Questioning Venue

For those of you who aren’t interested in restructuring/legal inside baseball, feel free to just scroll down to the News section below. Why? Well, we about to get legal up in this m*ther$%&$*, that's why. 

Thanks to that pesky little thing called federalism, every state has their own court system. This makes "venue" a big deal in bankruptcy cases as companies on the verge of a bankruptcy filing generally have several venue options based on various factors (i.e., principal place of business, location of an affiliate, etc.). Historically, Delaware has been an obvious choice of venue because most companies are incorporated there. It also helps that the jurisdiction's law is debtor-friendly and the judges are viewed as smart, sophisticated, and fit to handle the most complex and commercial of issues. 

Right now, though, there are a number of Delaware practitioners wondering what's behind a recent shift of significant bankruptcy filings to other venues. There are a number of theories swirling around. 

  1. Jurisdictional Competition. One theory is that that other jurisdictions, i.e., Texas and Missouri, want in on the recent surge of restructuring action. And to get in, they’re intentionally exhibiting a greater willingness to work with Yankee professionals and ensure a smooth case. Otherwise known as "playing ball." This is why some believe Payless Shoesource landed in the lap of a Missouri judge (note: curiously, the judge, by certain accounts, has virtually no track record to speak of - yes, there are plenty of folks who monitor judicial leanings). It stands to reason, then, that a $100mm+ critical vendor ask would slide by without as much as a batted eye by the judge (note: even the company must have anticipated some controversy here; it filed a declaration in support of the relief - not something typically deserving of a separate evidenciary filing). Query this: if many of these vendors were already stretched to 100-day terms - per the company's own declaration - what real difference would another 10-20 days make so that a creditors' committee could form to evaluate the request? Hmmm.
  2. Releases. Play ball with what, exactly? This may be the bigger question. We’re not going to opine on the current state of the law vis-a-vis third-party releases but, suffice it to say our favorite topic of late - dividend recaps - seems in play here too. After all, Payless is another private equity backed retailer and, by all accounts, there were dividends to speak of within the relevant lookback period. Why WOULD those guys want to take the likelier risk that releases would be in question in Delaware? Well, they wouldn’t. And so the question is: will they be in question in Missouri? The fact is that, more and more, these cases are driven by the interests of those other than the debtor.  Delaware is often looked upon as a solid choice of venue because of the vast and relatively predictable case law. If you're funding and/or driving a case, that may be part of the problem. Sometimes it may just be worth rolling the dice (Caesars notwithstanding).
  3. Too sophisticated? The third theory relates to whether the Delaware judges are TOO sophisticated. Apparently practitioners scare easily. When the Texas bench filleted investment bankers early on in the oil and gas wave (see BPZ Resources Inc.), bankers on subsequent deals purportedly grew increasingly skittish about United flights and advocated for Delaware filings instead. But this was short-lived. Once the Delaware bench dropped Paragon Offshore’s plan confirmation attempt faster than Pepsi drops distasteful ads and demonstrated that we have a feasibility problem, that mood quickly shifted. Fickle bunch. Clearly nobody wants to be on the wrong side of a bad feasibility opinion. After all, why risk losing the chance to refile the case in approximately 12 months and collect on a second round of fees, right? See, e.g., American ApparelRadio Shack/General WirelessGlobal Geophysical Services. Had the Delaware judge turned a blind eye to day rates, utilization and refinancing ability - sophisticated inputs that factor into valuation and feasibility - maybe there’d be discounted shoes lining up outside the Delaware courthouse steps. Then again, maybe not...releases!

It’ll be interesting to see where the next set of cases file... 

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We Have a Feasibility Problem

We're thankful this week for Judge Sonchi's decision last week in the Paragon Offshore bankruptcy cases. The decision was more than just a victory for the company's term loan lenders: it was a much-needed warning signal to the restructuring industry. 

First, a quick synopsis of the opinion. In short, Judge Sonchi sustained most, but not all, of the term lenders objections on the basis that the Debtors' (i) deployed unrealistic rig utilization and day rate assumptions and (ii) failed to take into consideration macro considerations that would affect the Debtors' eventual ability to refinance debt upon maturity in 2021 (if they didn't run out of cash before then). 

