đź’ĄWindstream Blown Into Bankruptcyđź’Ą

Windstream Files for Bankruptcy (Long Litigation-Induced Bankruptcy)

Well, that sure escalated quickly.

Days after being on the wrong-side of a ruling by Judge Jesse Furman in the United States District Court for the Southern District of New York in U.S. Bank National Association v. Windstream Services, Inc. v. Aurelius Capital Master, Ltd., Case No. 17-cv-7857 (JMF), Arkansas-based Windstream Holdings Inc. ($WIN) â€” a provider of (i) network communications and technology solutions for businesses and (ii) broadband, entertainment and security solutions to retail consumers and small businesses in small rural areas across 18 states — filed for bankruptcy in the Southern District of New York (along with 204 affiliates). The upshot of Judge Furman’s decision is that, as of the petition date, the debtors are on the hook for approximately $5.6b in funded debt obligations. And they are f*cking pissed about it. Likewise, a number of investors (BlackrockVanguard), hedge funds (Elliott Management CorporationBrigade Capital Management LPPointState Capital LPBlueMountain Capital Management LLC), retirees (California Public Employees’ Retirement System) and counterparites (AT&T…yikes…a $49.5mm unsecured claim) are likely also a wee bit miffed this week. But remember: “💥Aurelius is NOT Litigious, Y'all💥” and â€śThe Rise of Net-Debt Short Activism (Short Low Default Rates).” MAN THIS IS SAVAGE.

In the press release announcing the debtors’ bankruptcy filing, CEO Tony Thomas said:

“The Company believes that Aurelius engaged in predatory market manipulation to advance its own financial position through credit default swaps at the expense of many thousands of shareholders, lenders, employees, customers, vendors and business partners. Windstream stands by its decision to defend itself and try to block Aurelius’ tactics in court. The time is well-past for regulators to carefully examine the ramifications of an unregulated credit default swap marketplace.

“Windstream did not arrive in Chapter 11 due to operational failures and currently does not anticipate the need to restructure material operations,” Thomas said. “While it is unfortunate that Aurelius engaged in these tactics to advance its returns at the expense of Windstream, we look forward to working through the financial restructuring process to secure a sustainable capital structure so we can maintain our strong operational performance and continue serving our customers for many years to come.”

Eeesh. Here’s a live shot of Mr. Thomas after getting board authorization for the bankruptcy filing:

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In turn, here’s a live shot of Aurelius’ Capital Management LLP’s Mark Brodsky:

(Yes, we thought that Mike Tyson was an apt choice here given how hard this punch landed). Aurelius absolutely loves this sh*t.

For those of you who are new to this sh*tshow, here is a link to Judge Furman’s decision. If you don’t feel like reading 55 pages of boring legalese, here is a summary by Weil Gotshal & Manges LLP. Therein, Weil succinctly recounts (i) the 2015 transaction wherein Windstream created a new holdco to enter into a sale-leaseback transaction with a spunoff real estate investment trust, Uniti Group Inc. ($UNIT), and (ii) the 2017 transaction wherein WIN obtained post facto consent from a majority of noteholders to waive the resultant (alleged) default in exchange for money money money and new notes. To these events, Aurelius was like:

aurelius leo.gif

And Judge Furman concurred; he ruled that the 2015 transaction was a prohibited sale-leaseback transaction under WIN’s indenture and invalidated the 2017 consent solicitation, awarding Aurelius $310.5mm plus interest. As justification, the Judge basically concluded that (i) the new holdco was just a legal shell/pretense, (ii) the subsidiaries who previously owned the assets continued to use those assets, (iii) the subsidiaries exercised effective control over the assets, (iv) the subsidiaries were effectively paying rent under the lease by way of dividending payments up through the new shell holdco, and (v) WIN had admitted to nine state regulators that the transferor entities would get the benefit of the leaseback. In other words, for all intents and purposes, the new holdco’s name was on the transaction but no legal abracadabra was going to fool anyone into thinking that the original transferring subsidiaries weren’t the real parties under the lease.

