đNotice of Appearance - Jayme Goldsteinđ
Paul Hastings LLP's Global Co-Chair gives his views on LME, coops & more.
This week we welcome an appearance by Jayme Goldstein, Partner and Global Co-Chair of Paul Hastings LLPâs Financial Restructuring group. Jayme and his colleagues have played pivotal roles â from various vantage points â in countless bankruptcies and restructurings in recent years, so weâre excited to pick his brain. This is an especially in-depth NOA, wherein we cover a lot of ground so get yourself a âď¸ and get comfortable. Weâre about to go deeeeeeeep.
PETITION: Thank you for making an âappearanceâ with PETITION, Jayme. Given the nature of your practice, we want to start with the highly unoriginal topic that people in the RX industry donât seem to want to ever stfu about: liability management. Letâs start with laying a foundation: how would you describe, as succinctly as possible, the difference between whatâs been dubbed LME 1.0 versus LME 2.0 versus LME 3.0?
Jayme: Marketing. This is also a beauty of a leadoff question given that the Paul Hastings financial restructuring group just this month pioneered LME 4.0 and we look forward to telling your readers about it on one of our upcoming webinars or podcasts, đ . As for the answer:
LME 1.0: Majority lenders acting to the detriment, and exclusion, of minority lenders.
LME 2.0: Majority lenders acting to the detriment of minority lenders but seeking those lendersâ consent to do so in exchange for greater economics and lesser subordination than non-consenting lenders (routinely through âlayer cakeâ first-out/second-out/third-out/fourth-out structures that try to incentivize steering groups, supporting parties, junior and/or non-consenting lenders and equity â in that order).
LME 3.0: Majority lenders still reigning supreme, and non-consenting lenders still suffering the most, but minority lenders now being offered more economics and process benefits given enhanced focus on litigation risk of LMEs.
PETITION: How do the Serta, Wesco/Incora and ConvergeOne rulings factor into those distinctions?
Jayme: Depends on the day. The Serta bankruptcy court opinion led to the proliferation of the LME-Texas Two Step, which was halted by the 5th Circuit in December 2024 and resulted in greater concern about âopen market purchaseâ provisions. The Wesco/Incora bankruptcy court opinion resulted in parties being afraid to be too aggressive, which fear may have been overblown given that the decision was overturned by the Southern District of Texas (though we will all see what happens when the 5th Circuit formally weighs in). While it needs to go through its own appeal, ConvergeOne just made it harder to obtain outsized economics in bankruptcy, potentially forcing parties to try more creative consensual structures out-of-court. Taken together, these decisions illustrate the benefits of the LME 2.0 and LME 3.0 approach (or the filing dangers), because participants in an LME and parties trying to attack an LME bear risk that their arguments will not hold up in the face of judicial scrutiny and there is therefore value in consensus and enhanced participation in all transactions. In other words, less fighting.
More specifically, the 5th Circuitâs Serta decision further cemented LME 3.0 as the current âgo-toâ structure, and the recent ConvergeOne decision from the District Court for the Southern District of Texas is likely to heavily affect out-of-court and chapter 11 balance sheet negotiations in the near and long-term. Sertaâs primary takeaway â that an âopen market purchaseâ in the context of a broadly syndicated loan (BSL) needed to be properly market tested/cleared through an established secondary market â has had a broad impact on how LMEs are negotiated and ultimately structured when the credit agreement involved features âpro rata sharingâ language identical to that of the credit agreement in Serta. In ConvergeOne, Judge Hanen built upon the reasoning of Serta (and LaSalle) and held that a chapter 11 plan was not confirmable because it violated Bankruptcy Code §1123(a)(4) when minority term lenders were not provided the opportunity to become backstop parties along with the other ~80% of the class and the backstopped exit financing was not market tested. Many questions remain regarding whether the result in ConvergeOne would have been different if the backstop had been market-tested or offered, with reduced economics, to all lenders as in Peabody (cited to approvingly by Judge Hanen). We will be watching the appeal of the decision to the 5th Circuit and the inevitable consideration of the decision by other courts around the country going forward closely. A few things are clearer now though. Prepetition lenders in a situation cannot assume that their new money opportunities in a restructuring are distinct from their creditor rights. Majority lenders also cannot rely on âprivateâ processes in the same manner they previously had and BSL structures/opportunities (especially ones that may find their way into chapter 11 proceedings) need to be market tested by companies, sponsors and their advisors more vigilantly than ever. The LME 2.0 and LME 3.0 approach of offering some economics to all lenders may now be even more essential when preparing an in-court restructuring. Finally, while Judge Crane of the District Court for the Southern District of Texas only mentioned his upcoming Wesco/Incora ruling at a status conference and hasnât yet released his written decision, we expect it to provide the takeaway that multi-step LME transactions are generally acceptable and that if parties want to ensure protection against unclear âsacred rightsâ language (i.e., âhas the effect ofâ or âdirectly or indirectlyâ inferring that steps of a transaction should be collapsed to determine their true effect, barring actual consent) they need to ensure that their credit documents are written as explicitly as possible.
PETITION: Whatever the vintage, it sure seems like LME has really slowed down quite a bit in the past couple of months. What do you attribute that to and should we expect things to pick back up in â26?
Jayme: While the overall number of transactions in â25 may be down a tick given the temporary pause to determine how tariffpalooza was going to play out and how Serta was going to be interpreted, we have continued to stay extremely active in the LME market on the company and lender side. Deals are still being discussed and consummated, as we saw a rush of LME activity beginning mid-summer that we expect to take us through the end of the year. We also expect the market to ramp up considerably in â26 and â27 as we see a wave of looming maturity walls coming in â28 and â29 (along with unsustainable interest rates and escalating debt service).
