then the settlement.
Mo: Needless to say, Sears was a very difficult situation and the Chapter 11 process was also incredibly contentious at almost every turn. I’m proud of the fact that we were able to keep a significant number of stores open through the Chapter 11 process even if the UCC was pushing hard to liquidate the company. Although it took an unusually long time to emerge from Chapter 11, all of the alleged claims against the various parties were thoroughly investigated and an appropriate settlement was reached. Administrative claimants ultimately largely got paid. I was actively involved from the Chapter 11 filing of the company in October 2018 through to the sale to Transform/ESL in February 2019, and then through confirmation in October 2019. After that, the Litigation Trust board essentially ran the process with administrative support from my colleagues, Brian Griffith, Bill Murphy and Mary Korycki at M3, in relation to all of the litigation as well as ultimately getting to a settlement with the defendants. Tough contentious situation given the history and some of the strongly competing viewpoints, but the mediation team of Judges Chapman and Peck were able to get the parties to reach a global settlement. A good outcome under difficult circumstances.
PETITION: You also worked on Barney’s. Based on Barney’s and Sears, what lessons do you think vendors and suppliers have taken away from working with distressed retailers and how might this affect future distressed retail situations?
Mo: When you look at distressed retailers over the past decade, it is no longer a given that even the largest retailers will necessarily emerge from bankruptcy without the optimal business model, a sustainable capital structure and the right management team. The retail industry is still too competitive. Sears, Barneys, Forever 21 and various other retailers have shown that suppliers need to be extremely vigilant granting post-petition credit to these companies unless they are certain the company will emerge.
Practically speaking, that means a retailer should have a very clearly defined set of objectives and a largely pre-packaged (or at least pre-arranged) plan before a Chapter 11 filing …..freefall bankruptcies in retail are a mug’s game!
We represented creditors on JC Penney, Neiman Marcus and Tailored Brands in 2020 and were super vigilant on their behalf on all of those fronts…...despite the fact that these were Covid-induced freefall filings.
PETITION: What we love about having you do a Notice of Appearance is that you personally touch on so many of the hot topics we’ve discussed in recent years. Like SPACs. You’ve successfully gotten a few de-SPAC mergers off the ground and you’ve had to pull some others due to market conditions. Talk to us about the SPACs you’ve done, tell us about those you’ve pulled, and what do you think will happen to all those SPACs still out there hunting for deals with expiration dates looming?
Mo: I got into SPACs in 2016 when it was viewed as the “bastard stepchild” of Wall Street vehicles, largely frowned upon, and sometimes used by sketchy characters. For precisely these reasons, I was interested as we felt we would be a differentiated, high-quality player in a difficult space. At M3, we look for opportunity in thorny situations others shy away from. We raised $150mm in July 2016 around when there were 2 other SPACs raised (yes, that’s all!) – one by Rich Handler (CEO of Jefferies) and another by Chinh Chu (CC Capital/ex-Blackstone MoU). We bought a stake in an Oaktree portfolio company, Infrastructure and Energy Alternatives, Inc. (NASDAQ: IEA) that was one of the largest players in the construction of utility-scale wind farms. We learned a lot about the de-SPAC process from that deal and about the challenges that SPACs face in their early years as a public company. Fortunately, our investment thesis for that transaction was strong and the company grew from $500 million of revenue in 2017 to over $2 billion last year – which meant that those lessons were not too painful. IEA merged a month or so ago with MasTec (NYSE: MTZ), producing a good return for investors at all levels. It took a 5+ years of work to get there, we learned a lot, but in the end we are pleased with the result for both us and our investors.
Early last year, after it was clear that our thesis for IEA had played out (despite some initial hiccups…which PETITION had previously covered 😊), we teamed up with Brigade Capital and raised a $400mm SPAC in March 2021…. Within 3 months or so, we struck a deal for that SPAC to merge with Syniverse, a leading telecom and technology company. Thereafter, we raised another $300mm in October 2021. The bursting of the tech bubble late last year and changing market conditions caused us to pull out of the Syniverse deal in February 2022.
Since then, the SEC’s focus on SPAC regulation and challenging market conditions have made the environment much more difficult for SPACs. We are still in the hunt of merger partners for those SPACs.
Trust Wall Street to take a niche vehicle, massively oversell it and, here we are! A lot of sponsors are winding down their vehicles and with the glut of SPACs, some crazy de-SPACs were done in the 2020/21 timeframe which has sullied the entire sector. The clean-up process is now well underway. Longer term, we expect SPACs to still play a role in the capital markets and we intend to be one of the small set of repeat sponsors in the business.