Yet, suffice it to say, this result was not at all what WIN expected. Here was WIN’s statement relating to the decision. And here is Aurelius laughing and pointing at WIN as it responded to WIN’s statement. They wrote:

We take no pleasure in Windstream's resulting financial predicament.  Windstream could easily have averted it – first by not playing fast and loose with its noteholders in 2015, hoping nobody would hold the company to account, and second by settling.  Instead, Windstream wasted an exorbitant amount – more than would have been needed to settle with us at the time – on an ineffective exchange offer and then on litigation. 

In our view, a management and a board with an extreme and unwarranted assessment of Windstream's legal case chose to bet the company.  The company lost.

They take no pleasure, huh? We find that a bit hard to believe. Why? This is a live shot of Aurelius writing its response:

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Check out the rest:

According to its statement last Friday, Windstream now intends to appeal.  This is welcome news for our fund, as it will require Windstream to post a surety bond exceeding $300 million.  That surety bond will pay in full the notes our fund owns when Windstream loses the appeal.  We are happy to take the surety company's credit over Windstream's.

To noteholders who chose to play the company's game even after it had broken its promise, we wish you luck with your exchange notes.  Between their dubious status and their OID risk in bankruptcy, we suspect you will need it.

🔥💥🔥💥

Dubious status? What dubious status? Per Weil:

While the court held that the notes issued under the Indenture—i.e. any notes outstanding prior to the exchange offers—are accelerated, it specifically declined to hold that the New Notes issued in the 2017 exchange are invalid, giving rise to confusion over their status. (See Op. at 51). Because the Court held that the Third Supplemental Indenture containing the waiver of default was invalid, it follows that all holders of the 2023 Notes at the time of the exchange—not just Aurelius—should be entitled to a judgment. At least some of this confusion could have been obviated by a finding that all holders of the New Notes are to be restored to their status quo ante as it existed prior to the exchange offers. While this ruling would also raise complex issues, it would better accord with the operation of the Indenture.

Right. That probably would have made more sense. Insert some litigation here. And Weil doesn’t otherwise comment one way or another as to whether the Judge took liberties by extending his review outside the four corners of the legal document. They simply state:

The Court’s reliance on Windstream’s admissions is a reminder for counsel to consider not just whether a proposed transaction fits within the literal terms of the debt documents, but also whether it is: (1) consistent with the company’s public statements; (2) supported by the contemporaneous factual record; and (3) whether the economic substance of the transaction is consistent with its characterization.

But Professor Stephen Lubben did. He writes:

The court readily concedes that the plain language of the indenture does not cover the transaction on its face. Rather the court repeatedly argues that the “economic realities” of the transaction bring it within the terms of the indenture.

In essence, the court has granted Aurelius covenant protection that it (and its predecessors) were not savvy enough to negotiate in the first place. That’s the kind of interpretive stretch that law professors expect to see with sympathetic plaintiffs – the classic “widowers and orphans.” But Aurelius?

As the author of a law school corporate finance text, I’ve read my share of these sorts of opinions. I often tell my students that the one constant theme running through the bulk of corporate finance jurisprudence is that “if you want protection, you’d better contract for it.”

The Windstream opinion represents a clear departure from that trend. Instead, the theme seems to be, “I know what you really meant.”

Meh. We could get an ID with a picture of Chris Hemsworth next to it but that doesn’t make us Chris Hemsworth. You get what we’re saying?

Anyway, Lubben also reiterates a prior alarm that credit default swaps are having a deleterious effect on the market. He writes:

Long ago I warned that the growth the of the CDS (credit default swap) market represented a threat to traditional understandings of how workouts and restructurings are supposed to happen. The recent Windstream decision from the SDNY shows that these basic issues are still around, notwithstanding an intervening financial crisis and resulting regulatory reform.

Bloomberg’s Matt Levine adds:

“…the universal assumption is that Aurelius has also bought a lot of credit-default swaps that will pay out if Windstream defaults on its debt: By pushing Windstream into default, Aurelius will make a profit on its CDS, even if it loses money on the bonds. And, look, in general, I am all for CDS creativity, but here even I find it distasteful. “We, along with others in the market, found Windstream’s arguments that Aurelius pursued this litigation in bad faith and in order to ensure a payout on its CDS to be compelling,” wrote analysts at CreditSights.”