PETITION: Talk to us about the differences people ought to be cognizant of when looking at potential LMEs involved public companies versus private companies.
Jayme: There are two things we routinely point out to clients undertaking this analysis. First, public company debt documents are typically âequity friendlyâ with respect to basket capacity, voting thresholds and transfers of assets out of the system, which makes it easier for majority lenders to structure an LME that is difficult for aggrieved minority lenders to challenge. Second, public companies nevertheless have a heightened concern about minority-led LME litigation risks given the conservatism of the management and boards of many public companies and the âmaterial transactionâ disclosure requirements that may require enhanced disclosure of information about the LME. From the minority lenderâs perspective, this can be a critical avenue for settlement leverage.
PETITION: Do you expect to see more post-LME bankruptcies in â26? What characteristics do you see in companies that engage in an LME and then file anyway? Any common themes?
Jayme: We will likely see more post-LME bankruptcies in â26, and some in the remainder of â25. Many in the market have long characterized LMEs as the proverbial âkick the can down the roadâ approach, a ârearranging of deck chairs on the Titanicâ, or more cynically, a situation where a ârolled loan takes no lossâ. Theyâve predicted that the companies consummating the transactions would all likely need to eventually file for chapter 11. However, putting aside typical sector or overleverage issues, susceptible companies are now starting to need a âRound 2â given that LMEs only really ramped up in popularity around the time of the COVID pandemic. Many issuers have obviously already filed (e.g., Envision, Incora, J.Crew, Serta, Revlon) and others will be coming soon given that follow-on LMEs are unlikely. The common theme weâre seeing is that by design, the heavily negotiated credit agreements resulting from LMEs feature baskets that are extremely tight and amendment/consent thresholds that are subject to a supermajority or even unanimity standard effectively forcing a comprehensive process when there is a liquidity need. Minority lenders are also getting savvier, often being led by aggressive boutique litigation firms, and understand that there is value in attempting to be the âsqueaky wheelâ that tries to frustrate companies/sponsors/majority lenders. Those lenders will have to balance this strategy with the risk that they end up worse off in chapter 11 due to a failed out-of-court process (or even left out of the transaction altogether), of course subject to needle moving decisions such as ConvergeOne. While in-court or out-of-court non-LME change-of-control processes have generally not been the goal for majority lenders, theyâre quickly becoming part of the new go-forward reality.
PETITION: Cooperation Agreements are a hot topic these days. What do you think of them generally? What changes have you seen with them over time? How are those changes good? How are they bad? What do you make of this đ take?
Jayme: As youâd expect, I disagree with Spooky the JBA. Even if cooperation agreements have resulted in and still foster âRound 1â LMEs, there is a natural cadence to these processes and when parties are prepared to restructure a companyâs balance sheet they know how to do so. We see the benefit to our clients of these agreements, which lead to many types of transactions and not just LMEs. From the cooperating creditorsâ perspective, they establish trust, stability and confidence at an early stage of the process regarding what type of deal can be approved by a minimum controlling threshold of lenders. Lenders enjoy reducing uncertainty and knowing that their fellow cooperating lenders will both vote together and not act unfairly or opportunistically at each otherâs expense. From the companyâs and sponsorâs perspectives, having a unified group of cooperating lenders often results in a deal even if it: (1) limits flexibility because it prevents the company and sponsor from manipulating lender dynamics or pitting lenders against each other; and (2) increases the risk that lenders will act as a more demanding or aggressive counterparty. Weâve seen a few important changes to the convention. First, cooperation agreements have traditionally been âdefensiveâ, structured by lenders to block unwanted transactions. Today, they are more commonly âoffensiveâ, providing lender groups with the ability to negotiate a transaction with a company and/or sponsor while accomplishing their goal of preventing the other side from maneuvering around them given their collective size. Second, and as Iâll discuss in a later question, we are also seeing lender groups sign agreements increasingly early â often at the initial debt price drop or first hint of issuer distress. Third, the agreements are acting as de facto âbylawsâ for ad hoc groups of creditors, prescribing how additional paper bought will be treated in a transaction, how parties can communicate or trade, and related issues. Finally, the duration of the agreements has significantly lengthened. Historically, they used to be documents with short tenors such as a few weeks or a month, along with drag mechanisms that would force parties to extend. Now, and starting with our cooperation agreement in Travelport a few years ago, many cooperation agreements include terms through the full maturity of the relevant debt document (even if itâs three or four years away). Travelport is a perfect example of why this is happening â as is common, most of the protections in that credit agreement could be stripped away by a majority of lenders; the cooperation agreement ensured that all signatories would be part of any such majority group, and would be protected against any games the company, board or sponsors attempted to play to pit creditors against each other. A carefully drafted cooperation agreement will nevertheless usually include an early termination right for a sufficient % of cooperating lenders, and the largest lenders acting together can always ârip up the coopâ should it make sense to do so. While cooperation agreements do impose trading and other restrictions, the certainty and protection afforded to the process combined with the leverage associated with being an initial cooperating lender shouldnât chill liquidity and it actually often leads to a âcoop bumpâ whereby such paper trades meaningfully better than unrestricted paper.
PETITION: Thereâs been a lot of talk lately about the latest coop technology that benefits steering committees (âsteercoâ) â so-called carveout premiums â and how theyâve created pricing bifurcation in the market. What are your thoughts on this purported steerco benefit and what challenges do you think they might be susceptible to?