PETITION: Another topic is independent directors in bankruptcy. You’ve been in that role a number of times, serving on the boards of Frontier Communications, Philadelphia Energy Solutions, SHOPKO Corporation and Toys “R” Us. Are we too critical of independent directors? Are you concerned that certain actors in the space are giving your ilk a bad rep? If not, why not?
Mo: The Oxford definition of independent is “free from outside control; not depending on another’s authority”. To be an effective and credible independent director, it is critical that you are not beholden to the entity appointing or referring you into the role. In every director role I have taken on, I ask myself whether I can act independently and if I cannot be 100% certain on that issue, I will not take that role on.
Over the past decade, I have interacted with dozens of directors who have served in this role either alongside me or in relation to companies I was advising or restructuring. The vast majority of those are smart accomplished individuals who are doing exactly what they should be doing. The bad apples have worked themselves out of ongoing roles pretty quickly as the market is pretty efficient in recognizing them. Also, it seems like there’s an endless supply of retired executives potentially available for these roles. While there was a period of time that a few individuals dominated this space, I don’t see this a broad issue going forward.
PETITION: We know you’re not a lawyer but, in our experience, a lot of financial advisors like to act like one (lol). What do you make of all of these mass tort cases like JNJ and 3M? Is this an appropriate use of the bankruptcy process?
Mo: I am definitely not a lawyer and don’t even play one on TV! That said I have spent decades learning from smart lawyers and judges and often hear their views on the current issues in bankruptcy and restructuring. The use of the Chapter 11 process to escape mass tort liability is clearly one of the hotter topics in the industry today. I have heard good arguments on both sides of the question of whether this is an appropriate use of the bankruptcy process. Mass tort cases are facilitating the restructuring of fundamentally strong companies that are burdened by mass tort claims resulting from a single business line – which does sound like something that our insolvency laws, with their focus on restructuring of companies, should be able to address. On the other hand, I do understand the criticism that the system is being used to strip assets away from tort claimants to benefit large corporations that did the damage at the expense of those who have suffered from it – which seems inequitable.
Personally, I would say the Chapter 11 process is a great tool for settling mass tort claims efficiently. However, the US Congress, if it could ever get its act together, needs to put some parameters around the usage of Chapter 11 for this purpose. Maybe the US Supreme Court will weigh in…
PETITION: Private credit. Are you hearing about these guys finally starting to mark down their books? Will we start seeing “non-accrual” loans again? What are you seeing/hearing out there in this space?
Mo: The private credit industry has quintupled since the Global Financial Crisis…...a Kroll Bond Rating Agency report recently indicated the market has grown from $234 billion in 2008 to $1.2 trillion in 2021. To state the obvious, the pace of interest rate increases this year will dramatically impact highly levered companies’ ability to service their debt.
I think the private credit industry recognizes that this the first time since its massive growth in the past decade that the Fed put is not immediately available at the first sign of stress to solve issues for its borrower universe. What I am hearing is that private lenders are doing stress tests to try and anticipate the scale of potential problems but it is obviously difficult to pin this down with any degree of accuracy. Another interesting note is that these private lenders theoretically lent money on the general thesis that in times of stress/distress, if they had to own these companies, they would be prepared to do so – and now that thesis may be tested.
My own observation is that owning and managing a company during times of economic turmoil is a heck of lot more complicated than lending large heaps of money to companies in a low interest rate environment. So, I do expect them to be reaching out to firms like M3 for help….and we are already seeing early signs of that.
PETITION: We’re now in Q422. What would you say were the biggest developments of the first nine months of the year and what do you anticipate for the final three? What are some trends you’re keeping an eye on going forward as we head into ‘23? Is there a big wave coming? What industries are most at risk? Play macroeconomist if you feel like it.
Mo: If we step back and look at the past couple of years, post the start of the pandemic in early 2020, the combination of the Fed, plus the various Trump and Biden stimulus packages kicked in almost $12 to $13 trillion of fiscal and monetary stimulus into the US economy. This resulted in 5.7% GDP growth in 2021!
Many companies borrowed money to get through the pandemic and made it comfortably through 2021 with a strong stimulus-fueled consumer. This same consumer is now contending with high inflation, a doubling of mortgage rates and a Fed focused on Quantitative Tightening…….so while I don’t like to sound like the stereotypical restructuring person who’s always predicting a recession, it’s difficult for me to see how highly levered companies who have gorged on low rates for a long time won’t have some day of reckoning in the next 12-18 months.
The other issue is that the looseness of the covenants in the lending markets plus the strongly signaled intent by private equity sponsors to use every contractual angle they have to buy time could lead to an interesting cycle this go around…..with a lot of contentious battles amongst stakeholders of distressed companies.