The Financial Times writes:

“The judge just missed . . . the big picture”, said one hedge fund set to lose money from the ruling, noting Aurelius’ position in credit derivatives. “This decision opens a Pandora’s Box and is going to encourage a lot of aggressive behaviour”.

Ugly fights between creditors and companies over clauses in dense legal agreements are nothing new. But Aurelius’s win has companies suddenly wondering what enterprising hedge fund is now combing through their past wheeling-and-dealing, looking for an obscure technical violation that could result in a ransom payment. Debt investors have recently targeted Sprint/T-Mobile and Safeway over similar covenant technicalities.

Matt Levine rightly continues:

“Windstream’s accusation of market manipulation is nonsense,” says Aurelius, and that is completely correct as far as it goes. As far as Windstream is concerned, all that Aurelius did was read its bond documents, assert its rights under those documents, go to court to argue its position, and win in court. None of those things could be market manipulation. If Aurelius also bet in the CDS market that it would be correct, well, (1) that doesn’t sound like manipulation to me and (2) Windstream wasn’t selling CDS so the integrity of the CDS market isn’t its problem.

But of course the overall result is very much Windstream’s problem: Windstream is bankrupt now because Aurelius came after it, and it’s hard to imagine Aurelius coming after it if Aurelius hadn’t bought a lot of CDS on Windstream first. (Windstream’s other bondholders were very willing to forgive Windstream’s covenant violation, tried to help it fend off Aurelius, and are now facing huge losses due to Aurelius’s activism.) It is not hard to sympathize with Windstream’s view that something is wrong with the CDS market, if this is the result.

Sure, but, like, maybe don’t hate the player, hate the game??

Putting aside the CDS aspect, the (one) comment to Mr. Lubben’s piece is indignant and raises valid points. Sisi Clementine (cute name) writes:

WIN opco spun out the assets, and then holdco leased them back. What did holdco do with those assets? Well, they allowed opco to use the assets freely. Hmm, okay, but then how did holdco pay rent? Well, opco pays a dividend to holdco in the exact rent amount and then holdco pays it to the spinoff. I see. So do holdco and opco share the property? No, holdco has no separate address, employees or business, so the property is for the exclusive use of opco. Umm, does this smell funny to anyone else?

In fact, it does! The judge! In his ruling, he cite a body of case law on leases that shows that a person who makes regular fixed payments in exchange for the exclusive use of a space is the holder of a lease, regardless of whether a paper contract exists. Personally, I find this conclusion to be on firmer legal ground than Windstream's version of events, which is essentially that the lease goes to holdco and then disappears inside the company in an opaque cloud of trust.

Of course, the Judge did not rely exclusively on this reasoning for his judgment. He added two further, independent reasons why the opco was party to the lease. The first is that Windstream, as a regulated telecom carrier, required approval from state regulators for the transaction. When regulators expressed concern, WIN formally told them it was a sale-leaseback transaction to reassure them. The judge then estopped WIN from changing its story in court. The second independent reason is that WIN opco signed 120 subleases on the space. You cannot sublease without a lease, therefore opco must have had a lease in order so sign those contracts.

What Prof Lubben has not told you, is that the court's habit of siding with businesses in matters of likely covenant breaches is only about a decade old. Market participants have found it troubling that businesses are given the benefit of the doubt as long as they have some legal explanation, no matter how tenuous. Management has grown increasingly brazen over the last few years, often with the backing of their private equity sponsors. The fact that it has taken an opportunist like Aurelius to right this wrong is proof that there are no heroes here. But maybe one day the legal establishment will wake up and end this plainly predatory behavior. (emphasis added)

Apologies, Clementine, but Aurelius may have achieved the impossible with all of this:

Aurelius, of all funds, may actually live long enough to see itself become the hero. In contrast to Levine, Clementine is saying that WIN is the predator, NOT Aurelius! And Clementine isn’t alone:

Levine adds:

