💰The United States Trustee (Long Perverse Incentives).💰

The Wall Street Journal reports that the UST fund is approximately 75% short of its funding goal for the year.* Currently, the fund gets fed by quarterly fees paid by bankrupt companies with over $1mm in operating expenses. As with all things bankruptcy, the new federal law mandating the fee increase has a number of holes in it. Consequently, various cases implicating the law are winding their way through the courts.


🏦How are the Investment Banks Doing? Part II.🏦

You didn’t think we’d just stop at Evercore and Greenhill, did you?

Moelis & Company ($MC) recently reported “disappointing” financial results reflecting a dramatic decline in M&A activity in Q1, which affected revenues significantly. Reported revenue was $138mm, down 37%. “This compares to the overall M&A market in which the number of global M&A completions greater than $100 million declined 18% during the same period. The decline in revenues was primarily driven by fewer transaction completions.” Restructuring activity “declined slightly.” MC guided towards softness in the first half of the year with a relatively stronger second half.

Some key takeaways:

  • Brexit and a number of shaky elections in Europe are having some effect on M&A activity in Europe.

  • Expected continued chill of cross-border M&A that involves China due to “underlying weariness” of “significant Chinese ownership of American companies.”

  • The melt down in late Q4 certainly affected M&A chatter in the C-suite as people are cautious about price volatility.

Asked what happens at MC if the M&A volume remains down, Moelis unabashedly indicated that costs would have to come out of the business, i.e., travel expense and headcount. That must’ve been a bit chilling for MC employees. Sheesh.


The Curious Case of Jefferies LLC v. Banro Corp.

In many respects the restructuring industry benefits from an information dislocation. Management teams thrust into stressed or distressed territory are dealing with different subgroups of investment banks and law firms than they're accustomed to. The professionals are different, the terminology is different, and the terms of engagement are different. On the flip side, sometimes the terms SHOULD be different, but aren't.

A fee tail is a great example of that. We've seen a variety of investment banker engagement letters that include a one year tail. Boiled down to its simplest form, this generally means that an investment banker is entitled to its fee (or a pre-negotiated portion thereof) if the company consummates a "transaction," as defined, within 12-months of the bankers engagement - regardless of whether THAT banker got the transaction to the finish line.

In the compressed timeline of a distressed issuer, a year is like a decade. Given that, we would argue, as a general matter, that a 12-month tail is absurd in the restructuring context. There are so many externalities that could come into play during that time that might require a change of strategy. A 6-month tail strikes us as far more reasonable. After all, we've heard of instances where a company considered filing for bankruptcy merely to be in position to reject a retention agreement and avoid the potential duplicative and monstrous fee. That's ridiculous. 

Now you're probably expecting us to shred some banker for a specific (ridiculous) provision. We hate to disappoint. Notwithstanding the above, we're actually of the view that tails serve a critical function. Why should an investment banker roll up sleeves and go to bat for a client if the client can cut ties at any moment and transfer all of that work over to an execution banker for a fraction of the cost? 

Jefferies LLC is asking precisely that question. In Jefferies LLC vBanro Corp. (1:17-cv-05490), Jefferies is asking the New York Southern District Court to enforce the terms of its engagement letter with the once-bankrupt gold-miner, Banro Corp.(and, in turn, Banro is attempting to transfer the litigation to federal court.). Jefferies alleges that it is contractually owed approximately $3.7mm in fees and expenses on account of a $175mm note exchange that is, according to Jefferies, expressly contemplated in its retention. The company purportedly terminated its relationship with Jefferies mere days before announcing that very transaction. Call us crazy but a tail of a few days strikes us as eminently reasonable. Professionals across the board ought to watch this case with great interest.

Reasonability of Fees

We want to apologize for an issue related to last week's newsletter; we failed to recognize that the (Amazon Web Services') link embedded in our feature (apparently) expires with time. Sorry about that. 

The right information could be found all week on our website (hint, hint) and we encourage you all to visit it here. The upshot is that an Iowan judge gave Weil a beating because of redonk fees. But don't take our word for it: the opinion is worth a read if for no reason other than its sheer comedy. We enjoyed where the Court indicates that Weil argued that the fees were reasonable because, well, they're Weil, damn it, and they damn well said the fees were reasonable. 

On the subject of fees and billing, the opinion wasn't nearly as amusing (or bemusing, depending on your POV) as this quote from a Caesars-related story from Q4 '16: "The advisory firms have adopted the attitude that every possible land grab that is is worth chasing. These firms have no capital markets businesses and just outsource the work to JP Morgan and the like. These fees are just a tax on the estate. The creditors are doing most of the work here and these restructuring proposals are really ours [creditors]. But the legal departments of these investment banks are crafty. Debtors have to be more responsible on the front end of an engagement. The problem is that the debtors’ lawyers are completely and utterly conflicted. The bankers are often former restructuring lawyers themselves and they are all just referring each other business. This has become a feeding frenzy." 

In many ways, the problem stems from information dislocation. The buyside appears to be getting sick of WSJ headlines about fees - whether they're in Caesars or Lehman Brothers. And so tighter and tighter DIP budgets are becoming the norm and professionals are increasingly expected to agree, upfront, to some fee concessions. But company management teams aren't nearly as savvy; they don't know where to find out what "market" engagement terms are. Certain resources that track this information are firewalled unless you pay tens of thousands of dollars for access. So, who is going to educate management? Debtor's counsel? If the quote above is any indication - and referrals truly are traded like chips - that may be asking for a lot. And so don't be surprised if there are more activist judges opining on the reasonability of fees going forward.