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DistresseD InvestIng report ApriL 2008

HigHligHts from tmA’s And tHe deAl’s 2008 distressed

investing ConferenCe

DistresseD investing r e p o r t

ApriL 2008 VoLume 1 issue 1

HAppy DAys for DistresseD Debt inVestorsOppOrtunItIes—and rIsks—are great, yet experts warn that thIngs cOuld get cOmplIcated

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� DistresseD InvestIng report ApriL 2008


It’s our great pleasure to present you the highlights of the second annual Distressed Investing Conference, co-produced by the

Turnaround Management Association and The Deal. Over 550 corporate renewal professionals and financial and corporate dealmakers gathered at the Wynn Las Vegas on January 23-25, 2008, and enjoyed an unrivalled opportunity to exchange ideas and hear the latest trends on distressed investing from leading experts in the field.

This report details the keynote and panel discussions that took place over both days. From an examination of the state of the leveraged markets, the most pressing issues facing distressed debt traders, the CLO, derivative and SWAP markets and the opportunities presenting themselves in China to the Founders Panel, which gathered the founders of significant distressed investment funds, we hope this report gives you insight and ideas on how to benefit in the next phase of the distressed investing cycle.

TMA and The Deal are already planning our next Distressed Investing Conference to be held in Las Vegas in January 2009, at which we hope you will be able to join us. Mark your calendar for the third annual Distressed Investing Conference for more news in the dynamic world of corporate restructuring and finance.

Colin P. Cross Managing Director Crystal Capital LLC Immediate Past Chairman, Turnaround Management Association

Kevin Worth President and CEO The Deal LLC

contents

Highlights from TMA’s and The Deal’s 2008 Distressed Investing Conference

Executive Director, TMA: Linda M. Delgadillo, CAEManaging Director of Events, The Deal LLC: Allan Cunningham

Director of Fund Development, TMA: Joseph KarelVP, Communications & Development, The Deal LLC: Martha Brown

Project Manager, The Deal LLC: Mark A. BaileyArt Director: Cezanne Studio/Paul Colin

Writer: Leila Zogby

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

3 Happy Days For Distressed Debt Investors In 2008 Opportunities—andrisks—aregreat,yetexpertswarnthatthings couldgetcomplicatedastheeconomystruggles

6 The Why And How Of Turnarounds KeynoterJerryYorksaysacommittedmanagementteamthat takesthelongviewcanovercomethefailureofpoorstrategyand execution

8 Experts Advise Patience And Caution For Distressed Debt Investors Thebetterdealswilllikelycomealonglater,butthatdoesn’t meaninvestorsshouldn’tstartshoppingnow

11New Players Emerge In Leveraged Cap Markets Yet,hedgefundsandothernewinvestorsmayfacesurprisesas economicstormcloudsgather

13 2008 Distressed Investing Conference Photos

16 When Creditors Are Traders, Gray Areas Arise Withthesupposedprotectionofbig-boylettersnowinquestion, creditorsmustweighthebenefitsofservingoncommittees

19 CLOs: Down But Not Out CLOshaveproventobeasolidassetclassthatwillsurvivethe currentmarketturmoil

24 China’s New Bankruptcy Law Opens Possibilities WhileamoreWesternlegalcodewillhelpopenmarkets,cultural differencesmakeimplementationaslowprocess

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HAppy DAys for DistresseD Debt inVestors in 2008 opportunities—and risks—are great, yet experts warn that things could get complicated as the economy struggles

Whatadifferenceayearmakes!Whenthedistresseddebtinvestmentcommunitygatheredinearly2007forthefirstannualDistressedInvestingConference,talk

centeredonhowtheamazingamountofliquidityinthemarketswasmakingittoughtoearnabuck.

Atthisyear’sevent,againco-producedbytheTurnaroundManagementAssociationandTheDeal,youcouldalmosthearthemorethan500participantshummingthetuneHappyDaysAreHereAgain.Lastsummer’ssubprimemortgagecrisisturnedoffthecreditspigotandchangedthegame.

“Evenhealthycompaniesarehavingtroublegettingfinanced,”notedMarcLeder,SunCapitalPartnersInc.,“andthetroubledcompaniesreallycan’tgetfinancedatall,orwithalotofdifficulty…..But,we’veseenthisbefore.Thishappenedbackin2001,evenlate2000,andthewayIandmycolleagueswhoinvestindistressedcompaniesrespondedandreactedisthroughstructuringthedealsdifferently.Inalotofdealsoverthelasttwo,three,fouryearsinagoodfinancingenvironment,

wewouldgointoanydealandwe’dbeanall-cashbuyer,knowingwecouldgetthird-partyfinancingafterclosing.”

That’snolongertheprocess.LedertoldthoseattendingapaneldiscussionthatSunCapitalisworkingonmanydealsnowinwhichlendersareoverleveragedandthecompanyis

underperforming.“Itwasn’tagreatcompany,anditshouldn’thavehadthiskindofleveragedcapitalstructuretobeginwith.They[lenders]knowthereisnochancethey’regoingtobetakenoutofthedeal.So,whatthey’relookingtodoistobringsomeoneintoprovidenewcapital.

“Inalotofdealswedidin’01,existinglendersstayedinplace.Wewouldinvestequityintothecompanytoprovideliquidity.Wewouldtakealargemajorityownershipposition.Therewouldbenoimpairmenttoanycreditors,nowrite-offs,maybesomeloweringofinterestrates…butthewholestructureofthe

dealhaschangedfromacontrolledsaleforcashtoanequityinvestmenttorecapitalizeacompanythatnevershouldhavebeensoleveragedtobeginwith.”

Collateralizedloanobligations(CLOs)tookabackseatfollowingthesummercrisis,andnontraditionalinvestors,suchashedgefundsanddistresseddebtfunds,assumedadominantroleinthemarkets.“Oneofthethingswesawlastfallafterthemarketdidcorrect,”explainedMattGerdes,managingdirectorofFreeportFinancial,“wassome[price]stabilization…assomeoftherelativevalueplayers,thenontraditionalinvestors,high-yieldhedgefundscrossedoverandprovidedsomesupport,seeingalotofvaluethererelativetotheircoreassetclasses.”Henoted,however,thatstabilizationwasshort-lived,ashigh-yieldspreadshavewidened.

TherecessionmaybeaspoilerManyexpertsspeakingattheconferencewarnedthatthecurrentrecessioncouldholdsomesurprisesthisyearandnext,andurgedinvestorstotreadcarefully.SeveralspeakersnotedthatMoody’sInvestorsServicepredictedthattheglobaldefaultrateonhigh-yield,high-riskbondswilljumpmorethanfivefoldbythecloseof2008becauseofaweakereconomy.

TheMoody’sreportalsoexpectedthedefaultratetoreach5percentin2009,whichcomparestothe26-yearlowrateof0.9percentpostedatthecloseof2007.Theratingsagencyalsonotedthatthepercentageofissuerswithdebttradingatdistressedlevelsatthebeginningof2008was11.5percent,thehighestlevelsinceJuly2003.Ayearearlier,theratewas4.2percent.

CONTINUED >

“…troubledcompaniesreallycan’tgetfinancedatall,orwithalotofdifficulty….But,we’veseenthisbefore.”

“Ihavebeenpreachingpatienceandcaution.”

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Thesizeofloansthatmayfacetroublewasalsoaworryamongexpertsspeakingattheconference.“Ifyoulookattheaveragesizeofwhataleveragedloanlookedlikein2007,itwasgoingfor$1billion,”explainedJimJeffries,managingdirector,WachoviaSecuritiesInc.“Ifyougobacktothebeginningofthelastcyclein2001,itwasaround$350million,maybe$400million.So,we’reatleastthreetimesbiggerbasedonthatstat.”

ComplexcovenantsandliensThedealsnotonlywerebig,buttheyalsowerecomplicatedinstructure.“Weseeadifferentcreatureintheleveragedloan

market,thatofcovenantliteandsecondlien,”SeanLynch,directorofcreditandco-manageroftheSutterhigh-yieldfixed-incometeamatWellsCapitalManagement,toldtheaudienceattendingapaneldiscussionthathemoderated.“Obviously,secondliensdidnotexistatallinthe2000timeandcovenant

lite,asweallknow,hasexpandedtoatleastone-fifthportionofthemarket.”

Thesemegadealshaveinvolvedadiversecastofinvestors,whichmayposeanotherprobleminaturnaroundorrestructuringscenario.“We’redealingwithcapitalstructuresnowthathavebecomemuchmorehighlycomplexwiththeintroductionofalotofdifferentlenders,whichchangesthedynamicthataturnaroundmanagerneedstogothrough,”notesJeffZappone,CTP,seniormanagingdirectorofConway,MacKenzie&DunleavyInc.,adding,“I’dsaytheturnaroundandworkoutthatweclassicallyhaddoneinyearspastisgoneandit’snevergoingtocomeback.”