You can choose to view Aurelius not as an interloper messing up a perfectly amicable situation between a company and its bondholders, but rather a vindicator of the rights of bondholders against an overbearing issuer. The story might be that, in 2015, Windstream flagrantly violated the terms of its bonds and dared its bondholders to do something about it, and those bondholders were too meek or confused to defend themselves. They were simple long-only credit investors, they don’t have the time or inclination to sue, their positions weren’t concentrated enough to make it worthwhile, they weren’t expert document-readers, or whatever: They were mugged by Windstream and had no practical way to stand up for themselves. But eventually they (well, some of them) sold their bonds to Aurelius, and Aurelius stood up for bondholders’ rights. And now other bond issuers will think twice before trying to steamroll their bondholders in the future, knowing that Aurelius may be lurking to call them on it.

As for Windstream placing the blame at Aurelius’ feet? Aurelius had something to say about that too. Per Barron’s:

“Windstream’s accusation of market manipulation is nonsense,” says an Aurelius spokesperson. “Rather than whining about us and Judge Furman, Windstream’s management and board should engage in much-needed introspection. They alone caused the company to enter into a terrible sale-leaseback and prejudice its bondholders by breaking its promises to them.”

Things really ARE getting weird in distress these days. Just imagine what will happen when we finally tip into an actual distressed cycle…? Will less boredom lead to less “manufactured” action??

So, where do things stand now? The bankruptcy court held the first day hearing yesterday and generally the debtors got all requested relief approved (including access to $400mm in interim funding — out of a committed $1b — under the DIP credit facility). This will obviously address the immediate liquidity crunch the company faced upon the post-judicial-decision acceleration of its debt.

So now all focus turns to Uniti Group Inc. which, itself, isn’t exactly unscathed by all of this.

Source: Yahoo Finance.

Source: Yahoo Finance.

Per Bloomberg:

Uniti’s future is clouded because the company gets more than two-thirds of its revenue from its former parent, with a master lease giving Windstream the exclusive right to use the Uniti’s telecommunications network. That lease could be in jeopardy because of its sizable expense to Windstream -- more than $650 million a year -- and bankruptcy proceedings often lead to revision or rejection of existing contracts.

Windstream relies on Uniti to serve its customers, and it’s also Uniti’s biggest customer, making a complete cutoff of their relationship less likely. 

So, yeah. There’s that. There are also those — notably, the ad hoc group of second lien noteholders — who may agitate for the debtor to go after Aurelius for its “manufactured default.”

Not for everyone (if it happens…we’re dubious). In fact, we’re pretty sure none of WIN, its debt and equity investors, or its other interested parties find this “interesting” at all.

đź’°Private Equity Own Yo Sh*t (Short Health. And Care)đź’°

Forget Toys R Us. Private Equity Now Owns Your Eyes and Teeth

It has been over a month since media reports that Bernie Sanders and certain other Congressman questioned KKR about its role in the demise of Toys R Us (and the loss of 30k jobs). At the time, in “💥KKR Effectively Tells Bernie Sanders to Pound Sand💥,” we argued that the uproar was pretty ridiculous — even if we do hope that, in the end, we are wrong and that there’s some resolution for all of those folks who relied upon promises of severance payments. Remember: KKR declared that it is back-channeling with interested parties to come to some sort of resolution that will assuage people’s hurt feelings (and pocketbooks). Since then: we’ve heard nothing but crickets.

This shouldn’t surprise anyone. What might, however, is the degree to which private equity money is in so many different places with such a large potential societal impact. It extends beyond just retail.

Last week Josh Brown of Ritholtz Wealth Management posted a blog post entitled, “If You’re a Seller, Sell Now. If you’re a Buyer, Wait.” Here are some choice bits (though we recommend you read the whole thing):

I’ve never seen a seller’s market quite like the one we’re in now for privately held companies. In almost any industry, especially if it’s white collar, professional services and has a recurring revenue stream. There are thirty buyers for every business and they’re paying record-breaking multiples. There are opportunities to sell and stay on to manage, or sell to cash out (and bro down). There are rollups rolling up all the things that can be rolled up.