Jayme: The traditional appeal of a cooperation agreement was that it lent certainty about how the economics of a deal would play out â especially if the agreement required pro rata treatment among the holdings of the cooperating lenders. No lender would receive an outsized economic burden or undersized economic benefit relative to their investment. Today, however, âinitial cooperating lendersâ (typically, a SteerCo) that negotiated the agreement will carve out economics for themselves often only for loans held as of the execution date, ensuring that a certain threshold of loans are provided beneficial treatment. This permits the owners of those loans to be compensated for the time and effort/sweat equity associated with building a group and leading negotiations. Carveout premiums are backstop or other customary fees, exchange mechanics or new money holdbacks allowing differentiated economics notwithstanding the pro rata standard that is otherwise the basis of the agreement. What is âcustomaryâ/market is often debated. However, carveout premiums can be significant and likely create pricing bifurcation as trading via joinders of now two-classed cooperation agreement paper occurs. While carveout premiums are permissible, as parties can always agree to whatever economic terms amongst themselves that they wish, the more aggressive the carve out, the more lenders will strongly consider holding out instead of agreeing to disparate economics and waiving their right to sue by signing the cooperation agreement. Those lenders often ultimately sign onto the agreement though after weighing whether they think they can extract more value by commencing/joining a lawsuit if donât like a proposed deal versus their treatment as a âsubsequent cooperating lenderâ (still usually better than being a ânon-cooperating lenderâ unless a lawsuit goes well).
PETITION: To what degree, if at all, can professionals in your position influence who is and is not part of a steering committee leading an LME? What do you make of the idea that certain lawyers might (đ) threaten to exclude certain funds in LME deal #2 if said funds donât hire said lawyers in LME deal #1?
Jayme: Nice softball. We find it critical to not put our fingers âon the scaleâ with respect to dictating who is in a steering committee for an LME. In my experience, that should be a decision made by the largest lenders, the lenders that have the closest working relationships with each other, the lenders needed to get to a majority, or all of the above. Our team has excellent relationships with the BSL and asset manager community writ large and those institutions feel very comfortable reaching out to us to seek our assistance when they are âon the outside looking inâ. We do whatever we can to help our clients when we receive those inbounds, and we have certainly advocated for their inclusion on many instances, but at the end of the day âSteerCo Determinationâ remains a business decision. As for that second question, itâs a wild notion Petition! Our team follows a credo of treating all lenders with as much time, focus and respect as we can irrespective of their size in a group, their relationships with other lenders in a group, or their decision to (or not to) hire us. We would not ever want to be known as threatening or act punitively towards a client, nor would Kris Hansen (my co-chair) or I ever tolerate one of our lawyers doing that. Thereâs no room for it in our restructuring community.
PETITION: There are those out there in the market who want to attack cooperation agreements as anti-competitive. Walk us through the alleged argument and give us your best argument for why it might be utter horsesh*t.
Jayme: While we, along with the rest of the market, are still analyzing the Selecta complaint filed this week in the Southern District of New York, the argument that cooperation agreements are illegal seems to turn on the concept that lenders are not allowed to cooperate with each other in negotiating amendments or waivers with a borrower unless a company first invites them to do so. If this were correct, an ad hoc group would arguably in and of itself be illegal in the event that a company doesnât want it to exist. In our view, this is utter horsesh*t because it would destroy our current paradigm and make: (i) it impossible to negotiate restructurings; and (ii) bankruptcy processes even more protracted and expensive than they already are.
PETITION: Have you ever seen a party violate a coop? What happens in that context?
Jayme: No. It just doesnât make sense from a cost/benefit analysis. As a form of deterrence to prevent breaches, our cooperation agreements generally include liquidated damages provisions, which provide for, among other things, disgorgement of any benefit received by the breaching party in exchange for said breach. As a result, a breaching party would be out litigation costs, would be less likely to be invited to a future ad hoc group, and would have to give up all the benefit they received from any violation. Again, cooperation agreements are intended to make ad hoc groups and their rules more permanent and enforceable, but permanence is not always appropriate for every situation. Sometimes, differences of opinion amongst lenders due to position size or otherwise are inevitable and ad hoc groups break up (or multiple ad hoc groups decide that they no longer want to work together). While cooperation agreements seek to keep lenders bound to each other, many of them â especially cross-class ones â allow different groups to terminate the agreement as to themselves and only lock in certain tranches for a period rather than full maturity duration. We expect parties that want out of a cooperation agreement to continue to focus on duration and termination event language in their documents, rather than risk an open breach.
PETITION: Last one on coops, promise. A lot of the market activity seems to have moved earlier and earlier against a maturity, often times surprising issuers and sponsors. Some might argue that some of these negotiations are manufactured by RX professionals who are trying to get in the door earlier. A counterpoint is that that usually just means said RX professionals are working for âfreeâ for longer. Whatâs your take on this dynamic?
Jayme: Both points are accurate. As someone who has spent the greater part of the last decade trying to build the best BSL/CLO restructuring practice in the business, Iâve learned that the only way to do it is to compete all-out for market share. This requires assembling the most talented, creative and hard-working team available, being provided the requisite firm support and resources to do so, and trust and loyalty from clients. The BSL/CLO market continues to trend in such a way that ad hoc groups are being formed, and cooperation agreements executed, at an extremely early part of the debt life cycle. One of my partners even recently commented that he soon expects to see cooperation agreements involving treasuries. He was kiddingâŚI think. Many of our clients, especially those with private credit arms, abhor the practice of premature formation because they (1) donât want to upset their sponsor relationships, (2) donât want to see their loans trade down prematurely and (3) are concerned about early formation occurring where, irrespective of their size in the loan, they could be excluded from steering groups due to the retaliatory behavior you alluded to above or otherwise. While we would love to help prevent this practice from occurring and thereby make those lender clients and our sponsor clients happy, we are stuck in a race to the bottom that will occur with or without us. As such we believe, and our clients agree, that it is better for us to be involved. While we of course arenât awarded every mandate we chase, weâre awarded many of them and in those matters we can work with the lenders to appropriately guide the pacing and narrative. As for early formation leading to enhanced âfreeâ work, we appreciate that while we have not made the full transition to an investment banking model, there are certain âloss leaderâ aspects to our profession and are comfortable doing that work and creating additional brand loyalty for our clients. Especially when they can see the high quality of our analysis. In the circumstance where a situation fizzles out completely, weâre comfortable because it usually means a successful result for our clients and something theyâll look back upon positively.
