💥LMEarnings Down 8.2%💥
FTI Consulting Inc. Reports Earnings + a Mondee Holdings update.
Callback to our investment banker (“IB”) earnings summary from two and a half weeks ago:
As the title implied, we discussed how our friends at the IB shops have been rolling in dough thanks to liability management exercises (“LMEs”). Naturally, however, wherever there’s a winner there’s a loser and if FTI Consulting Inc. ($FCN)(“FTI”) is any indication, financial advisors accustomed to hourlies in big ticket bankruptcies are definitely a loser in this environment.
On February 20, 2025, FTI reported earnings for 4Q’24 and … well … what’s that old saying about a picture being worth a thousand words? 👇
The company reported revenues of $894.9mm for 4Q’24, down 3% YoY, and $3.7b for FY’24, up 6% YoY. 4Q’24 adjusted EPS came in at $1.38 vs $2.28 in 4Q’23 while FY’24 adjusted EPS grew to $7.99 compared to $7.71 in FY’23.
While those numbers were, on their face, not overly terrible, the market was more focused on the unexpected revenue drop after a very strong 1H’24. CEO, Steve Gunby, was prepared to address this. Here he was on the earnings call:
“Let me start with 2024. As I think many of you know, we had a terrific, terrific first half of the year. Revenues, you may recall, were up 12% and EPS grew 48% compared to the first half of 2023. Now some of that strong performance in the first half was because we were cycling a slow first half of 2023, but it's also somewhat because of what we did.”Double “terrific.” Right on.
He continued:
“Let me turn to the second half of the year. We always expected that year-on-year growth would be slower, mainly because we knew we were cycling a much stronger second half of 2023. But the sales we actually got in the second half of 2024 turned out to be even a bit slower than we expected. Last quarter, we talked about the fact that we only had revenue growth of 3.7% year-on-year, which is among the slowest growth we have seen in a while. This quarter, we were actually down year-on-year and down sequentially.”“Down year-on-year and down sequentially.”
As if to make matters worse, Mr. Gunby didn’t exactly present confidence-inspiring guidance:
“Now I think most of us on this call know that our multiyear growth, the performance of this company over time has never been a straight line up, and we never expect it to be. However, I did want to point out that we did expect the business to be a bit better in the second half. We knew it was going to be slow and it actually turned out to be worse. That's somewhat important for explaining 2024 results, but it's also important because it presents a revenue trajectory that is carrying into 2025 as a headwind.”Mr. Gunby’s caution stems from the fact that (i) one group (not RX) experienced a number of senior departures, (ii) M&A was down, (iii) international work was depressed (he noted the UK as an example), and (iv) sales slowed down in FTI’s strategy business in Corporate Finance. About RX, Mr. Gunby had this to say:
“Revenues of $894.9 million decreased 3.2% compared to the fourth quarter of 2023. The decrease in revenues was primarily due to lower demand in our Corporate Finance & Restructuring and Technology segments … Worth noting, the fourth quarter of 2023 was an exceptional quarter, a quarter when three of our five segments, Corporate Finance & Restructuring, Economic Consulting and Technology delivered at the time, record quarterly revenues in what is typically our slowest quarter of the year.”Okay, but:
Not enough.
We live in a savage, savage world.
Here is CFO Ajay Sabherwal:
"To better align capacity with demand, we reduced headcount in Q4, resulting in a special charge of $8.2 million related to severance and other employee-related costs. These actions continued after the new year, which will result in an additional estimated special charge of approximately $17 million in Q1."He continued:
"Sequentially, billable headcount decreased by 26 professionals or 0.4% and non-billable headcount increased by 18 professionals or 1%. The sequential decrease in billable headcount was largely due to headcount actions taken in the fourth quarter, which particularly impacted our Corporate Finance & Restructuring and FLC segments."Wait. Did FTI RX perform an operational restructuring on FTI RX? Too bad that sh*t isn’t billable. But why? Why is this happening?
"In Corporate Finance & Restructuring, revenues of $335.7 million decreased 8.2% compared to Q4 of '23. The decrease in revenues was primarily due to lower demand for transformation and strategy and transaction services.
In the fourth quarter, restructuring represented 47% of segment revenues. Transformation and strategy represented 31% of segment revenues and transactions represented 22% of segment revenues. This compares to 44% for restructuring, 34% for Transformation and strategy and 22% for transactions in Q4 of '23.
Adjusted segment EBITDA of $44.7 million or 13.3% of segment revenues compared to $65.4 million or 17.9% of segment revenues in the prior year quarter."EESH, we get it was a tough YOY comp but still. Restructuring revenues were flat sequentially in Q4’24 versus the prior quarter.