In my own industry, private equity firms have come in to both make acquisitions as well as to back existing strategic acquirers. This isn’t brand new, but the pace is furious and the deal size is going up. I’m hearing and seeing similar things happening with medical practices and accounting firms and insurance agencies.

Anything that can be harvested for its cash flows and turned into a bond is getting bought. The competition for these “assets” is incredible, by all accounts I’ve heard. Money is no object.

Here’s why – low interest rates (yes they’re still low) for a decade now have pushed huge pools of capital further out onto the risk curve. They’ve also made companies that rely upon borrowing look way more profitable than they’d ordinarily be.

This can go on for awhile but not forever. And when the music stops, a lot of these rolled-up private equity creations will not end up being particularly sexy. Whether or not the pain will be greater for private vs public companies in the next recession remains to be seen.

The Institutional Investor outright calls a bubble in its recent piece, “Everything About Private Equity Reeks of Bubble. Party On!” They note:

The private equity capital-raising bonanza has at least one clear implication: inflated prices.

Buyout multiples last year climbed to a record 10.2 times earnings before interest, taxes, depreciation, and amortization, according to S&P Global Market Intelligence. This year they remained elevated at an average of 9.5 times ebitda through May, a level surpassing the 2007 peak of the precrisis buyout boom.

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When you’re buying assets at inflated prices/values and levering them up to fund the purchase, what could possibly go wrong?

*****

What really caught our eye is Brown’s statement about medical practices. Ownership there can be direct via outright purchases. Or they can be indirect, through loans. Which, in a rising rate environment, may ultimately turn sour.

Consider for a moment the recent news that private equity is taking over from and competing with banks in the direct lending business. KKR, Blackstone Group, Carlyle Group, Apollo Global Management LLC and Ares Management LP are all over the space, raising billions of dollars, the latter recently closing a new $10 billion fund in Q2. They’re looking at real estate, infrastructure, insurance, healthcare and hedge funds. Per The Wall Street Journal:

Direct loans are typically floating-rate, meaning they earn more in a rising-rate environment. But borrowers accustomed to low rates may be unprepared for a jump in interest costs on what’s often a big pile of debt. That risk, combined with increasingly lenient terms and the relative inexperience of some direct lenders, could become a bigger issue in a downturn.

Regulators like that banks are wary of lending to companies that don’t meet strict criteria. But they are concerned about what’s happening outside their dominion. Joseph Otting, U.S. Comptroller of the Currency, said earlier this year: “A lot of that risk didn’t go away, it was just displaced outside of the banking industry.”

What happens when the portfolio companies struggle and these loans sour? The private equity fund (or hedge fund, as the case may be) may end up becoming the business’ owner. Take Elements Behavioral Health, for instance. It is the US’s largest independent provider of drug and alcohol addiction treatment. In late July, the bankruptcy court for the District of Delaware approved the sale of it the centers to Project Build Behavioral Health, LLC, which is a investment vehicle established by, among others, prepetition lender BlueMountain Capital Management. In other words, the next time Britney Spears or Lindsay Lohan need rehab, they’ll be paying a hedge fund.

The hedge fund ownership of healthcare treatment centers thing doesn’t appear to have worked out so well in Santa Clara County.

These aren’t one-offs.

Apollo Global Management LLC ($APO) is hoping to buy LifePoint Health Inc. ($LPNT), a hospital operator in approximately 22 states, in a $5.6 billion deal. Per Reuters:

Apollo’s deal - its biggest this year - is the latest in a recent surge of public investments by U.S. private equity, the highest since the 2007-08 global financial crisis.

With a record $1 trillion in cash at their disposal, top private equity names have turned to healthcare. Just last month, KKR and Veritas Capital each snapped up publicly-listed healthcare firms in multi-billion dollar deals.

Indeed, hospital operators are alluring to investors, Cantor Fitzgerald analyst Joseph France said. Because their operations are largely U.S.-based, hospital firms benefit more from lower tax rates than the average U.S. company, and are also more insulated from global trade uncertainties, France said.

Your next hospital visit may be powered by private equity.