Creditorsmayfacenewtroubles.Inapaneldiscussionthatfocusedonrecentcourtcasesandsettlementsinvolvingcreditorswhosatoncreditorcommitteesandalsotradedinthesecuritiesofthecompanyinquestion,listenerslearnedthatitmaynotbewiseforsellersofdistresseddebttoassumethatabig-boyletterisprotectionenoughfrompost-salelawsuits.Suchlettersaregenerallyprovidedbysellerswhohavenonpublicknowledgeaboutacompanytobuyerswhoagreethattheyare“bigboys”andunderstandthesituation.n

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“We’redealingwithcapitalstructuresnowthathavebecomemuchmorehighlycomplex...”

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tHe WHy And HoW of turnAroundKeynoter Jerry york says a committed management team that takes the long view can overcome the failure of poor strategy

Notingthat“aturnaroundissortoftheflipsideofdistressedinvesting,”JerryYork,CEOofHarwintonCapitalLLC,aprivateinvestmentcompany,and

keynotespeakeratthesecondannualDistressedInvestingConference,describedwhatheviewedasthereasonscompaniesfailandthemosteffectivewaystorescuethem.

BasinghisremarksonhispersonalexperiencewithturnaroundsituationsatChryslerCorp.,IBM,AppleandTycoInternational,Yorkreferredtothewrongstrategyorbusinessmodelandpoorexecutionasthe“symptoms”ofadiseasethatconsistsofpoorgovernance,aculturethattoleratespoorperformance,inadequatemanagementandamajorshiftinindustryconditions.

Pre-turnaroundconditionsYorkdissectedthepre-turnaroundconditionofthefourcompanies.Regardingstrategyissues,hesaid,“Chryslerhadanoverallgoodstrategy.IBM’swasseverelyflawed.Appleessentiallyhadnostrategy,andTyco’swasprettygoodbutexcessivelyrisky.Intermsofthebusinessmodel,bothChryslerandIBMweretooslowandcostly.Applehadseriousdistributionproblems,andTycowastoocostlybecauseoftheredundanciesthatexistedinthebackofficeandmanufacturingareas.

“Occasionally,Chryslerhaddonereasonablywell,buthadbeenleftvastlybehindinpassengercars,hadhugemarketsharelosses.IBMwasbehindineverythingvirtually,exceptmainframesandasmall,atthattime,servicesbusinessthatwasstillsmallerthanEDSatthatpoint.Applehadmajormanufacturingfootprintissues,andTycowasoperationallysubpar.”

YorktermedthepreturnaroundboardsofChryslerandIBMasstrongandindependent,butchidedthemanagementoftheautomakerforlackofteamworkandthetechnologycompany’sleadershipforinflexibility.YorkwasCFOofChryslerandjoinedIBMin1993asCFOunderLouGerstner.

Apple’sboardseemedunabletomovethecompanyforwarddespiteadepthofSiliconValleyexpertise,anditsmanagementunderGilAmelio“clearlylackedthepassionfortheMacplatformthatyouneedwhenyou’reasmallplayercomparedtoabiggorillalikeMicrosoft.”YorkbecameanAppledirectorin1997afterSteveJobsrejoinedthecompany.AsforTyco,acompanyhedescribedas“asingle-leggedstrategyacquisitionmachine,”itsdirectorswereinaweoftheCEOanddidnotaskseriousquestionsofhim,hesaid.Yorkjoinedthatboardin2002afterthecompanywasincrisis.

Japanesecompetitionwastheindustrychangethathurt

Chrysler,hesaid,whileatIBMitwasthe“titanicindustrychangestakingplaceintheITspace”intheearly1990s.Microsoft’smarketdominationwastheissueforApple,butTyco“waslargelyverywell-positionedasset-wise.”

TurnaroundresultsAllfourturnaroundsdeliveredontheirpromises.AtChrysler,Yorktermedthesuccessspectacular.“Thesharepricebottomedoutin1990,’91atabout$9,andin1993whenthatparticularturnaroundhadbeensuccessfullycompleted,thestockwasat$45.”Daimler-Benz,whichpurchasedChryslerin1998,“totallyscrewedupthatacquisition,”Yorksaid.“Thereisnoreasonthatcouldnothaveworkedout,andworkedoutbeautifully.”NotingthatChryslerisnowinitsthirdmajorrestructuringofthepast15years,YorksaiditwasbecausetheyhadnotadequatelyaddressedtheircompetitivedisadvantagesagainstAsiancarmakers.

IBMisanothersuccessstory.“Thestockbottomedoutat$10onasplitadjustedbasisin1993andit’sat$103currently…they[IBM]haveexhibitedtheabilitytochangeandnotjustwaituntiltheygetincrisisagain,”henoted.

YorkattributedApple’sturnaroundtoSteveJobs’srefocusonbetterproductdesignandproductinnovation,particularlythehugelypopulariPhone.“Thethingsittingonyourdeskdoesnothavetobeanuglygrayorbeigebox.Itcanbeanattractiveindustrialdesign.Interestingly,Dellisnowstartingtoemulatethat10yearslater.Bytheway,MichaelDellin1997saidthatAppleshouldnotbeturnedaround…andtodayApple’smarketcapisgreaterthanDell’sbyasubstantialamount.”

Tyco’sturnaround,whilesuccessful,hasnotbeenplayedout,

CONTINUED >

Jerry York, CEO, Harwinton Capital LLC



accordingtoYork.“Thiswasacompanyinseverecrisis…andwehadahugecredibilityrebuildingjobtodo.IwentontheboardinNovemberof2002.Iwasthesecondnewdirectorandfivemonthsafterthat,theboardhadbeenchanged100percent.LastcountIsawofthetop200executivesinthecompany,190werefromoutsidethecompany.So,wedidwhatwehadtodotogetourcredibilityback.

“Partofthestrategywasjusttosaytoalloftheorganizations,‘Nomoreacquisitions.Runwhatyouhave,straightenitout,maximizethereturntotheshareholders,andlet’sseehowwellyoucandothat,’”herecalled.Thebenefitsofthedecisiontobreakupthecompany,whichtookeffectlastyear,areunknown.“…It’stooearlyinthegametoseehowwellthat’sgoingtoworkoutbecausetwoofthethreemanagementteamsofthenewpiecesarenewtoWallStreet,andWallStreetisgoingtotakeabitofawait-and-seeattitudetoseehowthesenewmanagementteamsdo,”Yorksaid.

TheelementsofsuccessSeniormanagementwithpassionanddeterminationistheessentialingredientforasuccessfulturnaround,accordingtoYork.“You’vegottohavesomebodywhohaslookedatthesituationandsaid,‘Itisabsolutely,vitallynecessarythatwetake

drasticaction.Therearenosacredcows,nothingisoffthetable,andwe’regoingtodowhateverwehavetodotofixthisplace.’”

Communicationisvital.“You’vegottosellittothetroops.You’vegottocontinuouslybeouttherecommunicating…whatwe’redoingandwhywe’redoingit,”hesaid.Symbolicgesturescount,too.“Thetopdogshavetosettheexample,”Yorksaid,“Youcan’thaveascrumptiouslyappointedexecutivediningroom,limousinesallovertheplace.Tonesettersareveryimportant.”

Finally,Yorkpraisedthebenefitsofbenchmarking.“It’sincredibletheamountofinformationyoucangetyourhandson,ifyoureallyworkatit,”hesaid.“AtIBMwehad12initiatives.Wetrackedallofthesemonthly.Wetiedthemtothefinancialstatementssothatyoucouldn’tclaimcostreductionsinthisareabut,bytheway,costsarerisingoverhere.And,ofcourse,measureandreportitfrequently.”

Onepointthatisoftenignored,accordingtoYork,isthatturnaroundsarelikesuccessfuldiets:long-termsuccessrequiresconstantvigilance.“Turnaroundscannotbeconsideredone-timeeventsandmustbefollowedbycontinuousimprovementapproachesandhighlevelsofstrategicadaptability.Ifyoudon’tdothat,thenyou’rejustgoingtogofromonecrisistoanotheronetoanotherone.”n

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experts Advise pAtienCe And CAution for distressed debt investorsthe better deals will likely come along later, but that doesn’t mean investors shouldn’t start shopping now.

Thecurrentclimateinthecreditmarketsandtheaccompanyingeconomicslowdownhavechangedthepsychologyofthedistressedinvestmentmarket,primarily

becausepredicting“thebottom”hasbecomemoredifficult,accordingtoourexperts.

