New York-based Kirkland & Ellis restructuring practice group partner Steven Serajeddini has been the tip of the spear in many of the largest and most complex U.S. chapter 11 cases in recent years, representing debtors in highly successful matters including Intelsat, PES Holdings, GulfPort Energy, Belk, SandRidge Energy, Ascena Retail Group, and GenOn Energy, among others, where he led each of those companies to a value-maximizing outcome.
In the latest edition of the LevFin Insights Bankruptcy Spotlight series, Steve and LFI’s head of bankruptcy coverage and analysis, Jason C. DiBattista, sat down for a discussion about his latest high-profile engagement as lead counsel to the Talen Energy Supply ad hoc bondholder group and related issues, Intelsat’s arduous – and ultimately fully-consensual restructuring, and a look ahead to what may be coming in the restructuring world as a consequence of deteriorating market conditions.
JCD: Let’s start with the Talen case and your current role as lead counsel to the plan sponsor, the ad hoc unsecured bondholder group. As recently as mid-March, those bonds were trading at an all-time low and it seemed that bondholders might be out of the money in a bankruptcy scenario. Two months later, the company files for chapter 11 with an RSA with your group that provides for noteholders to receive 100% of the company’s new equity under a plan, with your clients backstopping up to $1.55 billion of an equity rights offering – a dramatic reversal in a short period of time to say the least. I think everyone is anxious to hear how that deal came together.
SS: There was definitely a perception in the world that the bonds in this case were not in a good spot in the lead up to the filing. It was incumbent on our clients – and to their credit they saw it very early on – to step up with capital to improve their position and preserve value for all unsecured creditors. The closer we got to the filing, the greater the risk became of an RSA with parties other than our clients that might have been very harmful to unsecured creditors.
Seeing that, our clients quickly worked through the underwriting processes to commit to writing a significant check and keeping it in place for a very long period of time in a volatile environment. They did that because they had the courage of their convictions. We gave it the full-court press to try to get a seat at the table and to get that, the clients had to step up in a big way and they did, so it’s a tremendous result.
It shows that unsecured creditors that organize with conviction around a premise can take steps to prevent what is a more common outcome perhaps in a lot of large cases, which are RSAs with secured creditors and potentially unfavorable outcomes for unsecured creditors.
JCD: Following up on that, what types of challenges do you see in the Talen case going forward as we move into the “go-shop” period and a plan confirmation process?
SS: What’s in the best interest of all stakeholders is to move quickly and limit the amount of time the company spends in chapter 11. Our focus will be to continue to resolve open points and move the cases forward as efficiently as possible to get this case to emergence.
There’s still some more work to do, but we will all do as much as we can as quickly as we can so we can get the business back to doing what it does best.
JCD: I think we are most used to seeing you as debtor’s counsel in cases. What was it like for you taking on a different role as an unsecured creditor group’s counsel in a large case like Talen?
SS: While it may not always be as visible as our debtor practice, we have a very large creditor practice and investor practice. We approach our creditor practice very much like our debtor practice, which is finding areas for alignment with the company and its stakeholders and where parties can work together to maximize value.
By putting ourselves in the shoes of the company and working with a company to develop a transaction and a process that we would stand behind as debtors’ counsel, our approach can be incredibly effective. Whereas perhaps others might look at it more from a zero-sum perspective, we come at it from a value-maximization perspective. I think that distinguishes our creditor practice.
JCD: We touched on the upsized $1.55 billion ERO backstop commitment that your unsecured bondholder clients are providing in Talen. As you know, these types of backstops are becoming more and more en vogue in chapter 11 as a way for debtors to raise capital and fund a plan. Can you talk a little bit about this form of financing and why it’s being used so effectively in large chapter 11 cases these days?
SS: Yes, I think there are a few factors that contribute to it. One is that we are seeing capital structures that are more and more levered with secured debt. By the time a company exhausts its out-of-court restructuring opportunities and gets to the point where a chapter 11 filing is really the ideal means of implementing a transaction, the company is often heavily levered with secured debt.
The consequence of that will be one of two things. You either have to find a solution where secured lenders are willing to equitize, or you have to find a solution where other constituents are willing to write big checks to de-lever the company and ensure there is go-forward liquidity. You often want larger committed checks when it comes to refinancing the senior parts of a large company’s capital structure and that’s where the backstop need comes in.
It’s a very popular tool because management teams, many of whom have experience in M&A, focus on commitments. Generally companies don’t favor an open-ended rights offering because you never know what the result is going to be. So they’re looking to secure, early in the case, a fully-committed financing that will allow the business to emerge and tick off one of the big variables that a company was looking at with respect to its capital structure and wondering whether it could achieve.
If a creditor constituency can give a company that commitment, you’re taking that uncertainty out of the equation, addressing issues related to valuation and adequate protection of secured lenders, and providing a company with a clear path to emergence without one of the biggest variables, a commitment around financing.