How about dentistry? Well, in July, Bloomberg reported KKR & Co’s purchase of Heartland Dental in that “Private Equity is Pouring Money Into a Dental Empire.” It observed:

In April, the private equity powerhouse bought a 58 percent stake that valued Heartland at a rich $2.8 billion, the latest in a series of acquisitions in the industry. Other Wall Street investment firms -- from Leonard Green & Partners to Ares Management -- are also drilling into dentistry to see if they can create their own mega chains.

Here’s a choice quote for you:

"It feels a bit like the gold rush," said Stephen Thorne, chief executive officer of Pacific Dental Services. "Some of these private equity companies think the business is easier than it really is."

Hang on. You’re saying to yourself, “dentistry?” Yes, dentistry. Remember what Brown said: recurring revenue. People are fairly vigilant about their teeth. Well, and one other big thing: yield baby yield!

The nitrous oxide fueling the frenzy is credit. Heartland was already a junk-rated company, with debt of 7.4 times earnings before interest, taxes, depreciation and amortization as of last July. KKR’s takeover pushed that to about 7.9, according to Moody’s Investors Service, which considered the company’s leverage levels "very high."

Investors were so hungry that they accepted lenient terms in providing $1 billion of the leveraged loans that back the deal, making investing in the debt even riskier.

Nevermind this aspect:

Corporate dentistry has come under fire at times for pushing unnecessary or expensive procedures. But private equity firms say they’re drawn by efficiencies the chains can bring to individual dental practices, which these days require sophisticated marketing and expensive technology. The overall market for dental services is huge: $73 billion in 2017, according to investment bank Harris Williams & Co. Companies such as Heartland pay the dentists while taking care of everything else, including advertising, staffing and equipment. (emphasis added)

Your next dental exam powered by private equity.

Sadly, the same applies to eyes. Ophthalmology practices have been infiltrated by private equity too.

Your next cataracts surgery powered by private equity.

Don’t get us wrong. Despite the fact that we harp on about private equity all of the time, we do recognize that not all of private equity is bad. Among other positives, PE fills a real societal need, providing liquidity in places that may not otherwise have access to it.

But we want some consistency. To the extent that Congressmen, members of the mainstream media and workers want to bash private equity for its role in Toys R’ Us ultimate liquidation and in the #retailapocalypse generally, they may also want to ask their emergency room doctor, dentist and ophthalmologist who cuts his or her paycheck. And double and triple check whether a recommended procedure is truly necessary to service your eyes and mouth. Or the practice’s balance sheet.

The Rise of Net-Debt Short Activism (Short Low Default Rates)

Aurelius Goes After Windstream Holdings Inc. 

🤓Another nerd alert: this is about to get technical.🤓

With default rates low, asset prices high, and a system awash with heaps of green, investors are under pressure by LPs and looking for ways to generate returns. They’ll manufacture them if needs be. These forces help explain the recent Hovnanian drama, the recent McClatchey drama and, well, basically anything involving credit default swaps (“CDS”) nowadays. To point, the fine lawyers at Wachtell Lipton Rosen & Katz (“WLRZ”) write:

The market for corporate debt does not immediately lend itself to the same kind of “activism” found in equity markets.  Bondholders, unlike shareholders, do not elect a company’s board or vote on major transactions.  Rather, their relationship with their borrower is governed primarily by contract.  Investors typically buy corporate debt in the hope that, without any action on their part, the company will meet its obligations, including payment in full at maturity.

In recent years, however, we have seen the rise of a new type of debt investor that defies this traditional model.

Right. We sure have. Boredom sure is powerful inspiration. Anyway, WLRZ dubs these investors the “net-short debt activist” investor.

The net-short debt activist investor has a particular modus operandi. First, the investor sniffs around the credit markets trolling for transactions that arguably run afoul of debt document covenants (we pity whomever has this job). Once the investor identifies a potential covenant violation, it scoops up the debt (the “long” position”) while contemporaneously putting on a short position by way of CDS (which collects upon a default). The key, however, is that the latter is a larger position than the former, making the investor “net short.” Relying on its earlier diligence, the investor then publicly declares a covenant default and, if it holds a large enough position (25%+ of the issuance), can serve a formal default notice to boot. The public nature of all of this is critical: the investor knows that the default and/or notice will move markets. And that’s the point: after all, the investor is net short.

