💥Notice of Appearance💥

Jason Cohen + Tom Studebaker, Managing Directors at Portage Point Partners

L-R: Jason Cohen and Tom Studebaker of Portage Point Partners. Photos: Portage Point Partners.

This week we dust off our “Notice of Appearance” segment and welcome a joint entry by two gentlemen from Portage Point Partners (“Portage Point”): Jason Cohen, Managing Director and Head of Investment Banking and Tom Studebaker, Managing Director and Co-Head of Turnaround & Restructuring. That’s right, we’ve got a banker and a restructuring advisor here — from the same shop! Portage Point has been establishing itself as a bigger presence in the restructuring space over the past year+ — particularly in the middle market — and that’s, in large part, attributable to these guys. Let’s dive in ⬇️.

PETITION: Welcome guys and thanks for appearing. Before we dive in, just curious: how did you both end up in restructuring? And Jason, how does one go from practicing law for nearly a decade to banking? There are others in RX who’ve done that but it’s a pretty small club so we’re sure some of our student and junior lawyer readers would be interested to know ….

Tom: After starting my career in public accounting, I got into restructuring right out of business school. I had taken a great class (Turnaround Management by Professor James Shein at Kellogg) that really sparked the interest, and the more I learned about the profession the more interested I became. The ability to work across finance and operations to help companies address critical issues was the initial draw, but over the years it has been the dynamic of consensus building that has been the most rewarding. Developing a great solution to an issue at hand is important, but the ultimate outcome can often belong to the team most adept at convincing others that their solution is best.

Jason: I was initially drawn to restructuring in law school. I was quite certain I wanted ‘business law’, but once I took bankruptcy & reorganization classes I got the restructuring ‘bug’. I was drawn to the tactical nature of drawing up and assessing a strategy and then interacting and negotiating with multiple stakeholders to implement it. I liked that there was essentially a beginning and end and you ‘sort of’ knew where you wanted to land — of course, dependent on which stakeholder you are representing.

On the move from law to banking, there are more of us hidden in the shadows than you might appreciate.

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But yes, it can be done (although I still pay my bar dues 17 years after leaving the law just in case … ). Lucky for me the restructuring banker that first hired me set out to hire an ex-restructuring lawyer as a banker. As for the transition from restructuring lawyer to banker, I honestly used my knowledge of bankruptcy law as a crutch for the first several years — it was my comfort zone. You do, however, learn to appreciate there is a substantial overlap in the advice provided to a common client by a good team of restructuring lawyers, bankers and advisors, with certain obvious differences. As the banker, you eventually need to become more comfortable providing ‘banker’ advice around valuation, sale processes and math stuff. 

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That comfort level comes with deal repetition … and many sleepless nights.  

PETITION: Our boy Jerome POW-ell and his brethren at the Fed finally commenced easing rates. Given how you play in the middle market, how has the easing affected your clients? Does 50bps move the needle? If not, what level of rate reduction does and why?

Jason: For middle market companies undergoing some level of stress or distress, increased interest rates are usually only one of many factors contributing to their challenges. Even a significant reduction in interest rates, while helpful, is unlikely to solve all that ails a troubled middle market company. Amongst many other challenges, these companies struggle to increase prices (e.g. push cost of goods increases and wage inflation on to their customers) thereby having to absorb them with margin. And the margin of error for these companies is much smaller than large cap companies, with even one foot fault potentially having a cascading effect. Unfortunately, several of these companies also lack management teams with experience proactively addressing these challenges.  We have seen way too many situations this year where the company has called and simply said they are not sure if they can make the next payroll. Unfortunately, these companies are reacting to numerous dynamic variables, leaving little time for optionality. For these reasons, among others, we expect continued activity in the middle market regardless of cycles.

PETITION: There’s growing concern in the market about the potential impact of private credit due to, among other things, lack of regulation, lack of ratings on loans, and pure size. The space is HUGE and growing: there’s lots of dry powder out there. You guys work on a lot of deals with private credit bros at the top of the cap stack. What complexities do private credit providers bring to the restructuring context? In what ways do they make things easier?

Jason: Our deals are almost exclusively situations with private credit providers in the cap stack. Private credit providers can often be more flexible in restructurings, as they are both able to take recovery in a non-debt instrument, which could include owning a substantial amount of equity, and contribute new capital to the solution. This has driven a new, interesting dynamic where many private credit funds who do not have internal operations teams are ‘taking the keys’ and must close knowledge gaps expeditiously to operate a business.

PETITION: What do you make of the recent trend where private credit guys are exercising proxy rights and reconstituting the board (e.g., Red Lobster)? Is that something you’re hearing a lot about? Are there any other stagnant lender protections that companies and their sponsors ought to be thinking about? Is this a form of middle market lender on sponsor violence, 😜?

