Participate, Profit & Celebrate:
Q.: How might the current spike in oil prices impact business?
Mr. Miller: Leveraged companies have a smaller margin-for-error if costs increase or sales decline. The increase in the cost of oil has broad ramifications for the economy. For one, we can all see the negative impact on discretionary spending from higher gas prices as consumers have less money left for apparel and major purchases. In particular, sales of full sized automobiles will decline - which in turn results in decreased demand for metal, rubber and plastics used in the production of such cars. Oil spikes also increase the cost of producing industrial chemicals, and the cost of air travel.
Q.: Given the current economic environment, what are your observations on the nature of restructuring cycles?
Mr. Miller: The restructuring market is cyclical. It lags in the periods of easy credit during which businesses are acquired at high valuations, companies finance dividend recaps, and lower quality issuers load up on debt. The recent cycle followed the record debt issuance through 2007 when it seemed like most deals could get done and default rates dropped below 1%. Of course, as we all know, the easy credit party ended in 2008, and the most leveraged companies suffered during the economic downturn; defaults soared to over 13% over the next two years and restructuring advisors were very busy.

After defaults spiked in 2009, the economy started to stabilize and the credit markets started to thaw. As the expression goes, it's now Déjà  vu all over again, dividend recaps are back, almost 20% of new issuances are rated B+ and below, and defaults are back down to 1%.
Q.: When will the next cycle occur now that credit markets have rebounded?
Mr. Miller: While I am no seer, I suspect that leverage will continue to increase over the next couple of years until some catalyst starts the restructuring cycle over again. In the meantime, a variety of factors seem to mitigate the level of current restructuring activity. First, while LIBOR remains low, variable rate borrowers continue to enjoy the cash flow benefit of paying abnormally low cash interest payments. Second, although many still fear the uncertainty created by high unemployment rates, inflation, a soft real estate market, natural disasters and international unrest, the economy appears to have stabilized. Third, now that the flight to safety has subsided, exporters are enjoying the benefit of a weaker dollar. Fourth, enhanced labor productivity and stagnant wage rates are supporting corporate profit margins. Fifth, easy credit is eroding the “maturity wall” and pushing out maturities. On the other hand, commodity prices have been on a tear and many companies are especially sensitive to the costs of oil and other commodities.
Q.: In the last few years there were a record number of prepackaged bankruptcies. Has this become a common corporate strategy for restructuring balance sheets, and why?
Mr. Miller: Yes. Prepackaged bankruptcies are a great tool to deleverage corporate balance sheets. For a variety of reasons, out of court deals are difficult to consummate. Free-fall Chapter 11s are potentially uncertain and expensive. Prepackaged bankruptcies are now a common way to reduce both uncertainty and costs. In a prepackaged plan, at the time of filing, the parties provide the court with all documentation and approvals necessary to approve the plan of reorganization. If all goes according to plan, the company can be out of Chapter 11 in as little as two months.
Q.: What are the risks to pre-pack Chapter 11 reorganizations, and what planning is a must for an effective outcome?
Mr. Miller: The risk is that the Judge does not approve your plan, leaving the company in an unintended free-fall Chapter 11 which, in addition to being more expensive, can have adverse consequences for the business as customers, suppliers and employees all reassess their options. Thus, before filing, it is critical to tie up your financing, obtain all required votes and approvals, and anticipate and answer all the possible objections by the Court and dissatisfied constituencies.
Q.: Do pre-pack's favor investors who seek to acquire ownership of distressed companies—and how?
Mr. Miller: It can. After acquiring the fulcrum debt security of a distressed company, a control investor can negotiate terms acceptable to the Company and senior creditors, and agree to exchange its debt for control equity pursuant to a prepackaged plan before exposing the Company to third party acquirers. Of course, in practice, specific deals can be complex and may require the would-be equity holder to infuse additional equity as part of the deal.
Q.: Though the number of traditional Chapter 11s decreased dramatically in 2010, in your opinion, when is it beneficial for companies to pursue a traditional Chapter 11 reorganization?
Mr. Miller: In general, I see free-fall Chapter 11s where it is infeasible to plan for a prepackaged or prearranged Chapter 11. This can occur for a variety of reasons, but a few come to mind. For one, the Company may simply be out of time (that is, out of money) and can only obtain the cash required to fund the restructuring process by obtaining DIP financing in Chapter 11. Two, the Company may be too complex or have too many constituencies to permit an efficient out-of-court restructuring process. Last, the company may have claims that can only be assessed as part of a court process.
Q.: Are turnarounds happening faster today?
Mr. Miller: I think so. From creditors to equity sponsors to management teams, the various constituencies are more restructuring savvy today. With the exception of large complex cases with numerous constituencies, uncertain asset values and/or dubious cash flows, or uncertain claim amounts, parties need less time to cut a deal. Moreover, the Courts and code changes encourage efficient cases. For example, debtors now have less time to decide which leases to accept or reject. Retail cases used to drag on as the Company and its creditors tried to figure out the optimal lease population. Now, decisions have to be made within a few months. For example, companies now must decide whether to assume or reject leases within 120 days with only one 90 day extension potentially available to them. Until 2005, companies had an effective unlimited ability to extend its deadline with respect to how to treat its leases.
Q.: How would you describe distressed M&A transaction?
Mr. Miller: I tend to think of distressed M&A as including any restructuring transaction where a third party acquirer, who's not a par creditor, seeks to obtain control of the restructured company. This clearly includes a bidder at a section 363 hearing seeking to acquire a distressed company's assets pursuant to a broad M&A process in Chapter 11. But, I also think distressed M&A includes transactions where a control investor acquires a big position in a troubled company's fulcrum debt and then exchanges its debt position for a control position in the company's restructured equity. At the peak of the last restructuring cycle, when credit was tight, this latter type of transaction was a good way for distressed control investors to create (really assume) leverage that could not be duplicated in the current market. Some recent examples include Platinum's acquisition of Keystone Automotive and Centerbridge's acquisition of Penhall.
Q.: What are the current trends in distressed M&A activity and why?
Mr. Miller: Well, the level of Distressed M&A activity correlates with the restructuring market in general. So right now, distressed M&A is less active as we see fewer imminent restructurings. On the other hand, over the past few years, we have seen Banks reluctant to take losses and favoring “amend and extend” transactions. Now that valuations have bounced back, and Bank balance sheets have improved, some Banks are starting to clean up their troubled loans and look for exits. This may provide some distressed M&A deal flow.
Q.: Who are the buyers of distressed companies today?
Mr. Miller: After the stock market crashed, companies and creditors were not eager to sell as the market's lack of liquidity and negative consumer sentiment impaired valuations. Moreover, with credit tight, and Companies hording cash, most investors were not eager to buy. Thus, over the past few years, most change of control transactions favored the well-capitalized distressed financial investors that were the market's primary source of liquidity. Today, however, with record cash positions in their coffers, strategic buyers are back. Some recent examples include Energizer Holdings' acquisition of American Safety Razor, Constellation Energy's acquisition of Boston Generating and Dish Network's acquisition of Blockbuster.
Q.: How can an overseas company prepare for acquiring underperforming assets in US?
Mr. Miller: In my experience, there are times when overseas buyers can have an advantage in acquiring distressed US Companies. Brutal US competition may have weakened the domestic industry leaving a strong foreign buyer in the catbird seat to consolidate global market share. Moreover, in periods of a weak US dollar, foreigners have a purchasing advantage.