And there’s no reason — especially with that guidance — to expect much improvement.
So, how is Q1’25 looking so far for FTI? Not amazing. Subject to the caveat that our data is largely manually kept and it’s accuracy depends on the magnitude of Johnny’s thrice-weekly benders, FTI has only been involved in two company-side matters thus far (Ligado Networks Corp. and Jervois Texas LLC); it has not secured any FA mandates for any official committees of unsecured creditors.*
To summarize, the rise of LMEs means a decline in large bankruptcies and the ones that do file typically tend to have shorter lifespans (sans a regulatory overhang like that in Ligado). Or the filings are in the lower to middle market — a part of the industry where FTI is vulnerable to smaller, nimbler firms, who rejoice in undercutting FTI on price. If this all continues, there’s plenty of reason to buy in to Mr. Gunby’s cautious ‘25 guidance.
*****
The question is: will these trends continue? Putting aside the consensus view that a lot of the LME 1.0 deals will cycle back in need of a formal in-court restructuring (end of ‘25? early ‘26??), there are other, newer externalities at play.
Indeed, as we write this President Trump is slapping fresh tariffs on China and our North American neighbors and policy uncertainty is reverberating through markets.
Do you remember how we kicked off this edition …
… by asking, “Are things feeling just a wee bit wonkier these days or is it just us?”
It’s not just us.
It’s also the S&P 500 index:
The Dow Jones Industrial Average:
It’s (definitely) the Nasdaq Composite:
It’s the Atlanta Fed:
It’s the consumer. Take a look at the amount of credit card debt in the US:
And take a look at the credit card delinquency figures:
Translation? This means that over 11% of credit card balances in this country are 90+ days overdue — the highest clip since 2011. Check out this synopsis from our friends at The Transcript:
It’s Target Inc. ($TGT):
It’s Warren Buffett. The Oracle of Omaha is liquidating stocks faster than you can pop a bag of See’s Candies. Berkshire’s portfolio is now 27% cash, a record high for the firm.
Of course, on the flip side, there’s this …
… which will provide some much-needed relief in the lower/middle market space that’s been hottest lately.
The bottom line is that nobody really has any visibility into ‘25 at this point — even less so, really, than at the end of ‘24, due to the daily barrage of WTF*ckery coming out of Washington DC. But there appears to be at least some argument for a surprise to the upside for FTI’s RX group if trends continue this way.
Just not in time for Q1’25.
*To be fair FTI does have a robust senior lender practice but that type of stuff is far harder to track than publicly-filed debtor and/or UCC mandates.
⚡️Update: Mondee Holdings Inc.⚡️
With marketing like that, we’re low-key impressed Mondee Holdings Inc. ($MOND) and 20 affiliates (collectively, the “debtors”) were able to stave off their trip to the District of Delaware (Judge Stickles) until January 14, 2025. If the answer isn’t painfully obvious to you, first, sorry, and second, maybe this’ll help.
That’s Canada’s soon-to-be-former PM Justin Trudeau referencing this …
… which was the tally at the end of the NHL’s 4 Nations Face Off series’ thriller of a final.* The two games between the US of A and Canada, in particular, were chippy as F********CCCCCKKKKK, with the first bout having — count ‘em — THREE fights in the FIRST NINE SECONDS of play. Maybe that’s what you ought to expect when threatening your neighbor with annexation, eh?
But enough about hockey and respecting the sovereignty of an entire nation, we have sh*tcos to update y’all on. If you’re catching up or just a bit slow, you can read all about this self-described disruptive and transformative company in our initial coverage:
Since then, the debtors, represented by Fried Frank Harris Shriver & Jacobson LLP,** have been treated to some disruption of their own thanks to the likes of Quinn Emanuel Urquhart & Sullivan LLP’s Ben Finestone and his client Tuesday Investor LP (“Tuesday”). Like those Canucks, Tuesday’s chippy AF too. Why? Because it dumped $85mm into the debtors’ pref equity in ‘22 and ‘23 and now the debtors are kicking Tuesday (and GUCs) to the curb, complete with a Canada goose egg of a recovery, by pursuing an all-asset 363 sale with TCW Asset Management Company LLC (“TCW”) and North Haven Capital Partners (“North Haven”), the debtors’ DIP lenders and two of their three prepetition lenders.*** And by “all-asset,” we mean ALL. ASSET. Among the things to be sold are unencumbered-would-be-DIP-collateral insider claims against (alleged) deplorables like the debtors’ former CEO Prasad Gundumogula, who’s under investigation by the US Securities and Exchange Commission for ticky-tack sh*t like insider trading and market manipulation. Why you’d want to stay in bed with this guy, who the f*ck knows.