In the case of a formal notice, all of this also puts the target in an unenviable position. It now needs to go to court to obtain a ruling that no default has occurred. Absent that, the company is in a world of hurt. WLRK writes:

Unless and until that ruling is obtained, the company faces the risk not only that the activist will be able to accelerate the debt it holds, but also that other financial debt will be subject to cross defaults and that other counterparties of the company — such as other lenders, trade creditors, or potential strategic partners — may hesitate to conduct business with the company until the cloud is lifted.  

Savage. Coercive. Vicious. Long low default rate environments!

In the case of Little Rock Arkansas-based Windstream Holdings Inc. ($WIN), a provider of voice and data network communications services, all of this is especially relevant.

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What to Make of the Credit Cycle (Part 4)

We’ve spent a considerable amount of space discussing what to make of the credit cycle. Our intent is to give professionals a well-rounded view of what to expect now that we’re in year 8/9 of a bull market. You can read Parts one (Members’ only), two, and three (Members’ only), respectively.

Interestingly, certain investors have become impatient and apparently thrown in the towel. Is late 2019 or early 2020 too far afield to continue pretending to deploy a distressed investing strategy? Or are LPs anxious and pulling funds from underperforming or underinvested hedge funds? Is the opportunity set too small - crap retail and specialized oil and gas - for players to be active? Are asset values too high? Are high yield bonds priced too high? All valid questions (feel free to write in and let us know what we’re missing: petition@petition11.com).

In any event, The Wall Street Journal highlights:

A number of distressed-debt hedge funds are abandoning traditional loan-to-own strategies after years of low interest rates resulted in meager returns for investors. Some are even investing in equities.

PETITION Note: funny, last we checked an index fund doesn’t charge 2 and 20.

The WSJ continues,

BlueMountain Capital Management LLC and Arrowgrass Capital Partners LLP are some of the bigger funds that have shifted away from this niche-investing strategy. And lots of smaller funds have closed shop.

A number of smaller distressed-debt investors have closed down, including Panning Capital Management, Reef Road Capital and Hutchin Hill Capital.

PETITION Note: the WSJ failed to include TCW Group’s distressed asset fund. What? Too soon?

We should note, however, that there are several other platforms that are raising (or have raised) money for new distressed and/or special situations, e.g., GSO and Knighthead Capital Management.

Still is the WSJ-reported capitulation a leading indicator of increased distressed activity to come? Owl Creek Asset Management LP seems to think so. The WSJ writes,

Owl Creek founder Jeffrey Altman, however, believes that if funds are shutting down and moving away from classic loan-to-own strategies then a big wave of restructuring is around the corner. “If anything, value players leaving credit makes me feel more confident that the extended run-up credit markets have been enjoying may finally be ending,” Mr. Altman said.

One’s loss is another’s opportunity.

*****

Speaking of leading indicators(?) and opportunity, clearly there are some entrepreneurial (or masochistic?) investors who are prepping for increased distressed activity. In December, The Carlyle Group ($CG), via its Carlyle Strategic Partners IV L.P. fund, announced a strategic investment in Prime Clerk LLC, a claims and noticing administrator based in New York (more on Prime Clerk below). Terms were not disclosed — though sources tell us that the terms were rich. Paul Weiss Rifkind & Wharton LLP served as legal counsel and Centerview Partners as the investment banker on the transaction.

On April 19th, Omni Management Group announced that existing management had teamed up with Marc Beillinson and affiliates of the Beilinson Advisory Group (Mark Murphy and Rick Kapko) to purchase Omni Management Group from Rust Consulting. Terms were not disclosed here either. We can’t imagine the terms here were as robust as those above given the market share differential.

The point is: some opportunistic folk sure seem to think that there’s another cycle coming. And they’re putting their money where their mouth is, thinking that there will be money to be made in the (seemingly saturated) case administration business. Time will tell.