“Thisisamarketplacethathasmadeincrediblecorrectionsinveryshortperiodsoftime,”saidDavidMatlinofMatlinPatterson,whilespeakingonapanelofdistressedfundfounders.“Thepsychologyhastotallychanged.Themantrathatyou’resupposedtobuyinthedips,Ithink,hascompletelyunraveledafterthesubprimedebacle.”

Patiencewaswellregardedasastrategyinthisenvironment,since“goodcompanieswithbadbalancesheets”won’tstarttoappearuntillaterinthedowncycle.“Thebestdealswe’vedonehavebeeninvestmentsmadelateinarecessionaryperiodorcrisisperiod,”saidMichaelPsaros,KPSCapitalPartnersLP.

“Wehavefoundthatitistheworstcompaniesintheirrespectiveindustriesthatarethefirstonestogetsick.And,thebestcompaniesintheirrespectiveindustriesarethelastonestocapitulate.So,we’reverycontenttojustsitandlettheopportunitiescometous,”headded.

Psaros,therefore,cautionedinvestorsagainstoverenthusiasmforbuyingadistressedcompany’sdebtduringthebeginningofaneconomicdownturn.Inparticular,henotedthattraditionalmiddle-marketleveraged-buyout(LBO)metricsaredifficulttoapplytoaverydistressed,underperformingcompanyoroneoperatinginbankruptcy,andasaresult,traditionalLBOfundsmustbewary.

OpportunitiesexistOpportunitiesnonethelesspresentthemselves.Psaros,whosefirmfocusesonmanufacturing,saidthatsectorssuchasautopartswillbehardhit,butsincehisfirmhassolidportfoliocompaniesinautoparts,“we’regoingtobuildthemoutbecausenowisthetimetobuy.”

MarkK.HoldsworthofTenenbaumCapitalPartnersLLCconcurred,notingthatsomeofhisfirm’solderportfoliocompaniesarenowpoisedforgrowth.“Wehaveveryhealthybusinesseswithgreatbalancesheets,soI’mtellingmymanagersthatnowmightbethetimetopickoffsomeweakercompetitorsanddosomeacquisitions.”

HealsopredictedthatEuropeancompaniesthatboughtNorthAmericanmanufacturingdivisionsorsubsidiariesathighpricesandfailedtomakeagooftheseinvestmentsareanxioustosellnow,creatinganotheropportunity.

OperationstakeonnewimportanceThedistresseddebtinvestmentindustryin2008isfardifferentfromthatof2001-02,anotherdifficulteconomicperiod,ourpanelistsnoted.Tennebaum’sHoldsworthdescribedtheindustryduringtheearlypartofthedecadeas“almostkindofacottageindustry,muchsmaller.Wehadsophisticatedwell-knownplayersbackthen,butitwasreallyaspecializednichewithinthealternativeassetspace.Todayit’smuchmoremainstream.”

Theresultisamorecompetitivemarketplacewithmajorplayersanddeeperpockets.Tobeabletosnagthebestdeals,therefore,it’sessentialtodifferentiateyourselfasaninvestor,andourpanelistsbelievedthatastrongtrackrecordofoperatingportfoliocompaniesisessentialindoingthat.

“Tobereallydifferentiatedinthismarket,Ithinkyouhavetobepreparedtoownandoperateabusiness,”saidHoldsworth.“Ifyou’reprovidingarescuefinancing,sometimesthosegosouthandyouendupowningthebusiness.Sometimes,you’reaccumulatingbondsintheopenmarketandyouendupowningthebusiness,perhapsbydesign.So,youhavetobereadyforthat.”

Operatingadistressedbusinessisnopicnic.Ourpanelistsnotedthatsuccessrestsonselectingsolidmanagementanddesigningappropriatecompensationprogramsforthem,implementingeffectivecostcutting,andlearningtoworkasateamwithotherowners.

“I’venoticedthatthedealsaresobig,thecompaniesaresobig,andtheamountofdistresseddebtinthebalancesheetsofthesecompaniesissobigthatit’sgoingtobehardforanyonefirmtoendupinarealpositionofcontrol.So,wehavetolearntogetalongwitheverybody,”saidHoldsworth.

MarkLederofSunCapitalPartners,Inc.offeredthisadviceaboutoperatingcompanies.“ThetwomostimportantlessonsI’velearnedovermanyyearsandmanydealsisthatwhenyou’ve

CONTINUED >



gotastrugglingcompany,youcannotmovetooquickly,butyoucanabsolutelymovetooslowly.”

Hedgefundsinvestorsmaybeatadisadvantagewhenplansgoawryandtheyendupasowners.“Idon’tseethehedgefundshavingtheabilityandthepeopletositandworkonmorethanoneofthesedealsintheirportfolioatatime,”notedMatlinofMatlinPatterson.“Ithinkthere’sgoingtobealotofopportunity.”

ForeigninvestmentsandinvestorsPanelistsdidnotviewEuropeandAsiaatpresentasstrongmarketsfordistresseddebtinvestors,particularlybecauseofthedifferentlegalandfinancialsystems.“AswelookoutinAsia,it’sveryquiet,”saidMatlin“UntilChinameaningfullyslowsdown,they’renotgoingtopulldownSoutheastAsiawiththem.We’llseewhathappensaftertheOlympics.”HenotedthatAustraliais“startingtohiccup,”andhethoughtthat2009mayopenopportunitiesinEuropeasthoseeconomiesslowdowninresponsetotheUnitedStatespicture.

HoldsworthalsosawpossibilitiesgrowingforinvestinginEurope,butcautionedthatlawsandcreditorrightsareverydifferentfromthoseoftheUnitedStates.“Ifyou’regoingtogooverthere,

you’dbetterdoyourhomeworkandyourresearchonthelawsbecauseyoucanfindyourselfinsomeprettystickysituationswithnowayout,”henoted.

Yet,panelistspointedoutthatforeigninvestorshavenotbeentimidaboutmakingalternativeinvestmentshereinU.Sfinancialfirms.AnexamplecitedwastheKuwaitiinvestmentinCitigroupinJanuary.“TheUnitedStatestodayisthemostsophisticatedfinancialmarketintheworld,”saidHoldsworth,“particularlywithrespecttoalternativeinvestmentproductslikeprivateequityanddistresseddebtinvesting.So,it’sanopportunitytogetafrontrowseatintermsofseeinghowit’sdone.”

Foreignersarenottheonlyonesseekinganeducation.“You’regoingtocontinuetoseestatepensionsandendowmentsalsomakinginvestmentsinfirms,againforalotofthesamereasons:thelearningprocess,accesstothefinancialminds,and,obviously,profit,”Holdsworthadded.

Theranksoflimitedpartnersareexpectedtoremainvirtuallyunchanged,accordingtoourpanelists,allofwhomreportedfewdefectionsamongLPs.“There’sanextraordinarilyhighlevelofre-uppingbyLPs,”saidLederofSunCapital.“Wetendtolosebetweenzero,oneandtwoLPsperfund.So,we’reintheneighborhoodof99percentre-upping.”n

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11 DistresseD InvestIng report ApriL 2008


neW plAyers emerge in leverAged CAp mArKetsyet, hedge funds and other new investors may face surprises as economic storm clouds gather

Theleveragedcapitalmarketsof2008lookdifferentfromthoseoflastyear,ourexpertssay,asthedominanceofcollateralizedloanobligations(CLOs)hasgivenwayto

hedgefunds,high-yieldfundsanddistressedfunds.ThisinfusionofnewbuyersfollowingthesubprimecrisisofJuly2007helpedtostabilizethemarketforcompaniesseekingfinancing,butwillthatlastastheeconomycontinuestoslow?

“Youhadanewsetofbuyersstepup,whichwerethehedgefundsandothernontraditionalleveragedloanbuyers,”explainsSeanLynch,directorofcreditandco-manageroftheSutterhigh-yieldfixed-incometeamatWellsCapitalManagement,whomoderatedapanelentitled,LeveragedCapitalMarkets:What’sHot,What’sNot?

“Thathelpedtostaveofftheamountofdefaultsandtheabilitytotakedowndebtforinstitutionalbanksthatstillhaddealsontheirbooks.”Lynch,however,seestroubleahead.“Overtime,weshouldseethedefaultratepickupquitesignificantly,”headds.

CovenantliteloansAccordingtothepanelists,anewwrinklethatmayaffectpredictedworkoutsandrestructuringsisthenewandmorecomplexstructuresnowinplay.“Weseeadifferentcreatureintheleveragedloanmarket,thatofcovenantliteandthesecondlien,”saysLynch.“Obviously,secondliensdidnotexistatallinthe2000timeandcovenantlite,asweallknow,hasexpandedtoatleastaone-fifthportionofthemarket.”