Jason: We have been seeing (and hearing about) it more often than in the past. Historically, lenders were quite reluctant to take any action that could be interpreted as exercising ‘control’ over the borrower. With the proliferation of private credit funds in the capital structure, these funds have demonstrated a willingness to exercise proxy rights and reconstitute the board. However, in talking with several private credit funds recently, they have indicated that while they may be willing to take these actions, they are not actions taken without significant deliberation. In fact, often the appointment of an independent director can conciliate lenders in this situation — although the extent of the authority granted to that director is a key consideration. Those with actual decision-making authority are certainly favored over those who only have the right to make recommendations. 

While lenders sometimes want a sponsor or company to act, they also have concerns about actions they view as detrimental to them. For example, not all bankruptcy cases are created equal and the relative cost of certain bankruptcy filings for middle market companies can be viewed as value destructive by lenders. Against that fact pattern, lenders want to ensure they have an independent director as a gatekeeper to a filing versus just recommendation rights. There is also a nuance to keep in mind as it relates to a sort of symbiotic relationship between sponsors and private credit funds — both parties often want to make sure they do not damage their relationship with each other, as they typically have lending relationships with the broader sponsor portfolio and are a likely source of deal flow and financing for these deals in the future.

Source: GIPHY

PETITION: Jason, tell us about the kind of financings that you’re seeing in the market these days. It just seems like it’s pretty easy to get a deal cut with all of the money swirling around the system. Is that right? What kind of new money opportunities are there out there for deep-pocketed investors? Are there any terms you’re seeing that surprise you (including with DIP loans)?

Jason: We are seeing a lot of financing activity in the current market environment even though LBO volume is a bit soft. It includes a good mix of healthy situations related to add-on acquisition financing, opportunistic refinancings to lower interest cost, dividend recapitalizations and growth/development capital.  Also, we are seeing a fair number of stressed/distressed financings to address maturities, covenant breaches and liquidity challenges. While you are right there is a significant amount of dry powder seeking to be deployed into private credit and special situations opportunities, we have found the deal teams on private credit platforms are stretched from a bandwidth perspective and therefore selective as to where they allocate resources and what deals they pursue. With respect to deal terms, spreads and up-front fees have continued to tighten, delayed draw facilities are back en vogue and dividend recap volume remains at record levels. It is certainly an issuers’ market. 

PETITION: Tom - you’re kind of an OG when it comes to solar restructuring, having participated in the Terraform BK many moons ago. That space has been wicked busy this year (we 👀 you Boston guy). What do you make of all of the activity in solar and do you anticipate more to come? Is this an area you’re keeping an eye on? Go Yankees, btw.

Tom:

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In the US, the solar industry grew tremendously fast over the past decade, largely due to government incentives and cost declines. As with any industry that undergoes rapid growth, there are bound to be a lot of winners and losers along the way. Combine that level of growth with complicated industry dynamics that include rapidly evolving technical advancements, regulatory elements, energy market volatility and geopolitical risk, and it is a safe bet there will continue to be restructuring activity in that industry going forward. Specifically, the Trump administration is likely to create additional headwinds for the industry through the potential reduction or elimination of tax incentives, increased support of fossil fuels (drill baby drill!) and potential tariffs on imported solar panels.

Specifically in the residential solar space (which has been at the core of a lot of the restructuring activity), there was such a focus on growth and customer acquisition that profitability and cash flow generation were largely ignored. These companies were able to maintain sufficient liquidity by raising capital through securitizations, corporate debt, tax equity funds and preferred and common equity. As the industry matured and growth moderated, new capital has been harder to obtain which has been forcing sponsors and lenders to the table. 

PETITION: Aside from solar, what industries are you guys most focused on these days? Please provide specifics as to why.

Jason: Right now, we are most focused on the TMT and business/industrial services industries. We also see quite a bit of potential opportunity in industries impacted by consumer discretionary spend (e.g., automotive, consumer products, financial services and retail). The chart below represents an industry breakdown of all restructuring advisory and banking opportunities Portage Point has seen over the last 12 months.

Source: Portage Point

PETITION: Back to you Tom. You’ve also been involved recently in an agriculture bankruptcy, AppHarvest. What an in-court sh*t show that was — to be clear, not because of you or your firm, just because. Why have there been so many of these cutting edge agtech bankruptcies? Do you expect them to continue? Were these companies a function of a frothy venture capital environment?