PETITION: The primary financing market is trying to get out ahead of lender coordination/agitation with all sorts of new technologies. What are you seeing now and how effective are these technologies? Why are we hearing about âdisqualificationâ so much more these days â both in the context of lenders and professionals?
Jayme: There are many new technologies out there seeking to act as impediments to groups of or individual lenders in some manner. Companies are trying to proactively defeat cooperation agreements directly and indirectly (which should provide lenders a pretty good indication that cooperation agreements indeed work), although those efforts have largely proven unsuccessful. Credit agreements rarely have anti-cooperation agreement language built in, though we have seen it occasionally in the past few years. Things weâre catching in practice or hearing about are credit agreement prohibitions of parties from entering into cooperation agreements, disenfranchisement of the votes of cooperation agreement parties, transfer restrictions to cooperation agreement parties, cooperation agreement party replacement provisions and attempts to void the cooperation agreement entirely via the integration/entire agreement clause. Additionally, leveraged finance documents have begun including voting caps on lender positions. While voting caps have historically been applied to sponsor affiliates to protect lenders from a sponsorâs debt arm acquiring a majority, the technology is now being aimed at lenders. It is deployed to discourage them from forming a â50.1%â cooperation agreement or prevent any individual lender from gaining too much leverage in negotiations. Relatedly, cooperating lenders are starting to include in their cooperation agreements a âDQ lender listâ that cooperating lenders must agree not to sell their positions to. The intent is to keep a lender posing a threat to negotiations from becoming too large and holding a controlling/blocking position. More recently, companies have proposed âDQ counsel listsâ for fee reimbursement blocking, targeted firms known for forming early cooperation agreement groups. Itâs very unlikely that a company (or their, ahem, lawyers) would seek to enforce it when a counsel represents a majority group and the company needs an amendment or waiver. We have, however, seen companies have some success in adding some form of âanti-cooperation agreementâ language to NDAs. We always push back on the language, but in cases where a company insists on including a cooperation agreement prohibition in an NDA, we have seen it effective for only a short period (e.g., 30 days) and not a full typical NDA term (i.e., 1-2 years). Realistically, such language will just have opposite effect â it incentivizes lenders to quickly sign a binding cooperation agreement prior to the time they execute the NDA.
PETITION: On the flip side, what do you make of all of the blockers (and their carveouts)? Do you have some sort of cheat sheet you can share with us on these?
Jayme: Here is a âcheat sheetâ of the typical âblockersâ that our LME/distressed finance team fights for when representing lenders to improve their rights vis-Ă -vis other potential creditors and try to eliminate a companyâs third-party options:
Chewy: Limits the ability to release guarantors that become non-wholly owned
Envision: Limits the investment baskets available for transferring value to unrestricted subsidiaries
Incora: Limits the ability to create a âRequired Lenderâ/supermajority group by issuance of new debt/new commitments for debt to a group that would otherwise constitute a minority (or less than the applicable consent threshold)
J.Crew: Limits the movement of material assets, often limited to IP, to unrestricted subsidiaries
Common weaknesses includes permitting such transfers to non-guarantor restricted subsidiaries or failing to prohibit âdesignationâ of unrestricted subsidiaries (which is functionally equivalent to a transfer)
Pluralsight: Limits the baskets available for issuance of debt (including preferred equity that would be structurally senior) at non-guarantor restricted subsidiaries
Each of these protections was designed as a response to the particular-named attempted transaction, and they reflect the continued significant leverage of sponsors and companies in the BSL/front-end market. For example, while it is rare for us to see companies use unrestricted subsidiaries for purposes other than LMEs, the J.Crew and Envision protections were nevertheless narrowly tailored rather than companies eliminating the concept of unrestricted subsidiaries completely. The existence and quality of these blockers and the companyâs particular need (e.g., liquidity, maturity, discount, etc.) generally create the negotiating framework for LMEs. Where a company needs a maturity extension, these provisions are less relevant because extending maturity without 100% consent is challenging. But in the event a company is seeking liquidity and/or would like to capture discount, these blockers help incumbent lenders establish negotiating leverage. While there is a spectrum of drafting quality in terms of blocker protection, it is rare that a single facility contains strong protections on all fronts â in other words, having great J.Crew protection without great Chewy protection is insufficient (especially for âdeal-awayâ concerns). Another consideration to note is that most of these provisions are not âsacred rightsâ and can be amended with majority consent. This often further entrenches incumbent lenders in situations where the blockers were drafted well, as the majority group can âunlockâ otherwise unavailable transactions.
PETITION: Talk to us about the âdeal away.â It seems like itâs been a big threat in the markets these past couple of years with very little to no traction/bite. What do you make of âdeal awayâ prospects and how do you advise the ad hoc groups youâre leading to contend with that possibility when negotiating with an issuer/sponsor?
Jayme: Our expectation was that post-Serta, companies would find incumbent creditor and document hurdles too burdensome and instead try to find third-party deal-away opportunities such as the ones consummated in Bausch or Liberty Puerto Rico.