Lackingtraditionalfinancialtriggers,covenantliteloansmayleadtosituationsinwhichlendersareunawareofacompany’s

distressuntiltoolate.“Ifyou’retheownerofanasset,”saysJimJeffries,managingdirectorofWachoviaSecurities,“youmaybeinasituationwhereyourfirstchancetohaveadiscussionaboutthecreditisreallyasit’shitaliquiditycrunchandisclosetohittingthewall.That’svastlydifferentfromthelastcycle,inwhichthereweremaintenancecovenantsthathadteethandyou

couldgetbacktothetable,resetyourself,andagreeordisagreewiththeplanbasedonwherethebusinesswasheaded.”

Workoutsrestontheperceptionthatacompanystillhasvalue,andourpanelistsbelievethenewstructuresmayaffectthatnegatively.“Ourruleofthumbisthatyou’llgetonehopefulbiteattheapplefromaprivateequitysourcetoprotect,preserve,anddefendtheirinvestment,”saysEdwardSiskin,executivemanagingdirectorofCrystalCapital.“Theproblemisthatifyou’redownattheendoftheline,wherethereisn’tanymoreperceivedvalue,sometimestheyhavetobecrazytoputupthemoney….Thewholerecovery,Ithink,andworkoutstrategyiscompromised.”

DiverseworkoutinterestsAnotherissueaffectingfutureworkoutsisthenumberoflendersinvolvedinthesestructures.“We’redealingwithcapitalstructuresnowthathavebecomemuchmorehighlycomplex

withtheintroductionofalotofdifferentlenders,whichchangesthedynamicthataturnaroundmanagerneedstogothrough,”notesJeffZappone,CTP,seniormanagingdirectorofConway,MacKenzie&DunleavyInc.,adding,“I’dsaytheturnaroundandworkoutthatweclassicallyhaddoneinyearspastisgoneandit’snevergoingtocomeback.”

CLOsareseenasbringingsimilarproblemstotroubledcompaniesinthefuture.“Mybiggestfearasasecondlienlender,”saysSiskin,“isthediversityandthenumberofCLOsthatareinthecredit.So,whenyouneedarestructuringdone,asimpleamendmentdone,tryingtogetallofthevotestogetherinaquickperiodoftimesometimesisanightmare.”

Howwillprivateequityfirmsthatfindthemselvesinthesesituationsbehave?“ThefundsforBlackstoneandKKRoranyPEfirmthatnowhasCLOsoutstanding,wehaven’tseenthat

CONTINUED >

“Theturnaroundandworkoutthatweclassicallyhaddoneinyearspastisgoneandit’snevergoingtocomeback.”

“Youmaybeinasituationwhereyourfirstchancetohaveadiscussionaboutthecreditisreallyasit’shitaliquiditycrunch.”


1� DistresseD InvestIng report ApriL 2008

they’vehadtodothisyet,butwilltheirgoalsbethesameasthoseoftheotherlendersinthegroup?”wondersRobPolenberg,researchanalystatStandard&Poor’sLeveragedCommentaryandData.“Aretheyinittoownthecompanyontheotherside?Aretheygoingtomaketherestructuringorthebankruptcyorwhateverprocessthey’regoingtogothroughmoredifficult?Nobodyknows.”

Thesizeofsomeofthecompaniesthatmayfindthemselvesinthesecomplicatedsituationsisanotherworry.“Ifyoulookattheaveragesizeofwhataleveragedloanlookedlikein2007,itwasgoingfor$1billion,theaverage-sizedfacility,”explainsJeffriesofWachovia.“Ifyougobacktothebeginningofthelastcyclein2001,itwasaround$350million,maybe$400million.So,we’reatleastthreetimesbiggerbasedonthatstat.

“And,you’vegotmultitudesmoreinvestorsinvolvedinthesecredits.Ithinkthatinsomerespectsit’llcreateawonderfulopportunityforsomepeoplebecausethestructuredvehiclesmaygetinasituationwherethey’reforsellers,andthatwillcreatesometechnicalsupply-and-demandproblemsinthemarketwhereyoucanfindrealvalue,”heconcludes.

Opportunitiesfor2009Therearealwayswaystoturnlemonsintolemonade,andourdistressedinvestingexpertsseeopportunitiesincertainmanufacturingsectors,suchasautomotiveparts,andtheretailsector,whichexperiencedalacklusterholidayshoppingseasonin2007.“You’rebasicallylookingattransportation,distribution,consumerproducts,”saysZappone.“Weknowwhat’sgoingoninthehomebuildingsectornow...andthoseofuswithexperienceinautomotiveknowwe’regoingtoseealotofhighactivityandhighdistress.But,youknow,withthatyoualsoseealotofopportunitiesinthemarketplace.

“Thecompanieswhobasicallygottheirdealsdoneandgotthemdoneearly,whohaveenoughliquiditytowithstandthedownturnandareoperatingefficientlyaregoingtobeopportunisticbuyers

inthemarketplace.Whenthiswholethingshakesout,therearegoingtobesomemuchstrongercompanies.But,there’sgoingtobeaperiodofseveredistresswithinthesebasiceconomiesandold-schoolindustries,includingretailandconsumerproducts,”heconcludes.

Whileconcurringwiththeoutlookforthesebasicindustries,[Crystal’s]Siskincautionedaboutcompaniesdependentonrawmaterialssuchasbasicmetals,resinandoil-price-related

materialsbecauseoftheinabilitytopassalongcostincreasesquicklytoconsumers.“IfyousellcarpettoHomeDepotorLowe’s,”hesays,“they’renotgoingtoaccept20percentincreasesinprice,eventhoughyourrawmaterialcostsmighthavegoneuptwicethat….So,youreallycan’tbuyintoEBITDAgrowth,and,quitefrankly,maybeweshouldtakethosemodelsdownbecauseofthetimelagofpassingthosecoststoyourcustomer.”

Whilecertainsectorslikeretail,automotiveandrealestatewilllikelyfounderintheyearahead,institutionalinvestorshavelearnedthevalueofdiversification.“Inthelastcycle,yousawthattelecomwas15percentofpeople’sholdings,”saysZappone.“Rightnow,there’snosectorthatholdsover10percentinanybody’sspecificholdings.So,IthinkthatbecauseofdiversificationthereissomeinsulationintermsofhowsteepitwillhitatleasttheCLOsandsomeinstitutionalinvestors.”n

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WHen Creditors Are trAders, grAy AreAs AriseWith the supposed protection of big-boy letters now in question, creditors must weigh the benefits of serving on committees.

Asthenumberofdefaultingcompaniesrises,debtholdersmustbecarefulaboutservingoncreditorcommitteesbecauserecentcourtdecisionsandlawsuitsettlements

appeartoplacecommitteemembershipinconflictwithtradingactivities,accordingtomembersofapaneldiscussionentitled,DistressedDebtTradinginVolatileMarkets.

Inthepast,manytradersbelievedthat“big-boy”lettersofferedprotectioninthesecases.Inexplainingthepurposeoftheseletters,EdwardWeisfelnerofthelawfirmBrownRudnicksaid,

“TheconceptisthatifI’vebeenexposedtomaterialnonpublicinformationbyvirtueofhavingbeenaninsiderorhavingparticipatedinsomecommitteefunction,eitherofficialorunofficial,thetheoryisthatIcansellmybondssolongasthesellerunderstandsandevidencesthathe’sa‘bigboy.’Inotherwords,heunderstandthatIwasprivytomaterial

nonpublicinformation,heunderstandsIknowalotmoreabouttheinvestmentthanheevercould,and,nevertheless,he’spreparedasa‘bigboy’toenterintothetransactionI’mofferinghimatthepricethatwe’veagreedupon.”

Suchaletterwasthoughttoinsulatethesellerfromanylegalactionthebuyermaydecidetotakepost-sale,butrecentlegalactionshaveraisednewissues.“Themoreinterestingquestion,”Weisfelnercontinued,“iswhetherornotfromtheperspectiveofthemarketplacetakenaswhole,andenforcementactionbytheSecuritiesandExchangeCommission,thebig-boyletterisgoingtoinsulatemefromFederalregulators.”

PanelmoderatorGlennSiegelofthebankruptcygroupofDechertLLPconcurred,notingthattheoreticallythebig-boyletter“mayworkinthecontextofatwo-partytransaction,butthequestioniswhetherornotthatgetsyoumuchmoreandwhetherornotthatabsolvesyoufromliabilitywithrespecttoallotherissues.”

Mustbigboysbepassedon?Toillustratethepoint,thepaneldetailedseveralrecentcases,includingthelawsuitthatwassettledin2007involvingSolomonSmithBarney(SSB),nowSmithBarney,andR2,aTexashedgefund.SSB,amemberofthenoteholderprotectivecommittee

inanout-of-courtrestructuringfortelecomcompanyWorldAccess,decidedtosellitsbondholdingsinthefailingenterprise.