If the sale closes, TCW and North Haven stand to receive, in exchange for a credit bid of $191mm (out of $251mm+) in DIP and prepetition TLs, a collective 25% of the equity in a newco buyer. Who gets the other 75%? Would you believe it, it’s Mr. Gundumogula himself, for …**checks notes **… an unfathomably paltry $10mm.
“Oh, hell nah!,” hollered out Mr. Finestone. He filed this…
… and this …
Awwwwww yeeeeaaah, it’s time for some long, at times testy, and all-things-considered pretty boring litigation. First up, the DIP and bid pros objection, where Mr. Finestone serves up some Grade-A beef with the debtors’ searing desire to lien up and then sell those insider, not-market-tested claims. But as fine a writer as Mr. Finestone is,**** the substance is the same, basic, color-by-number argument we’ve all seen dozens of creditors’ committees toss together. You know, that somehow certain unencumbered assets should be outside the reach of lenders ponying up new money to finance a bankruptcy process they didn’t create and some assets ought not be put into a sale process. Why not leave that “work” to them then? Because there’s no committee; GUCs didn’t want to spend any time on this turd.
Those claims also star in the examiner motion, alongside the ~$71mm deficiency claim the prepetition lenders will have if the sale goes through. That deficiency claim serves as the hook for the motion’s big argument. You see, under the Third Circuit’s FTX decision, an examiner is unequivocally mandatory if a party asks for one and the debtor has more than $5mm in fixed debts (excluding debts for goods, services, taxes, or owing to an insider). Truth be told, the motion’s lack of commitment left us wanting more, so mandatory hook it is. Look, we get it, Tuesday doesn’t have much by way of discovery, but assertions like Mr. Gundumogula “may have engaged in improper insider trading and manipulation of the Debtors’ stock,” “potentially plundered their assets,” and “may have absconded with corporate assets” ring kinda hollow. Tuesday also wasn’t pleased that … we wish we were making this part up … Mr. Gundumogula, an Indian man, traveled to India, where the debtors have material operations, during the weeks leading up to the bankruptcy. Anyway, these claims, says Tuesday, beg to be investigated by “an independent and disinterested party like an examiner” because the court can’t rely on folks with purported-yet-evidenceless “blatant conflicts of interests” like the debtors’ special committee of Tim Pohl, Neil Goldman, and Lawrence Hirsh. Suffice to say, the “mandatory” prong was the main issue, and to evade that, the debtors had to get creative, which they did by scheduling all unsecured claims as, lol, contingent, disputed, or unliquidated.*****
After a few weeks of flinging paper around the docket, it all came to a head at a February 20, 2025 hearing. Well, maybe we should say “started to come to a head.” If you ask the debtors, the hearing was supposed to come and go the same day, but the court had to call it quits after 3.5 hours, right in the middle of Mr. Finestone’s cross of the debtors’ Chief Restructuring Officer Mohsin Meghji (of M3 Advisory Partners, LP). Here’s a live shot of Judge Stickles mid-testimony:
Everything got booted 5 days to February 25, 2025. However, the debtors did need more cash; no one really disputed that – marketing professionals like theirs don’t work for free – so during the interlude, the DIP lenders agreed, like they had an option, to fork over more and increased the DIP from $27.5mm in new money to $30mm.
Good thing too because the debtors will need it for all the prof fees they’re racking up. The February 25 hearing stretched another, sigh, 6 hours. And while tempers flared mildly, at least it all mercifully came to an end. But still no answer. Instead, the court decided to mull it over before ruling, which happened a couple days later on February 27, 2025.
Anyone wanna take a stab at the outcomes?
Bidding procedures are easiest. It’s nonsensical to exclude assets from a sale process. You know that, the debtors know that, Tuesday knows that. Those were approved as-is. Onward.
Next, the examiner motion.