Is it going to be a big wave of restructurings or is it relatively contained downturn? In my view, it will be very difficult for any of the lower tier competitors in any industry which have leverage to get through the next couple of years without some degree of pain.
It will be interesting to see how much the delayed but aggressive push to raise rates contains the overall harm to the economy.
PETITION: What is your favorite thing about the bankruptcy code? On the flip side, you must have some thoughts about inefficiencies in bankruptcy. What is f*cked and needs fixing? Is there one subject that not enough people are talking about? If you could implore Congress to take action about one thing, what would it be?
Mo: I worked in Toronto prior to moving to the US (and also spent three years in London early in my career)…my favorite thing about the US bankruptcy code is that it’s focused on saving companies and reviving debtors, in some respects to a fault….unlike when I practiced in Canada when secured creditors largely called the shots in most if not all respects in relation to restructurings, especially with respect to middle market companies. What’s messed up about the Chapter 11 process is the cost of the process and the ability of various intermediaries and stakeholders to hold up and create inefficiencies adding huge cost and time delays to the process.
Under the CCAA process in Canada, judges have more flexibility to be creative in crafting solutions and obtaining equitable results than judges have here – and cases generally are completed faster in Canada and at significantly less cost.
So, while I would implore Congress to do many things (most of which are not printable here), I would urge those who care about reviving US companies experiencing financial distress to focus on making the process easier to navigate and more efficient.
I know at least one industry group that is working on creating a “Chapter 11-Lite” process to allow middle market companies to speedily navigate through the process and reduce the cost.
PETITION: What are some of the biggest changes you’ve witnessed happen to the business of bankruptcy over the course of your career?
Mo: When I moved to NYC in late 1998, the first wave of major restructuring cases was mostly free fall bankruptcy cases, where the lead creditor was almost always a large money center agent bank which called the shots. Cases for companies of any major size easily took 12-24 months to get done and debtors/their advisors had an incredible amount of power to shape the restructuring.
Fast forward to today, and you see bankruptcy cases driven on a much faster timeline driven by distressed debt investors and other private credit providers…which has generally made the process more efficient - although the flip side to it is that the due process end of the system has been increasingly squeezed. Junior creditors now have to fight very hard against senior tranches who take control through providing DIP financing and aggressively controlling case timelines. A lot of these changes have made the system better, but it feels like there’s more litigation now than before when you had the time to work things out.
Finally, the proliferation of rescue finance for stressed and distressed companies has changed the landscape significantly over the past decade. This has increased the likelihood of “creditor on creditor” violence amongst similarly situated lenders competing for control and bigger shares of these companies.
All of these changes have forced firms like M3 to ensure we have a team that can really add substantive value in improving company performance to differentiate ourselves. Our focus now has to be on identifying and maximizing value at the debtor, rather than simply providing reporting and liquidity management services.
PETITION: What is the best piece of professional advice that you’ve ever gotten and why? Please lay some wisdom down on our readers who may be at the initial stage of their careers.
Mo: I’ll highlight a couple of pieces of advice that I try to live by.
First, one of my earliest mentors advised me to always “play the long game”. What this means practically speaking is always to be willing to sacrifice things in the short term for bigger gains in the longer term and always, always investing in relationships for the future. As my mentor explained to me many years ago, “the older you get, the smaller the world gets”. Over the course of my career, I have experienced some interesting examples on how someone you interacted with can come back to help you years later in utterly unanticipated ways.
And, finally, in one of my favorite books “The Art of War”, Sun Tzu the warrior says on offensive strategy: “to win one hundred victories in one hundred battles is not the acme of skill; to subdue your adversary without actually fighting IS the acme of skill”. The restructuring business can be a contact sport; however, you are always better off by trying to get what you want without actually inflicting harm on your counter-party as much as you can.
PETITION: Finally, you’ve likely noticed that we like to snark “Long ABC” or “Short XYZ.” What are you “long” these days? What are you “short”? Feel free to be creative here but please list one thing that’s legal/financial and one thing that’s … well … whatever.
Long: Liverpool FC, the English Premier League team, whose owners Fenway Sports Group just yesterday announced that the team is up for sale….as a lifelong Liverpool supporter, it’s time for a big double-digit+ billionaire (a la Steve Cohen) to buy the team and make us perennial competitors versus state-owned teams like Manchester City and Paris St. Germain.
Short: The Metaverse is still something I don’t really get although I’m happy to learn more about Mr. Zuckerberg’s strategy.
Thanks Mo. Great stuff.