Tom: Controlled environment agriculture (CEA) or other agtech companies are relatively new to the US and have experienced a significant influx of capital within the past five to 10 years. In a tale as old as time, investors were sold on high valuations primarily driven by innovative technologies (e.g., artificial intelligence, robotics, growing configurations/equipment, etc.). This flood of capital combined with a focus on hyper-growth led to a system that largely ignored profitability. It turns out that the end consumers do not materially differentiate CEA produce from field-grown, which leads to grocers paying a similar price per pound for both. However, given the capital investments required for CEA, the cost per pound can be significantly higher. When raising fresh capital is both cheap and easy, the traditional concerns investors have are limited (or thrown out the window). However, raising new capital at historical valuations while a company is experiencing significant losses has proven incredibly challenging in the current environment. 

Future agtech bankruptcies will be driven by the existing investors’ appetite (pun intended) for, and their strategic approach to, distressed assets. However, there is no question there is a need for significant operational restructurings to align direct and indirect cost structures with top-line revenue profiles. The technology aspect, while promising, continues to be unproven and costly, often distracting management teams from core fundamentals. Given the current and expected levels of distress, the industry is ripe (sorry, we couldn’t help ourselves) for consolidation led by the outperformers who can effectively get ahead of the restructuring curve.

PETITION: On the topic of hairy bankruptcies, Tom, you were also involved in Benitago, the e-commerce aggregator, as CRO. We wrote a good deal about e-commerce aggregators and lately, there’s been a ton of consolidation in the space, largely out of court after Thrasio’s filing. That segment was promoted as the future of retail and attracted billions from putatively smart people, most of which evaporated. What happened to that space? What happened in that case, specifically? It was a messy one that teetered from day one but you were able to successfully navigate it through….

Tom: The concept of an e-commerce aggregator is relatively straightforward. Identify and acquire performing brands from founders and achieve scale that will create operational efficiencies that lead to increased profitability. The execution … not so much. 

To begin with, the hype and capital directed at the segment in the years following COVID led to intense competition to acquire brands, which in turn led to very high acquisition multiples. However, as e-commerce levels have since moderated, supporting those valuations and leverage levels has proven to be very difficult. Second, consolidating multiple brands onto a single platform requires robust systems and processes which many of the aggregators did not have or were still in the process of developing. This lack of systems and processes often made it very challenging to understand the true financial and operational brand level performance. Finally, many of the brands acquired were built by founders who lived and breathed their brand 24/7. They understood everything about their brand and were deeply committed to its success. Upon acquisition, these founders cashed out and often had little role in the brand going forward. Economies of scale can obviously have tremendous benefits, but it is very challenging to replicate the level of passion and dedication that these founders had for their brands.

As for Benitago, the company was an e-commerce brand incubator and aggregator focused on creating and acquiring brands that sold through Amazon. Founded in 2016, the company originally developed five in-house brands, and (not unexpectedly) experienced explosive growth during the pandemic. 

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Buoyed by this success, the company then pursued an acquisition strategy to scale its platform, purchasing 12 additional brands, and funded the acquisitions through a $95mm secured financing. Fast forward to the beginning of ‘22, consumer purchasing behavior shifted to pre-pandemic levels. 

Aside from the macro issues the company faced, Benitago’s capital structure complicated the restructuring discussions. Specifically, the $95mm of secured financing was composed of two separate facilities with two separate lenders that each had separate collateral packages. That alone is not terribly novel or problematic, but the complications stem from the fact that while there was not collateral overlap from a pure asset perspective, there was overlap from a ‘how do you actually operate the business’ perspective (i.e., for a given brand, one collateral package had the working capital and the other collateral package had the IP associated with the brand). This dynamic made it very difficult to arrive at anything other than a comprehensive solution.

Although the Benitago debtors were able to manage the case without a DIP, there was a desperate need for additional capital to fund the go-forward operations. Through the successful efforts of all stakeholders, we were able to quickly reach a consensual Plan of Reorganization which preserved go-forward operations through one of the secured lenders taking majority ownership of the reorganized company via equitization of its secured debt. As you noted, it was a bit of a tightrope throughout, but we were collectively able to get the situation to a good result, all things considered. 

PETITION: You’ve both been through multiple business cycles and worked with multiple industries. Is there a common theme or set of themes that bind the failures together?

Tom: At the end of the day, our industry is the result of either poor management, bad industry dynamics or bad balance sheets. Those broad themes will stand the test of time. 

Poor management is self-explanatory, but it is worth noting that this dynamic can be more prevalent in the middle market as management teams are often less experienced and systems, processes and reporting are often less sophisticated.  Bad industry dynamics and bad balance sheets typically result from shifting landscapes and a failure to adapt strategy. 

One common theme relates to technology. Technological innovation and advancements are happening all the time. The companies that are slow to adapt to technological change, overinvest in technology with poor ROI or adopt the wrong (i.e., losing) technology often find their way into restructuring. 

Another common theme would be 'irrational exuberance' that creates asset bubbles. The tech bubble and the subprime/real estate bubble both preceded recessions and a restructuring cycle. It is hard not to look around and not see asset bubbles all over the place, but perhaps that is just hope talking!

