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Unsecured creditors need a level playing field, which
means getting their own investment bankers.
Numerous Chapter 11 cases are being filed by
middle-market businesses with secured claims in excess
of going-concern values, and many unsecured creditors -
typically trade vendors, employees and other service
providers - face little to no recovery.
In some recent cases, however, the unsecured creditors
committee retaining an investment banker has made the
difference between no recovery and a substantial
windfall for unsecured creditors.
Unfortunately, for every success story, there are more
instances where the bankruptcy court has blocked UCCs
from hiring their own investment banking
representatives. Resistance comes from various
constituents, including the judge, U.S. trustee,
creditors and debtor's advisers in the case, all of whom
have their own agendas and objections that need to be
overcome.
The three most common objections to the UCC retaining
its own investment banker are
• No money. The UCC is "out of the money" and can't
afford to pay for its own banker.
• Duplicative services. The debtor's banker has
extensively marketed or is currently marketing the
assets.
• Disruption. Any co-marketing of the assets will be
disruptive to the existing sale process.
On the surface, these objections may appear valid in
most circumstances. Let's tackle them one by one.
First, the no-money objection: By soliciting input from
all parties to the bankruptcy, compensation can be
structured to align everyone's interest. To overcome the
"who pays" objection, the UCC must devise creative
compensation structures. These may include reduced (or
no) retainers, a guaranteed downside fee, success fees
that are payable based on values above the
stalking-horse bid or if the new banker generates
distinct bidders that participate or bid at the auction.
Second, the duplicative-services objection: Often courts
and attorneys representing UCCs do not understand the
subtle but critical differences of marketing a company
as a going concern pre-petition versus marketing these
same assets in a post-petition context, where few
debtors' investment banks are experienced. Differences
range from the requirement for new marketing materials
describing the events leading up to the filing, the
bidding/sale process and timeline of critical court
dates, and the restructuring/cost savings opportunities
afforded to new owners through the ability to reject
unfavorable contracts/leases.
Today, there are hundreds of acquirers with millions of
dollars that are dedicated to acquiring assets out of
bankruptcy due to the cleansing of liabilities afforded
by the Section 363 sale order. A non-bankruptcy banker
may be ill-experienced to know of and access these
unique pools of buyers.
A debtor's banking team can also experience "deal
fatigue" in which so much effort has been expended on
marketing a deal that the team literally gives up trying
to find new potential buyers. Deal fatigue can also
occur from misaligned compensation structures that
involve a large minimum fee versus a percentage of the
transaction value.
Finally, the "disruptive to process" objection: Some
cases need constructive disruption. With the debtor
facing severe financial distress or liquidation, many
filings today have first-day orders involving a
prenegotiated stalking-horse purchase agreement that are
intended to chill bidding rather than promote a
transparent process that maximizes the value of the
estate.
In a recent case, the UCC and its advisers were able to
change the initial bulk-only bidding requirement to
allow for individual lot bids for the intellectual
property, real estate and machinery while still allowing
any bulk bidder to participate as long as its bid
exceeded the aggregate of the individual lots. In this
case, the UCC went from about $30 million out-of-the
money to a $40 million in-the-money recovery and the
secured creditors received a 100% recovery.
This example demonstrates the many possible benefits of
UCCs winning the battle to retain their own investment
banker. But in many cases, even an unsuccessful attempt
can have benefits for the committee. The very threat of
the retention puts the debtor under the microscope of
the court, resulting in more open communication and
stepped up marketing efforts by the debtor's bankers.
Moreover, it can also result in concessions being
extracted from secured creditors through a monetary
carve-out for unsecured creditors in exchange for the
UCC standing down.
Ricardo S. Chance is an investment banker and managing
director of the bankruptcy and restructuring practice of
Trenwith Securities LLC.
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