This week we welcome a Notice of Appearance by J. Scott Victor, a Managing Director at SSG Capital Advisors LLC, a boutique investment bank based in Philadelphia. We edited the dialogue lightly for content and length. Enjoy.
PETITION: You've carved out a niche in the middle market. What is your assessment of distress in the middle market today and what may we expect in that area in the next 6-9 months?
There is always distress in the middle market. Regardless of the macroeconomic environment there are universal constants: undercapitalization, too much debt, poor management decisions, sales declines, lack of margin control, excessive expense structure. I could go on and on – all resulting in a steady stream of distressed middle market companies.
From multi-generational family-owned or single owner and operator businesses with inadequate systems and not enough equity capital to PE portfolio companies leveraged to the hilt with debt to VC-backed and public bleeders that have been startups for a decade or more burning through tens to hundreds of millions to failed rollups, the distressed middle market has it all including real industry-specific Disruption. These beloved underperformers are in every industry and every region of the country and while they aren’t generally big enough names to warrant coverage in Petition, they provide an abundance of work for middle market professionals.
Nothing will change in the next 6-9 months. There is an incredible amount of debt capital from an ever increasing number of lenders – bank and non-bank ABLs and cash flow lenders, BDCs, commercial finance companies, factors, equipment and real estate lenders. The better underperformers will continue to be refinanced out of their existing bank lenders and live to sink or swim next year. The rest can expect §363 sales, Article 9’s, ABCs, receiverships, or straight-up liquidation. It’s economic Darwinism at work.
PETITION: What is one thing that most needs changing in order for middle market clients to get the most they can out of an in-court bankruptcy proceeding?
Don’t get me started on this one! Chapter 11 is too expensive and lower middle market companies can’t afford it. More importantly, the lenders for the smaller borrowers don’t want to pay for it. Thus the rise of Article 9’s, ABCs and state court receiverships being utilized for smaller transactions. Almost every one of my Chapter 11 cases has two sets of counsel, a financial advisor, an investment banker, and a claims agent and that’s just for the debtor. Factor in two sets of counsel and a financial advisor for the creditors committee and another two sets of counsel and financial advisor for the lender(s) and that’s before any other professionals such as real estate advisors, special counsel, liquidators and independent board members. And, don’t forget the new UST fee schedule! The fee burden on debtors is often why there’s rarely ever a meaningful distribution to unsecured creditors. I know I’m preaching to the Petition choir, but Chapter 11 just costs too much.
PETITION Note: See #1 above if you skipped the end.
PETITION: We've written a lot recently about the decline in L. Brands' Victoria's Secret ($LB) line and the rise of direct-to-consumer and celebrity-backed (i.e., Rihanna) brands. You did the Peekay Acquisition LLC bankruptcy. What lessons did you learn there that may apply to L Brands and other legacy lingerie brands that are currently under attack?
I learned that sexual health and well-being is a very good thing! Peekay was too small to be public and had way too much debt resulting from a poorly-implemented roll-up strategy. Victoria’s Secret has numerous issues including deteriorating product quality resulting from revolving manufacturing facilities around the world and an underwhelming yet distracting customer store experience that a huge marketing spend can’t fix. Insta-friendly celebrity brands, including lingerie and cosmetics are trending, but their sustainability is ultimately tied to quality, buying experience and the celebrity quotient.
PETITION: What is the best piece of advice that you’ve been given in your career?
My first legal mentor told me that practicing lawyers will make a good living, but never be rich. My second legal mentor told me to become an investment banker. My investment banking mentor told me to dress well and to drink heavily. I take advice well.
PETITION: What is the best book you’ve read that’s helped guide you in your career?
Two books: The 1st edition of Peter and Wendy by J.M. Barrie – the opening line “All children, except one, grow up.” I say no more.
Hostile Witness by William Lashner. Bill was a colleague at my first law firm in the mid-80’s and the son of my legal mentor. He left the firm to become a writer. I am Victor Carl.