It is inescapable that deals with incumbent creditors can create greater value and provide longer term solutions though. Sponsors and boards are increasingly focused on capturing discount and extending maturity, which is only possible in a deal with existing creditors. As discussed above they lead, however, to material go-forward document restrictions and can foreclose future maneuverability and subsequent LMEs (resulting in change of control transactions and/or chapter 11 filings). This is a positive for lenders but a detriment to the company. Alternatively, a third-party deal-away can be more expensive in commitment/advisor fees and forego the ability to capture discount but let the company retain future flexibility (including to potentially capture discount in a follow-on transaction, like in Trinseo). Legacy relationships between the company/sponsor and incumbent lenders will also play a role, as those parties donât want to wrestle with their lenders unless they have to. Companies primarily threaten that they will go with a third party âdeal awayâ to extract better terms from existing lenders on new money and discount capture. This is not dissimilar in key respects to a âthird party DIPâ process. The primary reason why such companies pay commitment and advisor fees to third-party lenders is that such lenders are otherwise reluctant to spend time and money âbiddingâ because they know that they are often little more than a âmarket checkâ and generally not a real option for capital. We therefore advise our clients to be mindful, but not overly scared. Some professionals and sponsors are rumored to be actively seeking the chance to go with a third-party deal to keep majority lenders honest or to curry favor with certain institutions, so we may see more going forward, perhaps through the oft-discussed but rarely executed âinside outâ structure.
PETITION: You guys were involved in the Selecta LME transaction. What are you seeing in Europe these days in terms of RX generally and LME specifically? What are some interesting issues there that have yet to play out that could impact volume in coming months/years?
Jayme: We are very excited about the rapid growth of our London and Paris teams under the leadership of our European Head of Restructuring, Will Needham. This is important because we appear to currently be facing a complex landscape for European stakeholders navigating distressed assets and refinancing challenges. European restructuring is undergoing a dynamic shift, marked by a surge in private credit restructurings which we are at the very forefront of. We are also acting for top asset managers across both public and private restructurings, recently winning mandates for the RCF group in Cerba, and for the AHG in Reno de Medici. There is a clear tendency to move away from in-court solutions, particularly given the uncertainty around Part 26A restructuring plans in the UK following the Adler, Thames Water and Petrofac judgments. It will be interesting to see what the judges have to say in the Waldorf hearing early next year, which has tremendous legal significance in the UK as the first restructuring plan case to be heard by the Supreme Court. Additionally, LMEs are being increasingly deployed as quasiârestructuring tools to help reshape capital structures without having to resort to formal insolvency processes. Selecta was just one recent example of an LME that tested how far sponsors and lenders were willing to leverage document optionality. There are arguments in the market about whether Selecta actually constituted an LME or not, since it was structured to be pro rata, while simultaneously subordinating non-participating holders. The transaction was blessed by a Dutch court which transferred ownership of the company to the AHG from the sponsor. It has nevertheless been seen as a seminal moment for cooperation agreements, representing one of the first âoffensiveâ cooperation agreements in Europe, and it has hinted at the potential for more aggressive LME technology becoming normalised in European markets. Indeed, we have already had requests from clients about the need for âSelecta Blockersâ. With respect to deal volumes, macro interest rate environment has been a primary driver of restructuring activity in Europe, and selective lending from banks has led companies to seek creative solutions. There is sectorâspecific stress too, particularly in retail, automotive and industrials. We are also seeing clients more willing to challenge judicial dicta in various forums, which may constrain novel LME technology. Finally, there is currently uneven implementation of European legislation in respect of crossâborder recognition of restructuring regimes, which will continue to complicate multiâjurisdictional exercises.
PETITION: You guys recently brought over a massive team from King & Spalding LLP with specialty in private credit. It just so happens that, subsequent to those hires, LME moved on over to the private credit space too (e.g., Pluralsight). What is the firm seeing in private credit distress and should we expect to see more PC-oriented LME deals?
Jayme: We are extremely fortunate to have a Chambers Band 1 ranked private credit practice, advising clients through all stages of the lifecycle of their investments â from front end performing to distressed. We have well over 200 finance lawyers at the firm, many of whom sit within our restructuring group. We were excited to land the King & Spalding team in June 2024, which features many phenomenal lawyers that helped round us out nicely on the company and creditor sides substantively and geographically. One of the stars of that team was the incredible Jenn Daly, now our head of private credit and special situations. In terms of trends in distressed private credit, we are absolutely seeing an uptick in private credit workouts and expect that to continue over the next few years. While thereâs always been some cross-pollination of terms between the private credit and BSL markets, for a time it was believed by some that LME risk was largely limited to the BSL market given those marketsâ fundamental differences (e.g., broadly dispersed lender groups with different bases in the ultimate debt vs. smaller groups of more similarly situated lenders). However, recent transactions have shown us that sponsors are just as willing to stop supporting portfolio companies and/or explore LMEs in the private credit context. Weâre also seeing private credit lenders in these situations now willing to pursue more novel or aggressive transactions, take actions contrary to the wishes or expectations of those sponsors, or even effectuate change of control transactions (including on a non-consensual basis). Pluralsight was a fascinating situation, as the lenders thought there would be a different outcome given their relationships with the sponsor, and it initially went down a contentious path before a change-of-control transaction was ultimately agreed to. Critically, it was a wake-up call for many of our private credit lenders who were not accustomed to, or prepared for, sponsors acting in that manner. We therefore now tend to view documentary flexibility in our private credit deals more critically and the lenders seek to insert numerous protections and other guardrails at the origination stage. This reaction to transactions such as Pluralsight means that we often have a need to reach 100% consensus (at least for an out-of-court transaction) because of the protective manner that those credit agreements are drafted, but we feel extremely well-equipped to handle those matters given our expertise and deep relationships in the space.
