Bankruptcy, Transparency and the White Knight: McKinsey (Short Logic)

Another week, another chapter in the Jay Alix and McKinsey drama. And, seriously, folks, this sh*t is fiercer than a White Walker facing off against some dragons so hold on to your seats.

On Tuesday, Law360 reported:

Restructuring consultant Jay Alix again urged a New York bankruptcy court on Tuesday to let him investigate McKinsey & Co. over alleged conflicts of interest in the SunEdison Inc. Chapter 11 case, just days after McKinsey revealed that it paid $17.5 million to SunEdison’s estate to resolve nearly identical claims.

Tuesday’s motion comes as U.S. Bankruptcy Judge Stuart M. Bernstein is considering whether to take additional action in the SunEdison case, or let the $17.5 million settlement end matters as far as McKinsey is concerned.

And on Wednesday:

Alix’s filing in the SunEdison case comes as a Texas bankruptcy court rejected his pleas to dig further into McKinsey in the case of the Westmoreland Coal Company, which emerged from bankruptcy last month and is another McKinsey client.

The conflict of interest claims Alix raised in that case forced McKinsey to disgorge $5 million in fees in a settlement with Westmoreland’s estate, but on Wednesday U.S. Bankruptcy Judge David R. Jones shot down Alix’s request for an “emergency order” that would allow him to conduct further discovery.

Indeed, Mr. Alix sought an “emergency motion” for entry of an order compelling McKinsey to disclose all of the investments of its affiliate MIO Partners Inc. Mr. Alix wrote:

The time to move forward on Mar-Bow’s objection and determine whether McKinsey is qualified to serve as a professional in this matter is long overdue. It is notable that McKinsey has never denied the MIO’s holdings in the Debtors’ estates or in interested parties. Accordingly, this emergency motion seeks prompt and highly discrete relief: an order compelling McKinsey to (a) identify all equity or debt investments held or managed by it or any of its affiliates (including MIO) in any Debtor, or in any party in interest, competitor, customer, or supplier; and (b) disclose information sufficient to allow the Court to evaluate the amount and nature of those investments.

The judge — perhaps a bit miffed that his docket had been completely overrun by motion practice relating to the Alix/McKinsey dispute…you know, rather than issues specific to the actual Westmoreland Coal Company matter — summarily dismissed the motion. In an order issued on Wednesday April 10, 2019, he wrote:

At best, the motion represents a self-created emergency with no underlying substance. At worst, the motion constitutes an improper collateral attack on the Court’s prior order at Docket No. 1427 for an illegitimate purpose. Counsel are advised that they are responsible for the words and allegations contained in pleadings on which their names appear. Candor and professionalism must never be sacrificed in the name of overzealous advocacy.


Of course, we find this language to be a wee bit hypocritical coming from a Judge who has skewered professionals of all types — lawyers, service providers, whomever — from his perch on the Bench. As just one example, recall this classy bit from an August 4, 2016 hearing in the matter of Sherwin Alumina Company LLC (that related to the Noranda Aluminum matter too):

You are on my radar screen. The financial transaction that ought to be being discussed a first-year business student can see. I’m not the smartest guy in the world, and I see it. I have been reading pleadings. And I cannot express the degree of disappointment that I have in the professionals that have been running these cases. If this case is going to fail, if the Noranda cases are going to fail, then so be it. But that’s going to create a block of time, and I’m going to use all of my education, all of my training, all of my experience in deciding where to lay the blame for this failure. That’s not a threat; it’s a promise. And if anyone wants to test my resolve, I encourage them to do it. Anyone doubts my commitment? Noranda’s local counsel spent a lot of years with me. They know exactly how I can be. You all are a talented group of people. I find it offensive that egos have gotten in the way. If we really want to try and have a contest as to who’s got the biggest set, I promise you I will win that battle.

“That’s not a threat; it’s a promise.” Really?

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Busted Hedge Funds and Fund BS

Busted Hedge Funds & Fund BS

Last week we noted the imminent closure of Blackstone's distressed-debt hedge fund. Here's more about it - and about illiquid funds generally. It's been a rough year+ for hedge funds.

And speaking of alpha (cough), we can't think of a better argument for 2-and-20 than getting profoundly middle-of-the-plate market advice like shorting retail! What genius!! C'mon Lasry. With hedge funds under siege, you'd think that someone with the reputation of Lasry could conjure up some originality here and actually "deliver 'alpha'" - whatever that means these days.

In the even-less-alpha category, Eric Mindich is closing his $7b hedge fund, Eton Park Capital Management LP, after a flat '17 and a 9% loss in '16 - a year when millennials putting money into an index fund through Acorns and/or Wealthfront returned 12%. According to the WSJ piece linked above, the one thing Mindich is delivering is "more of the same," considering over 1000 hedge funds closed shop last year - giving new significance to the derogatory descriptor "hedge fund hotel" (Valeant Pharmaceuticals and SunEdison, anyone?). We particularly loved the kicker in the WSJ piece which was that the closure was "party due to concerns declining assets would make it harder to retain employees," a mind-boggling assertion that, if true, merely reflects a lack of awareness that (a) again, 1000+ funds have failed in the last year (see, e.g., Perry Capital, as just one large example), (b) hedge funders everywhere are screaming bloody murder about comp (as always - such whiners), and (c) it should, at least conceptually, be pretty difficult for those employees to find an alternative with such an atrocious track record looming like an albatross. Finally, as one banker subscriber wrote in to us,  "Because they'd rather not have jobs?" Riiiiiiight. 