To prepare to acquire distressed companies, overseas companies must remain well-capitalized, regularly survey the US landscape, and when ready to make a move, use US restructuring advisors who can help develop the acquisition strategy, credibly express the foreigner's interest, navigate and influence the process, facilitate diligence, negotiate with the company and its creditors, and obtain financing if necessary.
Q.: On a personal note, what book are you reading?
Mr. Miller: Unfortunately, the Kindle is encouraging my ADD so I am never reading just one book. I find myself bouncing back and forth. Currently, I am reading Life by Keith Richards (autobiography), a mystery called The Cabinet of Curiosities by Douglas Preston and Lincoln Child, and Where Good Ideas Come From: The Natural History of Innovation by Steven Johnson.
Q.: On a personal note, what book are you reading?
Mr. Miller: Unfortunately, the Kindle is encouraging my ADD so I am never reading just one book. I find myself bouncing back and forth. Currently, I am reading Life by Keith Richards (autobiography), a mystery called The Cabinet of Curiosities by Douglas Preston and Lincoln Child, and Where Good Ideas Come From: The Natural History of Innovation by Steven Johnson.
Q.: How can an overseas company prepare for acquiring underperforming assets in US?
Mr. Miller: In my experience, there are times when overseas buyers can have an advantage in acquiring distressed US Companies. Brutal US competition may have weakened the domestic industry leaving a strong foreign buyer in the catbird seat to consolidate global market share. Moreover, in periods of a weak US dollar, foreigners have a purchasing advantage.

To prepare to acquire distressed companies, overseas companies must remain well-capitalized, regularly survey the US landscape, and when ready to make a move, use US restructuring advisors who can help develop the acquisition strategy, credibly express the foreigner's interest, navigate and influence the process, facilitate diligence, negotiate with the company and its creditors, and obtain financing if necessary.

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