PETITION: You guys have landed quite a number of impressive assignments on behalf of the official committee of unsecured creditors in cases (e.g., Prospect Medical Holdings Inc., Marelli Automotive Lighting USA LLC. Lifescan Global Corporation). Whatâs the groupâs strategy around UCCs? If you fail to land a big AHG, do you instantly pivot to trying to figure out how you can attack the deal from the UCC angle? From our vantage point, there would seem to be a push-pull when you have a practice group that tries to win mandates across debtors, ad hocs, private credit lenders and UCCs. How do you guys navigate that internally? We should point out for our readers that, despite the focus of this appearance being primarily creditor representations, Paul Hastings does dabble in company-side work too (e.g., Mosaic Sustainable Finance Corporation).
Jayme: You forgot to mention FTX and WeWork! The 120 lawyers on our team throughout the U.S. and Europe have skills covering four core competencies â restructuring, debt finance, distressed M&A and impact litigation. What separates us from our peers is that those competencies are joined together on one platform in the same group â most of our debt finance lawyers are generally versed in restructuring, our restructuring lawyers in debt finance and litigation, our litigators in restructuring and finance, etc. â a feature which makes us one of the deepest and most dynamic financial restructuring groups in the world. Many of us have also been working together for over a decade â weâre friends and family and have a strong level of comfort with each other. While there is some overlap amongst the skills of many in our group, we have a very varied, unique practice that generally covers all aspects of the distressed marketplace. We represent front-end and back-end lenders, companies and boards, ad hoc groups of secured and unsecured lenders and Official Committees of Unsecured Creditors, and the members of our team work with, and communicate with, each other constantly. We are not sector or geographically limited, we work on large-cap, mid-cap and small-cap matters and we are constantly building: (1) relationships with creditors of every stripe (e.g., hedge funds and CLOs on the AHG side and trade vendors, indenture trustees, unions, landlords, etc. on the UCC side); (2) a deep library of industry / capital-structure intelligence; and (3) credibility with the entire FA and investment-banking community. This means that there is not a mandate in the distressed marketplace that our group cannot handle, and we often work together to make sure the group is best positioned to land a role in any credit in the market, whether it be company/board, senior secured or unsecured.
In terms of potential competition across the AHG and UCC practices, there is a natural evolution of a distressed credit and chapter 11 case that allows us to start with a potential debtor representation or AHG mandate and then move lower down into the capital structure to unsecured creditors if those representations donât materialize. So, in that sense, there really isnât a huge âpush-pullâ among our group in picking our spots and we rarely conflict each other out of matters. I would like to challenge the notion that we only dabble in company-side work â while many of them are not public, Mosaic is far from our only notable company-side mandate this year. We have many phenomenal attorneys who focus on company-side work, and we believe strongly that our work on behalf of creditors makes us better and more efficient (with more ability to leverage relationships) when we work on the company side. I often think back to 2007, pre-Lehman, pre-Madoff and pre-CMBS, when I was part of a group that had less than 10 lawyers at Stroock and was hunting anywhere it could for work. It is extremely gratifying to be part of a group functioning at the level we are across the world and working on the likes of FTX, WeWork, Diamond Sports, Marelli, Steward Health, Franchise Group, Trinseo, Mosaic, Travelport, DISH and many other cutting edge situations.
PETITION: We have to delve into a specific situation: The Franchise Group. What. The. Actual. F*ck? Thatâs it. Thatâs the question.
Jayme: Ha! This one was a labor of love â a tremendously challenging deal regarding a $2b capital structure that lasted almost 2 years and which our team put a great deal of blood, sweat and tears into. It was one-of-a kind, featuring many unique things that you donât always get on your Bankruptcy Bingo card. On a prepetition basis, we had almost a year of contentious yet fruitless Company/1st/2nd/HoldCo negotiations regarding value, new money need, a right sized balance sheet, AHG cooperation agreement dynamics, credit agreement offensive and defensive wargames, a last-minute pre-chapter 11 filing substitution of an entirely new legal and banker team for the 2nd lien/HoldCo âFreedom Lendersâ and a former CEO that was an unindicted co-conspirator in a massive fraud. Postpetition, where do I even begin? A first day DIP fight over Zoom which led to a continued âsecond first day hearingâ in person in front of Judge Dorsey in Delaware (later replaced on the bench by Judge Silverstein), where nearly all substantive first-day relief was granted over objections of the Freedom Lenders, unsuccessful chapter 11 trustee and examiner motions from the Freedom Lenders, a denial of the retention application of Debtorsâ counsel in the middle of the cases due to an unwaivable prepetition conflict, an introduction of a new firm that immediately upon being brought in attempted to terminate the Restructuring Support Agreement between the Debtors and our clients, and an impending multi-week valuation fight that was about to occur absent a bottom of the 9th inning global settlement with the company, all secured lenders and the UCC. And, oh yeah, just for fun â Tom Lauria. It was not easy for my partner Dan Fliman and I to get in a word at the podium during any hearing when we were sharing it with him, Josh Sussberg (pre-piercing), and Chris Shore. That being said, it was an extremely well-litigated and hard-fought case that we are very proud to have prevailed in at every step of the process. It was also a mandate which allowed us to routinely demonstrate the incredible depth of our bench and our legal, strategic/game-theory and ad hoc group management skills. I should note though that while our clients walked away as the new owners of the company and pleased with the outcome, they indisputably look back and wonder (as weâre sure the Freedom Lenders also do) if there wasnât a better way to have done this instead of an 8-month, highly expensive bankruptcy case. Sometimes chapter 11 is unavoidable, and this one should have been; however, unfortunately, parties became entrenched and eventually stopped communicating productively with each other. The value of having professionals that can work well together, and communicate to avoid fights, keep the temperature down, eliminate misunderstandings and prevent anyone from âseeing ghostsâ simply cannot be overstated.