But have no fear. Management probably needs a few lifetimes to burn through the billions of dollars earned to date. Maybe Mindich will even join the bevy of Goldman brethren moving to Washington DC. Nothing would surprise us. This failure notwithstanding, he could always change course in a few years after a downturn and give it another go. He'll get money: hedge fund failures are like tech failures. In the absence of gross negligence or actual fraud, they're almost assured of getting a second bite at the apple from sycophantic suck-up former investors who want in on the next big shiny finance vehicle...

President-Elect Trump

We admit it. We got caught off-guard by the results. We had a nice feature piece ready about food, deflationary pressures, and the manner in which tech is affecting restaurants and grocers. Business as usual with President-Elect Clinton. But then Tuesday happened. 

So, instead we reached out to a small subset of the PETITION community for their take on what the election may mean for 2017. Here's what they had to say:

"Trump trade policies centered around taxing imports to protect American manufacturing will decimate consumer spending and accelerate the already rapid decline of brick and mortar retail...should be good for restructuring, right up until he gets goaded into World War III by some sort of 8th grade insult." - Restructuring Advisor, TX

"Despite an equity market rally following Trump's victory on Tuesday, plenty of signs point to an increase in restructuring activity on the horizon. First, there will be winners from deregulation, potential protectionism and lower taxes but there will be plenty of losers as well. Second, add higher interest rates and a steepening yield curve to the market's recent addiction to floating rate debt and levered borrowers are going to have a dramatically higher and in many cases unsustainable interest burden. Higher rates will also pull capital away from investor appetite to refinance the riskiest credits. Third, Trump thinks bankruptcy is a great tool -- don't expect him to go easy on a struggling sector; he may point debtors to the tools available under the Code as a smart solution. And finally, these drivers of increased activity all assume the best version of Trump shows up - any destabilization from Trump volatility in policy or leadership will likely spook capital markets and create far greater restructuring needs." - Investment Banker, NY

"I don’t have any special insight into Trump. The probability of Trump winning was so low that very few people involved in the markets went beyond focusing on his rhetoric to understanding what he would mean for the country economically. That was clearly a mistake. If Hillary would have been the predictable president with flat to moderate growth, Trump seems to be the high growth president with high tail risk. Trump, filtered through the Paul Ryan orthodoxy, with a Republican Senate and a Republican House, has a possibility of being highly productive and the market seems to be willing to believe that until proven otherwise. In particular, the market is and will continue to be focused on the unwinding of certain themes that have constrained growth during the Obama administration. Chief among these issues were increased regulation in certain sectors such as banking under Dodd Frank and the CFPB, the sweeping changes as a result of Obamacare, and a lack of progress on legislative initiatives such as increased infrastructure spending due to gridlock in Washington. While not entirely Obama’s fault, ultimately, the degree of change combined with legislative gridlock led to massive uncertainty that constrained capacity expansion and new construction, traditionally a large driver of growth in the economy. 
The view is now that the path is clear. With both the executive and legislative branches controlled by the Republicans and Trump’s agenda on some of these key issues relatively clear, the uncertainty has been eliminated, resulting in higher asset values and, in all likelihood, increased capital spending. The virtuous circle will then commence as higher asset values, begets more spending, begets higher asset values and so on. In particular, the long duration of lackluster business expenditure combined with a need for significant infrastructure spending has led to massive pent up demand and could further lead, ultimately, to a super cycle in corporate expenditure – a prospect that has excited distressed debt and equity investors in US markets. 
However, caution is warranted. It’s not all roses. Some sectors such as steel/iron ore may benefit from higher tariffs on Chinese imports of steel and increased infrastructure spending but automotive growth may be tempered by changes in free trade agreements as costs rise and foreign markets close. Community banks will do better as Dodd Frank is re-worked but large banks may continue to face harsh scrutiny as too big to fail. Healthcare’s picture will remain muddled for some time. For now, this will be viewed as a rising tide lifts all boats but I don’t believe that such a view is entirely accurate. I would steer towards the clear winners. 
My advice: in order to make money in this market, ignore Trump’s antics and focus on the policy he’s likely to achieve. Clear themes will emerge."  
- Investor, NY

The immediate effect of the election is clear: recent restructuring hotspots such as oil and gas, mining, and commodities saw bumps this week while others like healthcare and renewables got beat up badly. The recent focus on regulation of biotech/pharma will likely dim. So, too, for for-profit education and private prisons. Tech - notably the "FANG" stocks - got hit hard. Query whether this will help accelerate what many view as the inevitable popping of the tech bubble.

Speaking of tech, there is an active petition on to get Donald Trump to sit with Elon Musk to discuss, among other things, climate change. Notably, Musk has been silent since the election; aside from one EPA-related retweet, his twitter feed has nothing but an oddly and somewhat ironically timed announcement about Tesla's new German production facility. Musk is likely in wait-and-see mode: after all, it's no secret that both Tesla and SolarCity have benefited significantly from government subsidy over the course of the Obama administration and Trump was quick to highlight the Solyndra failure in the debates. The imminent showdown between Trump and the inspiration for Iron Man should be interesting: solar has taken a beating this past year with SunEdison and Verengo filing for bankruptcy and Yeloha shutting down shop. There isn't a lot of room for error in the space...

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.