Source: GIPHY

PETITION: We’ve seen you guys get involved in deals where you serve as both financial advisor and investment banker to a chapter 11 debtor. We imagine that’s a compelling proposition for a company that has professional retention fatigue pretty much out of the gate. What’s your pitch? Have you run into any problems serving in both roles on the same case? Does the UST’s recent surge in activity (and wins) concern you?

Jason: If you allow us a gratuitous Portage Point plug, we will tell you that acting as both Restructuring Advisor and Restructuring Banker to one client simultaneously is consistent with the firm’s fundamental value proposition of providing middle market stakeholders a full suite of capabilities and solutions across the entire business and investment lifecycle.

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But yes, it is a compelling service for our middle market clients as well as many of our referral sources such as restructuring lawyers and private credit funds. Other firms have acted in both roles on occasion in the past, but we have been more focused with it as a go-to-market strategy. Over the last 18 months, we have acted as both Restructuring Advisor and/or CRO and Restructuring Banker in approximately 12 restructuring engagements. We have intentionally assembled a team of highly seasoned restructuring advisors and investment bankers on our platform. Our team comes from many of the marquis restructuring shops we all know and love. We are focused on bringing the senior-level expertise from those platforms to the middle market, and importantly — at a middle market price point. From an execution perspective, we provide the efficiency of one team of advisors, thereby alleviating the ‘professional retention fatigue’ you mention. We all know the last thing a management team wants to do is interact with and educate ‘another set of advisors’. Aside from typical retention comments, no parties have raised material issues with us serving in both roles to date. And whether we worry, well, we are restructuring professionals so that is all we know how to do. 

PETITION: What would be your selection for the most impactful restructuring matter of ‘24 thus far and why (don't shamelessly list your own work)? Feel free to acknowledge a matter that filed for chapter 11 or one that restructured out-of-court.

Tom: We assume you mean aside from Red Lobster which resulted in the end of the all you can eat shrimp deal?

Source: Getty Images

If that’s the case, then Purdue is likely the most impactful restructuring matter of ’24 given the Supreme Court’s decision and the ripple effect it has, and will continue to have, on the industry and more particularly, third party releases. 

PETITION: What would be your selection for the most clever restructuring matter of the year and why (don't shamelessly list your own work)? Feel free to acknowledge a matter that filed for chapter 11 or one that restructured out-of-court.

Tom: While not tied to a specific matter, we are seeing a lot more thought and energy put into finding clever alternative approaches to Chapter 11. Stakeholders have been much more willing to consider an ABC, friendly foreclosure, etc., to implement restructuring transactions, which has resulted in some very creative solutions. While these approaches typically have lower fees than a Chapter 11, they also don’t have certain key benefits of a Chapter 11 (most notably “free and clear” assets), so it will be interesting to see if this trend continues.

PETITION: If you had to list three dominant themes emanating out of the RX world in ‘24, what would they be?

Jason: For us, almost universally, our restructuring mandates this year have been driven by a lack of liquidity. And unfortunately, not the type where a company expects to have liquidity problems next quarter, but the type where management/sponsors say they do not know if the company will be able make payroll the following week. We have been dropped into that situation all too often this year. The corollary theme to a lack of liquidity has been the lack of proactive planning. Middle market companies, which are often founder or sponsor owned, often choose to run the clock out rather than proactively plan. In doing so, optionality (and often value) is severely diminished by the time advisors show up on the scene. Lastly, and effectively driven by the first two factors, getting these deals completed has been anything but smooth. The advisors have frequently had to pull stakeholders across the finish line to get a company-saving transaction closed. Feels like the risk of liquidation has been more real than I can ever recall.

PETITION: Macro or otherwise, who is your biggest winner of the year?

Tom: Private credit (see above). With money continuing to flow into the space, and the insatiable appetite of borrowers, the market has continued to expand at an impressive rate. 

PETITION: Macro or otherwise, who is your biggest loser of the year?

Jason: With a significant amount of activity in liability management recently, we imagine some of the biggest losers of 2024 won’t know they exist until they learn they are a non-participating lender in LME transactions that have closed.

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PETITION: What kind of visibility do you have going into ‘25? Will it be busier than ‘24, more of the same, or quieter? Leave us with some parting thoughts.

Jason: Our visibility right now seems a bit hazy in light of the uncertainty around any fallout from the election, timing and level of interest rate reductions and the potential for a broader war in the Middle East. To the extent lenders, sponsors, directors and management teams can delay making a significant decision related to a company and its capital structure, they are doing so and preparing for an early ‘25 transaction. While we may not have full transparency on all those issues by the end of the year, the election is at least over and whether the activity pick up is a waterfall or an increasing trickle remains to be seen.

PETITION: Thanks for participating, guys.

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