PETITION: Now weâll give you an easier one: The Container Store. Big well-known name. Relatively inconsequential filing. You guys represented the ad hoc group of term and DIP lenders in that one. Were there any big lessons learned? We donât see many âsuccessfulâ (âtwo-year ruleâ alert!) retail restructurings these days.
Jayme: We and our clients here are excited to be part of a successful retail restructuring. The Container Store filed in December 2024 with approximately $250mm of debt and emerged one month later after completing its restructuring. Significantly, throughout the process the company was able to maintain operations, keep stores open, and honor customer orders and deposits. This case matters because it demonstrates the broader retail weakness we still see in the market given the various pressures in the retail sector â particularly specialty/home-goods retailers tied to discretionary spending, housing/real-estate markets and high interest rates. Also, the fact that a once-healthy chain needed to restructure underscores how companies with longstanding brands arenât immune to financial distresses when market conditions affect it such as weak sales, rising costs and competition. Via the chapter 11, our clients assumed control of the company and also took it private. As the company focuses on improving its margins, rethinking its footprint and analyzing its go-forward product mix, it will do its best to let management focus on the business and determine how to create sustained success. While J.Crew and Claires are some of the very few retail companies to succeed, so many others have failed (e.g., Payless, Toys R Us, Bed Bath and Beyond, Rite Aid, Party City, The Body Shop and Circuit City). Companies in this sector need to try to keep it simple â have enough liquidity, an appropriate balance sheet, the correct core brand/identity, the right footprint/cost base, vigilance concerning the supply chain, and an appropriate investment in emerging technologies. Weâll see if we can beat your âtwo-year ruleâ â count me in for the âoverâ. And while I didnât get a chance to pierce my ears at the confirmation hearing, youâd be jealous of how well organized my office is right now.
PETITION: What would be your selection for the most impactful restructuring matter of â25 thus far and why (donât shamelessly list your own work)? Feel free to acknowledge a matter that filed for chapter 11 or one that restructured out-of-court.
Jayme: Altice France. It was an impressive and complex restructuring involving greater than $24b of bonds and loans, making it one of the largest out-of-court restructuring transactions in Europe to date and one which has broad global implications. Through the deal, Altice France reduced its debt by approximately $9b in exchange for a significant amount of cash and equity (Patrick Drahi ceded a 45% stake, which helped align incentives between him and his lenders) and extended out its remaining maturities materially. The fact that it occurred out-of-court is emblematic of how distressed firms â and especially those in Europe â are increasingly seeking to avoid long-drawn out formal proceedings for large capital structures unless there isnât time, there is a need for a stay or court approval of unique post-petition financing, or both (e.g., First Brands). Moreover, in addition to being a âcanary in the coalmineâ for further activity in the telecommunications/fiber sector, it sets a precedent for large European corporates to use liability management and demonstrated that large-scale value preservation can be pursued via negotiation and without protracted court supervision (this restructuring was quickly blessed via a French âacceleree sauvegardeâ proceeding and an ancillary chapter 15 proceeding in NY). The matter also demonstrates the significance of the French restructuring practice and the continued importance of cross-border tools. Finally, it put a spotlight on the use of long term, cross-class cooperation agreements, and specifically âdefensiveâ ones that prevent a companyâs ability to divide and conquer creditors. The cooperation agreement allowed holders of senior and junior debt to come together on their own volition in response to the companyâs initial desire to significantly de-lever quickly and coercively, and ultimately agree to a framework whereby they would negotiate with Altice France with a singular message. As with Travelport mentioned above, the agreement also prevented the Company from dividing the group in a way that may otherwise have ended in extreme creditor-on-creditor violence. Weâll see how the restructuring is ultimately implemented, but in the interim hats off go to the creativity and skill of the many excellent restructuring legal and banking/financial advisory teams that were involved.
PETITION: What is your favorite thing about the bankruptcy code? On the flip side, you must have some thoughts about inefficiencies in bankruptcy. What is f*cked and needs fixing? Is there one subject that not enough people are talking about? If you could implore Congress to take action about one thing, what would it be?
Jayme: My favorite aspect of the Bankruptcy Code is how it balances structure and adaptability. For example, the Code establishes a codified, formal system such as the one for Chapter 11 that is grounded in rules and priorities but also permits lawyers to innovate â through creative sale processes, DIP and exit financings, rights offerings and stalking horse and backstop structures. Notwithstanding this, it also fosters equality of treatment and fairness in capital structures through rules that the restructuring community knows and respects when going into a process. To an extent, this predictability is the backbone of various aspects of our financial markets. It also promotes the ability of a distressed, failing company to rebuild and preserve value. Finally, it allows for separation of the good legal practitioners from the great ones and permits the best to excel when it comes to matters such as valuation fights, cramdowns, plan negotiations and brief writing. That intersection of legal skill and strategic thinking is where our team lives. Nevertheless, bankruptcy cases are adversarial litigious and complex. The process inherently trades speed and structure for fairness and due process. Accordingly, they are expensive and time-consuming and as we often say to our clientsâŚevery day in bankruptcy is much more expensive than one outside of it. A chapter 11 estate funds not just one set of professionals, it funds many. Professional fees for cases can run from the tens to the hundreds of millions of dollars. The longer that the process continues, the more that estate value erodes and the less flexibility a debtor will have operate or reorganize. While itâs a recommendation âagainst interestâ and one that many of my fellow professionals may not want to agree with even though its one our clients would appreciate, I would love to find a way to further expedite our chapter 11 process and help provide as much fee relief to our clients as we can through the elimination of wasted time. Theyâre already dealing with distressed investments and they donât want to be hit further when theyâre down. While we are increasingly exploring foreclosure and other out-of-court alternatives with our clients to save on the cost of bankruptcy, I would implore Congress to work to make bankruptcy a more efficient and cheaper system, especially for mid-cap and small-cap companies.