SSBcontactedJeffriesGrouptolocateabuyer,andtheyfoundR2.WhenitsoldthebondstoJeffries,SSBprovidedabig-boyletter,butJeffriesdidnotpassthatalongtothehedgefund.Asaresult,whentheinvestmentprovedafailure,R2suedonthegroundsthatproperdisclosurewasnotmade.

Althoughasettlementofthecaseprecludedacourtopinion,therearelessonstoheed,panelistssaid.“Itteachesusthatasbetweenthepartiestoatransaction,intheactualcaseR2andJeffries,theexistenceofa

big-boyletter…isn’tashieldtoliability,”saidWeisfelner.

“Theconceptisthepotentialfraudinthemarketplace.Jeffries,havingtaken,ineffect,taintedbondsandputthemoutinthemarketplacewithouttellingpeoplethattheywerecomingfrompeoplewhohadmaterialnonpublicinformation,ineffectwasdefraudingthemarket.Ithinkthatwasthetheory,atleast,ofthelawsuit,”headded.

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“Thereisoftenatensionbetweentakinganactiveroleinarestructuring…andmaintainingtheabilitytotrade.”

Edward Weisfelner

Glenn Siegel



[Dechert’s]Siegeladded,“Thepositionis,andthisisthepositiontheSECtakes,thatthefactthatthereistradinggoingonwithmaterialnonpublicinformationdistortsthepricingonthebondsandthattherearepeopleouttherewhoaresellingandmakingmoneyonthefactthattheyknowsomethingthatsomebodyelsedoesn’tknow.

“And,thatbyitselfisenoughtogiverisetoasecuritieslawviolation,andthefactthatthecounterpartytothatindividualtradehaswaiveditthroughabig-boyletterdoesn’tsolvethe

problembecausethosetradesareoutthereinthemarketplace.Theysetthepriceofthebondsandthey’renotbasedoncorrectinformation.That’sthepositionthatthecommissionistakingthesedays.Howoftenthey’regoingtodoanythingaboutit,Idon’tknow,”hesaid.

Tradersaredefinitelycaughtinthemiddle,accordingtopanelistMatthewCarterofUBSInvestmentBank.“It’stoughtodisseminateifyoutransactwithabigboyandselliton.Typically,whatweliketodoispassthebigboyon.But,sayyoubuy$10millionfromsomebodyandstartpiecingitoff,atwhatpointcanyouclearlysaythatthesebondsaren’ttainted?

“Essentially,itmakesme,eventhoughIdon’tknowanything,havetopassonthebigboysall

thetime,whichpeoplereallydon’twanttotakeon.Itprettymuchwilltakeme,asamarketmaker,outofthesituation.So,wetendtotrytoavoiddealingwiththese.”

Areethicalwallsenough?Anotherissueofconcernfordistresseddebtinvestorsisthatoftradingbehindso-calledethicalwalls.IntheFederatedDepartmentStoresbankruptcy,negotiationsamongthecreditorscommittee,somelargeholdersandtheUnitedStatesTrusteeresultedinanorderbeingenteredthatallowedtradingaslongasan“ethicalwall”wassetupbetweenthetradingunitandthemembersofthecreditorscommitteeinthatparticularinstance.Theselargeinvestorswantedtoprotecttheirabilitytocontinue

buyingandsellingsecuritiesondirectionoftheirclientseventhoughthefirmswererepresentedonthecommittee.

“Theproblemwiththisisthatitworksforverylargefinancialinstitutionsthatcansegregatetheirtradingand,forlackofabetterword,theirfiduciaryfunctionwithinthesameinstitution,”saidSiegel.“It’snotquiteaseffectiveifit’sinvolvingasmallhedgefundwherethereareonlyafewpeopleinvolved.”

Ethicalwallsimposeotherproblems,too.“It’sanexpensivepropositionintermsofdemonstratingcomplianceonaperiodicbasiswiththeofficeoftheU.S.Trustee,”notedWeisfelner,adding,“Thenotionthattheguyonthefarendofthetradingplatformwhositsonthecommitteedoesn’ttalktotheguyontheotherfarendofthetradingplatformwho’sbuyingandsellingsecuritiessometimestakesalittlebitofsuspensionofdisbelief.”

TheprosandconsofcommitteeserviceDistresseddebtinvestors,therefore,woulddowelltoremainabreastofissuesregardingserviceoncreditorcommittees.“Theissuethatfacesthecreditorconstituencyiswhetherornottheywanttoopttoserveonanofficialcommittee,theviewbeingthatservingonacommitteeaffordsyouanopportunitytoinfluencetheoutcome,assistinnegotiations,andotherwisebeheretolookoutforyourinvestment,”Weisfelnersaid.

“Thereisasignificantcost,however,inservingonacommitteeandthatistheinability,atleastaccordingtotheruleswe’vebeentalkingabout,tobuyorsellsecuritiesorotherwiseprofitfromyourpositionasamemberofthecommittee,”headded.

Manymayfeelthatoptingtoserveonadhoccommittees,asopposedtoformalcommittees,solvestheproblem,butpanelistsdisagreed.“Thereisoftenatensionbetweentakinganactiveroleinarestructuring…andmaintainingtheabilitytotrade,”saidWeisfelner.“It’salmostinevitablethatonceyougettoacertainstageintheproceeding,whereultimatedecisionsoncuttingadealhavetobemade,that,ineffect,membersofadhoccommitteeshavetojumpoverthefenceandbecomerestricted.”n

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“…theexistenceofabig-boyletter…isn’tashieldtoliability.”

Matthew Carter


http://www.winston.com



Clos: doWn but not outClos have proven to be a solid asset class that will survive the current market turmoil

Whilecollateralizedloanobligations(CLOs)maynolongerdominatetheleveragedcapitalmarkets,theirvastholdingscontinuetomakethemapresence,

accordingtomembersofthepanel,CLOs,CreditDerivativesandSWAPS—WhatTheyAre,WhereThey’veBeenandHowThey’llImpacttheNextWaveofRestructurings,moderatedbyJeffMarwil,partnerofWinston&StrawnLLP.

“CLOs…historicallyhavebeenaverystablemarketwithlowdefaultrates,eventhroughcreditdownturns,”saidRobertContreras,managingdirectoranddeputygeneralcounselforDeerfieldCapitalManagementLLC.“Thatisdemonstratedbytheverylimitednumberofdowngradesbytheratingagencies—only98downgradesacrossapproximately6,000tranches.”

ExpressingtheopinionthatinthecurrentmarketCLOsare“thebabythat’sbeentossedoutwiththebathwater,”GregoryCooper,founderandmanagingdirectorofDenaliCapitalLLC,defendedtheassetclass,too.“TheratingagenciestakeaverystrongviewpointandstancewhenstructuringaCLO.Wehavealotofdifferentcovenants,ifyouwill,thatwehavetomaintain,suchasspread,weightedaverageratingfactor.They’restructuredto

thepointwheretherearemandatorydiversificationtriggersbuiltin.It’sdifferentfromCDOs[collateralizeddebtobligations].ACDOisbasicallyabunchofmortgagesfromonegeographicarea.Theygotblownoutofproportionandthey’vekindoflosttheirway.”

FellowpanelistMattGerdes,managingdirectorofFreeportFinancial,notedthatliquidityisanissuerightnowforCLOs.“TheCLOassetclassisasolidassetclass.There’salotofcapital

that’sbeeninvestedthereoverthelastseveralyearsandthatcapitalislong-termcapitalthat’sperformingwellforitsequityholdersanditsdebtholders.

CONTINUED >

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�0 DistresseD InvestIng report ApriL 2008


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“Theissuereallyisliquiditytofundfuturegrowthinthemarket.So,alotoftheCLOassetmanagershavebeenfrozenbythelargeinvestmentbanksandmoneycenterbanksthatprovidewarehousefinancing,justgiventhevolatilityinthemarketandthelackofatakeoutofthosewarehouselinesdowntheroad.”

TheperfectstormTheCLOmarketfindsitselfinturmoil,accordingtoCooper,becauseof“aperfectstormthatshowedhowinterconnecteda

lotofcapitalmarketsare.”Insummarizingtheeventsofthepastyear,Coopersaid,“ThereasontheCLOmarkethasbeenhurtthewayithasbeenisbecausewhenthesubprimemarketstartedtocometofruitioninJuly,itcausedtheinvestorbasefortheCLOliabilitiestoliterallydryupovernight.And,whenthathappened,anyinvestorsthatwereleftwererequiringwiderspreads.”