With respect to the former, the opinion underscores some dire trends (particularly provided correlations: rig supply up + price of oil down = dayrates down). Some highlights:

  • "E&P companies are currently seeking to drive excessive costs out of the supply chain and are working to sustain this reduced cost environment to avoid over-inflation and 'boom and bust principle' that has been seen in recent years and in the current cycle." (emphasis added)
  • "This 'vast oversupply' of rigs is creating a 'challenging commodity price environment' that is expected to last at least an additional 3.2 years...." (emphasis added)
  • "The oversupply of rigs is 'historical' even excluding newbuild rigs; and the only prior comparable downturn occurred in 1986, which had less of an overhang and did not have the additional newbuild overhang." (emphasis added)

Clearly, this is no bueno for revenue/EBITDA go-forward. Accordingly, an investment banker performing an analysis maybe ought to consider all publicly available resources to configure proper assumptions. Clearly, that didn't happen here and Judge Sonchi made it known. The term lenders' expert testified that, with respect to ongoing projected flat day rates, there wasn't "a single analyst that took a contrary view." But the Managing Director for the Debtors did. Curious.

Regarding the latter refinancing point, the Judge highlighted that "$110 billion of debt associated with severely strained oilfield services and drilling (OFS) companies will mature or expire over the next five years" - hitting RIGHT at the time Paragon would need to tap the capital markets. $110 BILLION. The Debtors' banker explained this massive number away by indicating that there is a $1 trillion E&P market and financing, therefore, would be available. The Judge demurred - calling the analysis "superficial" - and agreed with the term lenders' expert that (a) the market for "asset-based" lending for drilling companies generally is smaller and more specialized and (b) the historical capital used to support the market is no longer as prevalent as it was in previous cycles. Indeed, as this Bloomberg piece notes, fears about refinancing are starting to gain traction in the market.

Putting aside the specifics of this case, the decision is important for another reason: it highlights the importance of feasibility. Now, granted, the term lenders had to object for Sonchi to arrive at his conclusion in Paragon but there is an increasing likelihood of Judges scrutinizing feasibility. This Fox Business piece notes, "Some critics say bankruptcy judges too often focus on hammering out an agreement without paying enough attention to companies' chances of long-term survival." Will this continue?

Maybe we need Judges to be activists and save us from ourselves. Deals are being cut, sure, but are they for the right reasons? Are they cut to ensure the viability of the companies underneath capital structures or to uphold "castles in the air" theory and line the pockets of distressed investors? Hard to say: seemingly, these deals aren't doing them any favors either. Without greater transparency to the markets, it's hard to know.

Here's what we do know. In the last several years, there have been a number of repeat restructurings: American Apparel LLC. Global Geophysical Services LLC. Hercules Offshore Inc. Essar Steel Algoma Inc. Fresh and Easy. A&P. Sbarro LLC. Revel Casino. Catalyst Paper. Perhaps we all -- judges included -- ought to ask ourselves why that might be.

Comeback Kids

Everyone loves a comeback. And Weil is most definitely back.

Post-Lehman and GM, Weil settled into a notable rut as Kirkland & Ellis and others stole market share and preeminence in the restructuring world. Though Kirkland & Ellis arguably remains the dominant player in the industry, Weil is swiftly climbing back up the ranks. How have they done it?

We're going to stay away from crediting any specific individuals here because it is difficult to say what is outside deal flow origination and what is platform-based. 

But one thing is clear: Weil has diversified its practice. Sure, debtor work - across an array of industries - remains its bread and butter and debtor work abounds: Golfsmith, Aeropostale Inc., Breitburn Energy Partners, Fairway, Halcon Resources, Basic Energy, American Gilsonite, Paragon Offshore, CHC Group, A&P, Vantage Drilling Company, and Chassix Holdings Inc. But now Weil is also doing lender, bondholder, and equityholder work as in Seventy-Seven Energy, Things Remembered, Aspect Software, Performance Sports Group and DirectBuy Holdings. And unsecured creditor committee work, e.g., SunEdison and Ultra Petroleum. Wait, what? Weil does UCC work now? 

It's not all sunshine, though. Last week, Weil's attempted confirmation of Paragon Offshore's plan of reorganization over the objection of crammed-up term lenders failed in a rare judicial recognition of the feasibility standard. Now exclusivity may be in danger. In Breitburn Energy Partners, equity holders (represented by Weil alumni) successfully argued for an equity committee over vehement Weil objection (in contrast, this week Kirkland & Ellis successfully defeated an equity holder attempt to form an official equity committee in C&J Resources). In Aeropostale, the Southern District of New York judge handily denied Weil's attempts to recharacterize and equitably subordinate Sycamore Partners' claims.  

As we near the end of 2016, PETITION offers a hearty congratulations to Weil: it's been a great year. 2017 appears promising too.