JCD: When you’re dealing with so many sophisticated investment firms as part of a larger group, how difficult is it for you as bankruptcy counsel to get the players on the same page when it comes to major decision making?
SS: One of the more challenging aspects of creditor ad hoc group representations is building a consensus and building a common viewpoint. That’s really where advisors serve a very important role in synthesizing a disparate set of viewpoints into a consensus, or as close as you can get to a consensus perspective.
The good news is, as restructuring lawyers we are trained to find consensus where it may be challenging to find. We spend a lot of our time developing commonality among the various stakeholders, many of whom are very sophisticated and have perspectives predating your conversation.
Finding a way to foster that consensus is the most challenging part of what we do, but often the most intellectually rewarding part of what we do.
JCD: Intelsat emerged from chapter 11 in February of this year after one of the most complex restructurings that we will ever see, with you leading the Kirkland team as debtors’ counsel. While a fully consensual plan was finally achieved at the very end, it took around two, hard-fought years to get to that value-maximizing result. Can you talk about the Intelsat case and how it played out?
SS: Intelsat, you’re right, is one of those cases that folks are going to remember for a long time. Part of it obviously is the size of the matter. It’s one of the largest filings of the past couple of years, and in addition to that, it had unique complexity in terms of how it started, which was a company whose greatest source of value rested in the hands of how the FCC would approach monetization of the “C-Band.”
Once we got a little bit more certainty around what the C-Band monetization would look like, we determined that those funds were actually not going to solve all of the company’s challenges, especially in light of the negative impact of the COVID-19 pandemic. It led us to evaluating different forms of financing the C-Band clearing process, including comprehensive restructuring solutions. And it became clear pretty quickly that the best way to do that was going to be a DIP financing out of the senior secured position in the capital structure, which we were able to achieve.
Early on in the cases, the company saw an opportunity to act on an acquisition of Gogo Inc.’s commercial aviation business. That took us down a road that is pretty rare for a chapter 11 debtor, which was to be a cash purchaser of significant assets, and we were able to close that transaction as well.
When it came to the balance sheet restructuring, we had to come up with a comprehensive plan and there were various ad hoc groups to reconcile. They were very sophisticated, represented by very sophisticated advisors. And one of the things about larger cases is that certain issues in smaller cases that might fall to the wayside and get resolved quickly because the dollars are small relative to the cost of litigating them, whereas in a large case, you add a couple zeros to it and litigation becomes a more viable alternative for parties. That’s one of the biggest challenges, and we definitely saw that in Intelsat where parties were leaving no stone unturned in terms of potential arguments and theories.
Now, the company prudently had in place a very sophisticated director process that ran in a very independent way and was able to help drive consensus between the entities. Because when you’ve got a situation where you’re dealing with corporate entities and potential claims against one another, that’s something the company can resolve in and of itself. And so that was a very useful tool in bringing creditors to the table, where creditors may otherwise have been more willing to go down a litigation path.
We went through a process of building brick-by-brick consensus, which is something that we specialize in at Kirkland. Ultimately, we concluded that the cost of litigating the issues relative to taking the additional time to build further consensus was not a trade we were willing to make. Over the course of 2021, we used mediation and countless hours of negotiations with the ad hoc groups to try to find that consensus. Full consensus finally came together at the eleventh hour, as it often does.
Looking back over my career, I think it is one of my greatest accomplishments, with all credit to the client, fellow advisors, and the Kirkland team. We all really put in the blood, sweat and tears to get us to that point. It was about resiliency. It was about being principled, believing that the right answer was a negotiated outcome, and using all the tools available to a chapter 11 debtor to get there. It’s a testament to our process because you could just as easily have seen that case falter into long, value-destructive litigation.
I think it was the best possible outcome under a very challenging set of circumstances. We are very proud of the result.
JCD: Finally, with interest rates and inflation skyrocketing and other global conditions negatively impacting the world economy, how do you see the rest of 2022 playing out in terms of the restructuring landscape and what are you expecting in 2023?
SS: First off, while none of us restructuring lawyers like to be the grim reaper in terms of where the economy is headed, anyone can look at a number of objective factors and see the direction. You can look at inflation being where it is, whether it be from the dislocation of the supply chain as well as the fiscal and monetary policy of the Fed, and the current rising interest rate environment, and reach a conclusion that those are signs that a recession may be coming, which would of course lead to more restructuring activity.
On the flip side, there’s still a lot of capital on the sidelines and a lot of dry powder out there. But with the repricing that has taken place, it may not be on terms that every capital structure can withstand. There’s certainly going to be restructurings coming out of that, but that’s a process that takes time to filter through. And where you see it first is with certain industries where there is disruption or a significant repricing already occurring, like crypto, that accelerates the process.
So while it may be not be an overnight wave akin to financial crisis or 2020, I think you’re going to steadily see an uptick as long as current market conditions persist, and we’re already seeing the signs of that. I suspect there will be more for folks to do than there has been over the past couple of years when there were few situations that weren’t refinanceable.
JCD: Steve, I really appreciate your time. Thank you.