Thiscausedinvestmentbanksthatwerewarehousingdeals

inanticipationoffutureCLOclosingstofindthemselveswithbillionsofdollarsinassetssittingontheirbalancesheetsandfewoptionsformovingthemon.“Thereareleveragedbuyoutsthatsponsorscommittedtoearlierin2007,andthey’vereflectedmultiplesthatareone,two,insomecasesthree,timeshigherthanwhatthecompanydeservedtobegettingitfor,”Coopersaid,“andthebankshadcommittedfinancing,insomecaseswithnocovenants,withspreadsthatare150to250basispointsoutofmarket.”

Privateequityfirmshavebeencaughtinthesqueeze,too.“You’vegotallthisprivateequitymoneythat’sbeenraised,needsahome,buttheycan’tgettheirdealsunderwritten,”Coopersaid,“So,theyhavetogobackandrestructuretheirdeals,theirpurchaseagreements,withthesellers.Inalotofcasestheyhavetorenegotiate,andittakesawhile….So,alotofdealsjustgettakenoutofthemarketplace,whichisagoodthingforthePEgroupsbecausetheycan’tgetthemfinancednowanyway.”

PEfirmsalsofindthemselvesstrugglingtofinancetheneedsoftheirportfoliocompaniesandmayfindthemselvesinunfamiliarworkoutterritoryasaresult.“Privateequityfirmsenjoyedthe

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“It’snotefficient,butthereisamarkettogetthingsdone.”

http://www.andrewskurth.com/bankruptcyrestructuring


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�� DistresseD InvestIng report ApriL 2008


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excessliquiditythatwascreatedbyalltheseCLOmanagerswhocameintothebusinessinthelasttwoyears,”Coopernoted.“They’renotgoingtolikeitwhenadealdoeshaveanissueandtheyfindoutthatthereare110lendersinthedealandthey

probablyknowfourorfiveofthem….The[workout]landscape,theplayingfield,isgoingtobecompletelydifferentthiscyclebecauseyouhavedifferentplayers.Youhavemoreinstitutionalinvestorsasopposedtothelastcycle,inwhichyouhadmorebanks,regionalbanksandcommercialfinancecompanies.”

Theonebrightspotcitedbythepanelistswasinfinancingforsmalldeals.[FreeportFinancial’s]Gerdesnotedthathisfirmhasbeendoingdealsunder$125million.“Alotofthefinancecompaniesarestillactivelylending,andonaclubbasis,combiningregionalbanks,financecompanies,whathaveyou.

There’senoughcapitaltogetsomeofthesethingsdone.”

Theoutlookforlargecapstructuredproductsislessoptimisticbecauseofhighercapitalrequirementsandtighterterms.“You’renotgoingtosee[playout]theoldadage‘thethreeofusandaBloombergcouldgetstartedinthisbusiness,’whichyousawasrecentlyasJanuary2007,”Coopersaid.“Scaleisgoingtomatter.Ithinkeverystructuringagentouttherewilltellyouthattheuniverseofmanagersthatcangetnewdealsdoneisprobably20or30differentmanagers.”

Where’sthemoneynow?Withlendersreluctanttofinanceorrefinanceacquisitionsandloans,wherecanborrowersturn?“Fromourperspectiveinthemiddlemarket,”saysGerdes,“Ithinkthereisamarket.It’snotefficient,butthereisamarkettogetthingsdone.”

Cooperagreed.“Themarketsareopen….Thereisalotofmoneyoverseas,alotofpocketsofmoneyintheStatesthatwanttogetputtoworkintheloanassetclass.Itisanattractiveassetclass,andwe’reinacyclicalbusiness.”Thelessonofthecurrentsituation,accordingtoCooper,is“youjustdon’tturnaloanintoabondovernight,whichisreallywhathappenedoverthelast18months.Seniorsecuredloansbecamesecuredbondswithnocovenants.”n

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“…theuniverseofmanagersthatcangetnewdealsdoneisprobably20or30differentmanagers.”

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�4 DistresseD InvestIng report ApriL 2008


China’seffortstomodernizeitsbankruptcylawsareahopefulsignfordistresseddebtinvestors,buttheyarebabystepsthatwon’ttranslateintoeasydealsanytime

soon,accordingtomembersofthepanel,DistressedInvestingintheMiddleKingdom,moderatedbyGeorgeKelakos,managingdirector,KelakosAdvisorsLLC.

TheEnterpriseBankruptcyLaw,whichtookeffectonJanuary1,2007,incorporatesmanybankruptcyandreorganizationconceptsfoundintheUnitedStatesbutisoftenlackingimportantimplementationdetails.

Nevertheless,whilenotingthatuntilnowtheonlyoptionforforeignersinChinawaspurchasingnonperformingloans,HelenaHuang,aHongKong-basedpartneratKirkland&EllisLLC,pointedouttwopotentialopportunitiesaffordedbythenewlaw.Firstisthatitofferstheabilityofthedebtorortheadministratortosellsubstantiallyallofabankruptcompany’sassetsinbankruptcyand,secondly,itincludestheabilityofthedebtororadministratortoborrowintheordinarycourseofoperatingthebusiness.

“InthepastcoupleofmonthswhenIwasinChinatalkingtosomeofthejudgesandrestructuringprofessionals,”Huangsaid,“IcouldsensethattheChineserestructuringcommunityisveryinterestedinthis,althoughtheydon’tknowexactlyhowtoimplementit.”

CulturalbarriersremainChanginglawsisonething;changingculturalattitudesisquiteanother.“ThenewbankruptcylawinmyviewdoesnotandwillnotdoonethingandthatistochangethetraditionalculturalattitudeoftheChineseagainstbankruptcy,”saidAlanTang,whoheadsuptheRestructuringGroupofGrantThorntoninHongKong.

FrankMack,CTP,ofConway,MacKenzie&DunleavyInc.concurred.“InChinathereisabigemphasisonculturalissuesasopposedtointheUnitedStates,wherewehaveafocusonaframeworkoflawsandpractices.InChinayouhave5,000yearsofhistory,whichisnoteasytobreak.”

Tangnoted,however,thatthe2007lawemphasizesrestructuring,whichthepredecessor1986lawdidnot.“Thenewlawextendsthescopefromthestate-ownedenterprisestobasicallyalltypesofbusinesses,includingforeigninvestmententerprisesinChina,”Tangexplained.“Undertheoldlaw,only

thestate-ownedenterpriseswereallowedtobebankrupt.Butnowunderthenewlawallenterprisesaresubjecttothislaw.And,asIsaid,theemphasisisonrestructuringand,therefore,theopportunitiesarehuge.”

TheadventofrestructuringwaswelcomedbypanelistPhilGrovesofDACManagementLLC,thefirstforeignbuyerinChinaofnonperformingloansfromtheassetmanagementcompanies.“Undertheoldrules,thegovernmenthadgreatpowertodirectandoverseethebankruptcyprocess,sooneoftheeffectsofthenewlaw,althoughwehaven’tseenitinpractice,isthatthegovernmentcan’tdothatwilly-nillyanymore.”

Thischangewillbebeneficial.“Itmakesitalotmoreinteresting

fortherestructuringprofessionalsandthebuyersthatwenowhaveanotherwaytoexitourloansotherthanjustchasingpeoplearoundwithastick,sotospeak,”Grovessaid.

“Intheearlyyears,”herecalled,“almostallofthevalueofthecollateralwasrealestate.So,theonlytypeofrestructuringyoumightgetwasthatyoumightendupwithsomepropertyorabuildingorahotel.But,we’restartingtoseealotmoredebtorscomingtousnowsaying,‘Whydon’twerestructure?Wehavethisnewbankruptcylaw.’Theyhavenoideawhatitmeans.Theyjustknowit’soutthere,soyou’regoingtoseealotmorerestructuringwork,Ithink.”

OneofthemainstumblingblockstoinvestinginChinaistheamountofbureaucracyinherentinthesystem.“Oneoftheworstthings,”saidTang,“istheinfluence,ifnottheintervention,ofthegovernment….Therearedifferentlevelsofgovernment–provincial,central–andthentherearealsodifferentdepartmentsanddivisionswithingovernment.

“It’ssometimesconfusing,ifnotfrustrating,foroverseasinvestorsnegotiatingwiththeChinesetofindoutthattherealdecisionmakerisnotsittingacrossthetable.You’vegottogothroughalotoftheseroundsofmeetingsbeforeyoureallygetclosetothetruedecisionmaker.”

CHinA’s neW bAnKruptCy lAW opens possibilitiesWhile a more Western legal code will help open markets, cultural differences make implementation a slow process

CONTINUED >

“…theemphasisisonrestructuringand,therefore,theopportunitiesarehuge.”