Through some combination of the debtors’ creativity and the lenders’ deficiency claim not being set in stone until the sale closes, the court found that Tuesday didn’t make its case for mandatory appointment and, because a not-blatantly-conflicted special committee is already looking into the debtors’ causes of action, discretionary appointment didn’t fare any better. And yet, we wouldn’t call it a knock-out win for the debtors; the court left them with this:
“[T]he findings of an investigation are subject to the adversarial process. The court scrutinizes a sale to an insider, particularly where no official committee has been appointed to investigate the conduct of the debtors’ management, the operations, and potential causes of action. Here, given the mandate of the independent restructuring committee and the debtors’ representation with respect to the disclosure of their findings as well as the debtor's fiduciary out [under the RSA], there are sufficient procedures in place to protect the integrity of the process…
… To promote the integrity of this process … [i]f the debtors intend to sell causes of action at a sale hearing, the restructuring committee will need to provide all findings as part of the evidentiary record well in advance of a sale hearing. While the court appreciates there may be privilege issues, the court does expect sufficient disclosure.”“Sufficient,” huh? Go ahead and pencil us in for another Mondee update sometime in the future after more “adversarial process.”
Finally, the DIP. That was, to our surprise, a Tuesday ‘W’ of sorts. No, the court didn’t deny the motion outright, but she put a few conditions on the financing to assuage her concerns about liening up non-valued insider claims subject to an ongoing investigation. The fix? A grant of a DIP lien on causes of action, but only for the new money, not the $82.5mm roll-up. That’s all well and good, but as all y’all know, dollars be fungible. Yeah, that didn’t get past Her Honor, who is also requiring the lenders to marshal away from those claims as a source of recovery until the rest of the DIP collateral has been exhausted.******
Bold strategy, but do y’all really think the DIP lenders — the ones who signed an APA to purchase those claims — are just going to take that?
HAHAHA, trick question.
Hell yeah they did. Rolled right over. A debtor-revised order incorporating her ruling was entered the same day.*******
So now the debtors are off on their “marketing and sale” process. Quotations because it’s marketing-and-sale in name only. If you didn’t notice, the lenders are basically giving this company away. It’s going to yield f*ck all.
We’ll officially find that out around March 18, 2025, the bid deadline. A sale hearing is slated to follow on March 26, 2025, but that could change. The results of the investigation aren’t available yet, and the court was clear that if Tuesday doesn’t have a decent chunk of time to prepare, she’s not afraid to break out her kickin’ boots again. Whenever it happens though, the Bankruptcy Code’s absolute priority rule and this building …
… will be front and center in any Tuesday objection.
*The series’ other two countries were Sweden and Finland. Hockey juggernaut Russia was excluded for its own set of painfully obvious reasons.
**Y’all done a welfare check on your former colleagues at Willkie Farr & Gallagher LLP yet?
***The debtors speculate that Tuesday may have another reason to be a royal pain in the a$$: it “is a significant investor in Travelport, one of the Debtors’ largest competitors and contract counterparties.”
****No, this isn’t sarcasm. The writing, it’s 🤌.
*****The debtors blamed that setup on their having a “more elongated process for closing their books than a traditional company does.” Suuuuuuuuuuure. They filed amended schedules and statements on the afternoon of February 27, 2025, the same day the court issued its ruling.
******For enterprising young minds, marshaling is a legal doctrine that usually requires a senior creditor to collect from its unique, senior-only collateral before pursuing payment from common collateral shared with a junior lender. That way, the junior lender’s secured claim is preserved as much as possible. Here, however, it applies a bit differently because the DIP lender has to collect from collateral it shares in common with the prepetition lenders first, with the goal of hopefully preserving the amount of unencumbered assets available for distribution to GUCs. That itself has the potential to raise issues of diminution in value regarding the prepetition claims, but we’ll save it for another day. Just know it’s inherently messy and would involve a lot of litigation about the prepetition collateral’s value.
*******The court also approved the debtors’ uncontested solicitation procedures for their RSA-envisioned, GUC-donut-providing plan of liquidation, which does nothing more than wind down the post-sale-closing estates.
🔥Brilliant Insta of the (Mid)Week🔥
📚Resources📚
We have compiled a list of a$$-kicking resources on the topics of restructuring, tech, finance, investing, and disruption. 💥You can find it here💥.
🍾Congratulations to…🍾
Berkeley Research Group LLC (David Galfus) for securing the financial advisory mandate on behalf of the official committee of unsecured creditors in the Diamond Comic Distributors Inc. chapter 11 bankruptcy cases.
Jake Gordon on his promotion to Senior Counsel at Foley & Lardner LLP.
Jefferies LLC (Leon Szlezinger) for securing the investment banking mandate on behalf of the official committee of unsecured creditors in the Prospect Medical Holdings Inc. chapter 11 bankruptcy cases.
Province LLC (Paul Navid) for securing the financial advisory mandate on behalf of the official committee of unsecured creditors in Prospect Medical Holdings Inc. chapter 11 bankruptcy cases.