PETITION: What are some of the biggest changes youâve witnessed happen to the business of bankruptcy over the course of your career?
Jayme: Putting aside AI, the biggest changes Iâve seen in the business of bankruptcy relate to the rapid rise in hourly rates for bankruptcy lawyers, the growth and consolidation of firms competing for market share eliminating the ability of standalone mid-size firms to be able to adequately compete and the increasingly common lateral movement of senior lawyers. Lawyers simply donât seem to stay at one firm for all or most of their career anymore. Change begets opportunity, and two changes I made in my own career have been instrumental to the success I have been fortunate enough to achieve to date: (1) the decision to join Stroock as a 5th year associate, and then promptly stay with Kris to help him and others re-grow the group after it shrunk from 30 lawyers to under 10 within a month of my arrival; and (2) the move Kris and I made to Paul Hastings in 2022, when we brought over 40 lawyers to the firm from Stroock and created the foundation for a group that is approximately triple that size today. Our current combined team has accomplished what it has to this point in large part because of the buy-in from the tremendous restructuring lawyers who were already at the firm when we got there and the critical support of our many new additions, the largest one being the King and Spalding team we previously discussed (led, on the restructuring side, by Roger Schwartz and Matt Warren). Moving to Paul Hastings was the best decision I have made in my career, and I think the success we have collectively achieved illustrates how the consolidation of top-tier restructuring and/or restructuring-adjacent teams into one much larger global team has created far more than the sum of the parts. Which is probably a long way of saying that lawyer movement is here to stay (I see you, Dahl!), because it ultimately provides value for the firms and groups involved, and, most importantly, for their clients.
PETITION: What is the best piece of professional advice that youâve ever gotten and why? Please lay some wisdom down on our readers who may be at the initial stage of their careers.
Jayme: The following pieces of advice have guided me in my 23-year career:
never stop asking questions but know when to shut up and simply listen;
always find ways to step out of your comfort zone and take chances on yourself;
donât be afraid to make mistakes, just donât make the same mistake twice; and
if you donât have the âworry geneâ, get it.
PETITION: Finally, youâve likely noticed that we like to snark âLong ABCâ or âShort XYZ.â What are you âlongâ these days? What are you âshortâ? Feel free to be creative here but please list one thing thatâs legal/financial and one thing thatâs ⌠well ⌠whatever.
Jayme:
Long: The leadership of Frank Lopez and Sherrese Smith, the parmigiano reggiano-aged strip steak at Crane Club and my New York Mets (big shout out to Paulie D. and the LSRMF!)
Short: Attorneys working from home excessively and the notion that AI can ever replace the need for good legal judgment, relationships and practical experience
PETITION: Thanks Jayme. This was a long one and we appreciate your participation.
Jayme: This was a beast, Petition. Even though we have no idea who the heck any of you are we appreciate ya back. We circulate your newsletter to our full group each week, and you help make us current on real time issues that our clients want our views on. You also donât take yourselves too seriously, although you could have fooled me based on this tome weâve together created here! Keep it upâŚ
PETITION: đ
âQuotes of the Weekâ
From S&P Global Ratingsâ Jeff Sexton:
âTight bond spreads right now are understandable: Weâve had resilient economic growth for several years. Corporate earnings expanded uninterrupted for nearly two years. And relative credit quality remains resilient: the proportion of all rating actions that are upgrades (42.2%) stands slightly above the long-term average since 2010 and our speculative-grade negative bias is essentially unchanged from last year, indicative of a modest amount of downgrades expected over the next 12 months. Defaults are slightly above their long-term average (4,1%), but now roughly 2/3 of defaults are distressed exchanges, which carry higher recovery rates than traditional ones such as bankruptcies. If bond spreads reflect both default likelihood and loss given default, even a âstickyâ default rate can lead to tighter spreads if recoveries are greater. The relative mix of speculative-grade bonds is now a majority âBBâ, versus âBâ and lower, stronger than it was 10 years ago.â
*****
We all know that GLP-1s are a ticking time bomb for a lot of consumer product goods companies that hock sh*t to us that are bad for our health. Here is The Coca-Cola Company ($KO) CEO James Quincey taking stock:
ââŚwe certainly are out there generating data on what seems to be happening with households and people that are on GLP-1s. I think itâs still ultimately early days to know the full cycle. But I think what youâre seeing is very similar to what weâre seeing. Obviously, we track not just what they do on nonalcoholic beverages, but across what they eat and the alcoholic beverages. And so one can see the full change in the diet makeup. As it relates to nonalcoholic, clearly, we can see some very emerging conclusions. They tend to drink less full sugar soft drinks, but they tend to drink more diet soft drinks, also hydration, more coffee and as you say, a big shift towards protein drinks. I think thatâs a pretty standard set of conclusions that everyone is seeing.â
And, related, here is Heineken N.V. ($HEINY) CFO Harold Broek:
âGiven the challenging quarter just behind us and based on our current assessment of short-term consumer demand, we expect volume to decline modestly for the year 2025.â
Câmon people, holiday party season is just ahead of us. How boring is it going to be if nobody is binging beers and making fools out of themselves?*
*For the record both KO and HEINY are publicly-traded and the stocks are up YTD.
đĽSocial Media Post of the WeekđĽ
Oh, nice, Sycamore Partners is already working its magic, â°ď¸:
đChart of the Weekđ
đResourcesđ
We have compiled a list of a$$-kicking resources on the topics of restructuring, tech, finance, investing, and disruption. đĽYou can find it heređĽ.