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TheimportanceofbusinessrelationshipswhenoperatinginChinacannotbeunderestimated.Grovesdescribedhowhisfirmusesdifferentattorneysineachcityinwhichitwantstodobusiness.“Whenyouenteranewcitytobuythings,findtheattorneyswhoarerelatedtothejudgesandthemayorandwhoknowthesellersverywell…becausealmostyourentireacquisition,restructuringandsaleprocessisgoingtobedictatedbyhowwellyourattorneysknoweveryone,”hesaid,addingthathewasnotimplyingthattherewasanythingillegalgoingon.“It’salljustheavilyrelationshipdriven,”heexplained.

CourtsbecomemoresophisticatedThecourts,ofcourse,willplayasignificantroleasbankruptcyandrestructuringbecomemorewidelyused,butthequalityofjudgeshandlingthesecasesacrossChinavaries.“IfyougotoChina,you’regoingtoseeahugedisparityamongthequalificationofjudges,”Huangsaid,notingthatjudgesinlargercitieslikeBeijingandShanghaialsohandlecommercialmattersandsoaremoresophisticatedaboutbusinesstransactions.Judgesinsmallercities,however,arenotsoconversantwithbusinesslawsand

“wouldnotmakeadecisionuntiltheygetsomekindofOKfromthelocalgovernmentorrelevantagency,”sheadded.

“But,Iactuallyseethesituationimprovingandchangingdaybyday,”Huangsaid,“andIknowthateversincetheadoptionofthisnewbankruptcylaw,theSupremeCourtofChinaandthecourtsatvariouslevelshavehostedmanyseminarsandtrainingsessionsforjudges.”ShealsosawasapositivesignthefactthattheSupremeCourthasactivelysolicitedopinionsfromrestructuringexpertsworldwideinanefforttodevelopimplementationrules.

“Ihavealotofhopeforthedetailedimplementationrules,”saidHuang,“andIcanseethatalotoflittleissuespeoplearetalkingaboutmayshowupinthedetailedimplementation,whichcouldhelpalotintherealpractice.”

Perhaps[ConwayMacKenzie&Dunleavy’s]Mackhadthebestadvicewhenhesaid,“ThingsmoveveryslowlyinChina…soyouhavetohavepatientmoney.”n

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Abu DhAbi investment Authority • AccorD FinAnciAl • AccuvAl AssociAtes incorporAteD • Acorn cApitAl Group llc • ADveq mAnAGement us., inc. • AeG pArtners llc

Akin Gump strAuss hAuer & FelD llp • Alessio pArtners, inc. • AlGon Group • AlixpArtners • AlliAnce mAnAGement inc. • AlvArez & mArsAl • AmericAn cApitAl strAteGies

the AnDerson Group • AnDrews kurth llp • AnGelo GorDon & co. • Aon, inc. • Apex FunDAmentAl pArtners llc • Atwell,curtis & brooks, ltD.

AurorA mAnAGement pArtners AurorA resurGence • bAin & compAny • bAin corporAte renewAl Group • bAker & mckenzie llp • bAllArD spAhr AnDrews & inGersoll llp

bAnk oF AmericA business creDit bAnkers ADvocAte Group • bArnes & thornburG llp • bArrier ADvisors inc. • bAysiDe cApitAl • bDo seiDmAn llp

berenson AnD compAny llc • binGhAm mccutchen llp • blAnk rome llp • bmc Group • bownebrAcewell & GuiliAni llp • briDGe AssociAtes llc • briDGe FinAnce Group llc

broADwAy ADvisors llc • brookFielD Asset mAnAGement • brown Gibbons lAnG & compAny • brown ruDnick berlAck isrAels llp • bryAn cAve llp

burGunDy Asset mAnAGement ltD. • burns & levinson llp • cApes sokol GooDmAn & sArAchAn pc • cApitAl crossinG • cApitAlsource FinAnce llc

cArl mArks ADvisory Group llc • cArvAl investors • cb richArD ellis • ceDAr croFt consultinG ltD. • ceDArwooD AssociAtes llc • century services (usA) inc.

cerberus cApitAl chicAGo llc • chAse business creDit • cit commerciAl FinAnce • citibAnk • citic usA holDinG inc. • cleAr thinkinG Group • cleArbiD cApitAl

coFFin & AssociAtes • cohen seltzer inc risk mAnAGement & insurAnce • columbiA business school • columbiA lAw school • the comvest Group

cooley GoDwArD kronish llp • countrywiDe home loAns • creo cApitAl pArtners • crG pArtners llc • crowe chizek • crystAl cApitAl • cushmAn wAkeFielD

DAc mAnAGement, llc • DAy pitney llp • the DeAl llc • Dechert llp • DeerFielD cApitAl mAnAGement llc • Deloitte FinAnciAl ADvisory services llp • DenAli cApitAl llc

DieDrich von soosten & co. inc. • DlA piper uk llp • DlA piper us llp • DollAr FinAnciAl Group • Dominion pAciFic Group • Donlin recAno & compAny • Dorsey & whitney llp

DrinkerbiDDleGArDnercArton • DuFF & phelps, llc • e.h. winston & AssociAtes • em ADvisors • emerAlD technoloGy vAluAtions llc • epiq systems inc.

executive sounDinG boArD AssociAtes inc. • FAeGre & benson llp • FArber FinAnciAl GroupFeDerAl reserve bAnk oF chicAGo • Fennemore crAiG • FGi FinAnce

the Finley Group inc. • First AmericAn title insurAnce compAny oF ny • Firstcity crestone llc • FirstliGht FinAnciAl corporAtion

Focus mAnAGement Group llc • Fortress investment Group • Freeborn & peters llp • Freeport FinAnciAl • FrieD FrAnk hArris shriver & JAcobson • Fti consultinG inc.

FulbriGht & JAworski llp • G.e.m. Auction, ApprAisAl AnD liquiDAtion Group • GArnet cApitAl ADvisors, llc • GArrison investment Group

GAvin AnDerson & compAny • Gb merchAnt pArtners • Ge commerciAl FinAnce8 • Ge commerciAl FinAnce - bAnk loAn Group • Ge corporAte FinAnciAl services • Ge equity

Ge GlobAl sponsor FinAnce • Gemini pArtners inc. • Getzler henrich & AssociAtes llc • GolDmAn sAchs & co. • Goulston & storrs, p.c. • GrAnt thornton • GreAt AmericAn Group

GreenberG trAuriG llp • Gryphon investors • Gtc nutrition • hAckmAn cApitAl pArtners llc • hAhn & hessen llp • hArris, JerniGAn & Geno • hAynes AnD boone, llp

heAlth cApitAl investors, inc. • heenAn blAikie llp • the hilco orGAnizAtion • hollAnD & kniGht llp • holme roberts & owen llp • houlihAn lokey howArD & zukin • hsbc bAnk usA

hunt speciAl situAtions Group lp • huron consultinG Group • icon cApitAl • imperiAl cApitAl llc • inDustriAl opportunity pArtners • inG cApitAl, llc • insiGht equity

JAGer smith pc • JeFFeries • John lees & AssociAtes limiteD • Jones DAy • kAtten muchin rosenmAn • keArney & phelAn • keen consultAnts

the reAl estAte Division oF kpmG corporAte FinAnce llc • kelAkos ADvisors llc • kelleher & AssociAtes • kestrel consultinG llc • kirklAnD & ellis llp

klee, tuchin, boGDAnoFF & stern llp • klehr, hArrison, hArvey, brAnzburG & ellers, llp • kpAc solutions llc • kpmG (AustrAliA) • kpmG corporAte FinAnce llc

kps cApitAl pArtners lp • kurtzmAn cArson consultAnts llc • kutAk rock llp • lAminAr Direct cApitAl the De shAw Group • lAmm rubenstone llc • lAnDsbAnki

the lAsAlle network • lAurelton Group llc • lAzArD miDDle mArket • lbc creDit pArtners inc. • the lenDer’s Group inc • leucADiA nAtionAl corporAtion

levine leichtmAn cApitAl pArtners • lewis AnD rocA llp • locke lorD bissell & liDDell llp • loeb & loeb llp • loeb equipment & ApprAisAl compAny

lonGroAD Asset mAnAGement llc • lonGuevue cApitAl • louGhlin meGhJi + compAny • lsq FunDinG Group • mAcquArie securities (usA) inc.

mAnAGeD Assets internAtionAl llc • mAnninG & nApier ADvisors • mArlin equity pArtners

mAtlin pAtterson GlobAl ADvisors llc • mcDermott will & emery llp • mcDonAlD hopkins llc • mcGuirewooDs llp • meDicAl cApitAl corp.

melville cApitAl liFe settlements • the meriDiAn Group • merrill lynch cApitAl • mesirow FinAnciAl consultinG • mesirow FinAnciAl inc.

mesirow insurAnce services, inc. • miller buckFire & co., llc • miller thomson llp • moGliA ADvisors • monomoy cApitAl pArtners • monroe cApitAl llc • morGAn stAnley

morris AnDerson & AssociAtes ltD. • morris nichols Arsht & tunnell • much shelist • munGer tolles & olson llp • myers & co. • nAchmAnhAysbrownstein inc.

nAtionAl city speciAl situAtions Group • new streAm cApitAl • nixon peAboDy llp • north centrAl equity llc • northern heAlthcAre cApitAl llc

northwestern university kelloGG school oF mAnAGement • oceAn Avenue ADvisors, llc • o’keeFe & AssociAtes consultinG • orix usA corporAtion

otterbourG, steinDler, houston & rosen, p.c. • pAchulski stAnG ziehl & Jones • pArAGon FinAnciAl Group, inc. • phoenix cApitAl resources

pillsbury winthrop shAw pittmAn, llp • plAtinum FunDinG Group • pliAnt corporAtion • pnc business creDit • presiDentiAl FinAnciAl corporAtion • proskAuer rose llp

proviDence cApitAl • qorvAl llc • quinn pAciFic • r2 ADvisors llc • rAlly cApitAl services, llc • rbs Greenwich cApitAl • rcs reAl estAte ADvisors

rebeccA o. FruchtmAn lAw oFFices • republic FinAnciAl corporAtion • richter consultinG inc. • robert w bAirD & co. inc. • rosenthAl & rosenthAl

rothschilD • rr Donnelley • rsm mcGlADrey • rsm richter • sAFe hArbor AssociAtes llc • sAk mAnAGement services llc • sAlAns • sb cApitAl Group llc

schonbrAun mccAnn Group • the seAport Group, llc • seDGwick Detert morAn & ArnolD llp • sei investments • sentinel cApitAl pArtners • seyFArth shAw

sFw cApitAl pArtners, llc • sheArmAn & sterlinG llp • sheppArD mullin richter & hAmpton llp • siGnAture cApitAl pArtners llc • silver point cApitAl

silver point FinAnce • sirote & permutt pc • skADDen, Arps, slAte, meAGher & Flom llp • solutions in prActice llc • sommer bArnArD pc

southwest usA bAnk • sprinG street cApitAl llc • stAirwAy cApitAl • stAnDArD & poor’s leverAGeD commentAry & DAtA • steel city cApitAl FunDinG, llc

steptoe & Johnson llp • stevens & lee pc • stoll keenon oGDen • stony lAne pArtners & heico Acq. • stony lAne pArtners, l.p. • stutmAn treister & GlAtt pc

summit investment mAnAGement • sun cApitAl pArtners inc • superior cApitAl pArtners llc • suryA cApitAl llc • svb cApitAl • tAtum llc

tennenbAum cApitAl pArtners, llc • textron FinAnciAl • thilmAn Filippini/hrh • thrivent FinAnciAl For lutherAns • tiGner executive consultinG

tmb inDustries llc • trAmmell crow compAny • treADstone cApitAl mAnAGement • trenwith Group llc • tucker ArensberG pc • u.s. bAnkruptcy court

ubs investment bAnk • universAl equity Group • university mAnAGement AssociAtes & consultAnts corp. • university oF Detroit mercy

vArnum riDDerinG schmiDt & howlett • veDDer price, p.c. • versA cApitAl mAnAGement, inc. • vorys, sAter, seymour AnD peAse llp • voyAGer cApitAl

wAchoviA cApitAl mArkets llc • wAchoviA securities • weil GotschAl & mAnGes llp • wells cApitAl mAnAGement • wells FArGo business creDit inc.

wells FArGo Foothill • wells FArGo retAil FinAnce • the weston compAny llc • williAm blAir & compAny llc • winston & strAwn llp

womble cArlyle sAnDriDGe & rice pllc • wooDsiDe cApitAl mAnAGement llc • wynnchurch cApitAl ltD. • xroADs solutions Group • yAntek consultinG Group inc.

thAnks to All the compAnies thAt AtternDeD the 2008 DistresseD investinG conFerence


SkaddenSkadden, Arps, Slate, Meagher & Flom LLP

& Affiliates

Corporate

Restructuring

Skadden’s worldwide corporate restructuring practice has played a key role in some of the most widely

publicized matters involving troubled companies. From retail and telecommunications, to steel and energy,

these reorganizations were representative of an expansive array of global industries and included nonju-

dicial debt restructurings, acquisitions, financings and related matters, and in chapter 11 reorganization cases,

“prepackaged” and “prearranged” reorganizations. With 13 strategically located international offices, Skadden

has participated in the increased frequency of cross-border restructurings by representing companies, acquirers

and creditors in numerous transactional matters throughout Asia, Australia, Europe and the Middle East.

Skadden has advised on some of the most widely publicized recent chapter 11 cases, including acting as lead

counsel for Birch Telecom, Inc.; Chart Industries, Inc.; The Delaco Company; Delphi Corporation; First

Virtual Communications, Inc.; Friedman’s Inc.; GenTek, Inc.; Hayes Lemmerz International, Inc.;

Haynes International, Inc.; Interstate Bakeries Corporation; IT Group, Inc.; Kmart Corporation; NTL

Incorporated and its affiliates; Orius Corp.; Polaroid Corporation (now known as Primary PDC, Inc.); RCN

Corporation; Refco Inc.; Safety-Kleen Services, Inc.; Service Merchandise Co., Inc.; SLI Inc.; Tokheim

Corporation; Ultimate Electronics; US Airways Group, Inc. and Winn-Dixie Stores, Inc.. We have acted

as special counsel in numerous prominent reorganization cases, including on behalf of Enron Corp., Genuity,

Inc., Ingersoll International, Mirant Corporation, National Steel Corporation, Owens Corning, and The

Warnaco Group, Inc. Skadden has also advised on a number of major financial restructurings outside of bankruptcy

reorganization or insolvency cases, including those matters for Alamosa PCS Holdings, Inc., Evergreen

International Aviation, Fairfield Manufacturing Company, Gemini Industries, Inc., HealthSouth

Corporation, Intergen (North America), Inc., Reliant Resources, Inc., Rural Cellular Communications

and Xerox Corporation.

Firm/Affiliate Offices: BOSTON CHICAGO HOUSTON LOS ANGELES NEW YORK PALO ALTO SAN FRANCISCO WASHINGTON, D.C. WILMINGTON

BEIJING BRUSSELS FRANKFURT HONG KONG LONDON MOSCOW MUNICH PARIS SHANGHAI SINGAPORE SYDNEY TOKYO TORONTO VIENNA

WWW.SKADDEN.COM

New York

John Wm. Butler, Jr., Partner (212) 735-3114

J. Gregory Milmoe, Partner (212) 735-3770

D. Jansing Baker, Partner (212) 735-2150

Jay M. Goffman, Partner (212) 735-2120

Mark A. McDermott, Partner (212) 735-2290

Sally McDonald Henry, Partner (212) 735-2556

Kayalyn A. Marafioti, Partner (212) 735-2350

Alesia Ranney-Marinelli, Partner (212) 735-2870

J. Gregory St. Clair, Partner (212) 735-2424

Stephanie R. Feld, Counsel (212) 735-2107

Rosalie Walker Gray, Counsel (212) 735-3214

Thomas J. Matz, Counsel (212) 735-2365

Los Angeles

Van C. Durrer II, Partner (213) 687-5200

Kurt Ramlo, Counsel (213) 687-5628

Glenn S. Walter, Counsel (213) 687-5149

London

N. Lynn Hiestand, Partner (44) 20-7519-7120

Chris Mallon, Partner (44) 20-7519-7236

Chicago

John Wm. Butler, Jr., Partner (312) 407-0730

Chris L. Dickerson, Partner (312) 407-0786

J. Eric Ivester, Partner (312) 407-0920

John K. Lyons, Partner (312) 407-0860

Ron E. Meisler, Partner (312) 407-0549

George N. Panagakis, Partner (312) 407-0638

Felicia Gerber Perlman, Partner (312) 407-0758

Timothy R. Pohl, Partner (312) 407-0772

Stephen D. Williamson, Counsel (312) 407-0741

Wilmington

Anthony W. Clark, Partner (302) 651-3080

Mark S. Chehi, Partner (302) 651-3160

Eric M. Davis, Partner (302) 651-3190

Gregg M. Galardi, Partner (302) 651-3150

Marion M. Quirk, Counsel (302) 651-3129

Robert A. Weber, Counsel (302) 651-3144

http://www.skadden.com

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