97 Road to Recovery

7/31/2019 97 Road to Recovery

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Best Practices o the Best Dealmakers

Best Practices

of the Best

DealMaKers

the roaD to recovery

creating value froM

DistresseD coMPanies

Presented by Merrill DataSite and The M&A Advisor

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2012 Te M&A Advisor and Merrill Datasite. All rights reserved. No part o thismaterial may be copied or duplicated in any orm by any means or redistributed withoutthe prior written consent o Te M&A Advisor and Merrill Datasite.


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Drawing on the experience and expertise o the best in class dealmakers, TeM&A Advisor, together with the leading provider o virtual deal managementservices, Merrill DataSite, publishes the quintessential dealmakers guide series -Te Best Practices o Te Best M&A Dealmakers.

Proling the proven strategies and unique experiences o the leading M&A practi-tioners, Te Best Practices o Te Best M&A Dealmakers series is distributedin regular installments or M&A industry proessionals in both print and interac-tive electronic media. Previously published eatures and chapters are also available

in the online library o Merrill Datasite and Te M&A Advisor.

We are pleased to present the third installment in the series: Te Road toRecovery: Creating Value in Distressed Assets. Tis insightul chapter, eatur-ing a Special Report on Conicts o Interest, was composed through candidinterviews and thorough research, providing meaningul insight to practitionersalready active in or considering the restructuring and reorganization o distressedcompanies.

Dealing with companies in distress is a weighty and complex business that leaves

very little room or error, whether rom the distressed companys perspective orthat o a potential investor. Tis chapter o the Best Practices o the BestDealmakers Guide will be presented in two parts: Part 1, which ollows, ocuseson best practices rom a distressed companys, or sellers, point o view; and Part 2,which will be the next installment, discusses best practices or buyers o distressedcompanies or its assets.

Introduction


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Te Road to Recovery: Creating Value rom Distressed Companies

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We were introduced to the owner o a plastics manuacturing company in crisis. Hiscompany had suered fnancial losses or three years and his lender had asked himto take his business elsewhere because o the companys worsening perormance andweak internal control systems. He was acing a mounting list o operational issuesand ultimately, liquidation i he couldnt turn things around. We stepped in to help.First, we secured an extension o the existing lenders orbearance agreement, andhelped the owner to identiy immediate changes he could make to improve his busi-ness. Ten we prepared a fnancing request package that replicates the underwritingprocess lenders use internally, and identifed how the credit risks could be eectively

mitigated.

We approached several lenders within our network who specialize in fnancing thistype o company and situation, and quickly generated eight proposals. Te owner wasstunned! His accounting frm had approached and been turned down by dozens obanks, including a ew who submitted proposals to us. We reviewed all the propos-als with the owner, assisted him in selecting and interviewing fnalist lenders, andnegotiated on his behal to secure very attractive fnancing terms on his new loans.Tat was over fve years ago, and since then the owner has continued making the im-provements we recommended, urther strengthening the business. With a new lender

in place and a plan or improvement, the company made it back rom the brink andis thriving today.Meagan Hardcastle, Director, urnaround and Corporate Finance Practice, OKeee & Associates.

For many companies in crisis, the critical point o distress may seem to be prettycut and dried: the company lacks the cash to pay its obligations. However, the un-derlying circumstances that drive a company to this point are anything but simple,and bringing it back rom the brink is rarely easy. Moreover, navigating a turna-round is a complex journey that does not guarantee success.

Te majority o respected surveys put the success rate o turnarounds in thesesituations at between 20% and 35%, depending on the denition o under-peror-mance and success. 1

Success is possible, however, i the board o directors knows how to position thecompanys assets well and make the right moves at the right time to achieve thebest possible outcomes or the company. Te ollowing pages provide practicaladvice or those at the helm o a distressed company.

Te Road to Recovery: Creating Value fromDistressed Companies

1 John Maver, urnaround ips Tat Work,


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Distressed Companies Beware: Te Players Have Changed

In the ace o a liquidity crisis, many companies try to solve the problem by rais-ing capital through a nancial transaction, whether inside or outside o bankruptcycourt. However, todays boards ace a dynamically changing business environment.Access to capital continues to be elusive or companies, especially those in the mid-dle market. Bankruptcy and restructuring strategies have become more complex. Teentry o hedge unds, private equity and other private investors has required debtorsto learn how to deal with a much broader set o stakeholders.

As noted by Melissa Kibler Knoll, Senior Managing Director o Mesirow FinancialConsulting, You once dealt with the banks as one o the primary constituencies.Now youre also dealing with sophisticated parties with much more o a tradingmentality, she said, One o the things that has changed is that the transerability oall these positions has been enhanced tremendously. On one day, you may be nego-tiating with your bank group and bondholders, and on the next day there may be adierent group o people at the table.

Not only are distressed companies dealing with more diverse stakeholders, they arealso oen dealing with much larger groups, as noted by Jack Butler, a leading attorneyprimarily involved in the corporate restructuring and corporate governance practicesat Skadden, Arps, Slate, Meagher & Flom, LLP. Just ten years ago, when Xerox Cor-poration renegotiated $7 billion o senior debt as part o its successul restructuring,the company executed the renancing primarily with major banks as its debt holders.oday, there might be dozens, i not hundreds, o investors that would be holdingthat debt, many o which would likely have diering intercreditor views about howthe restructuring should proceed, he said. And some o the holders might well havepurchased credit deault swaps or made other investments that would have resulted

in their opposing the companys restructuring in search o higher returns ollowing adeault or bankruptcy ling.

Additionally, in Butlers view, the denition o a turnaround has taken on newmeaning. Te term turnaround implies that a company in distress will work withits stakeholders to turn itsel around and restructure as the same company with anorganic solution. Tats happening very seldom these days, he said. Instead, claimsagainst the company trade away rom natural stakeholders, such as suppliers, to dis-tress investors that are more likely to push or a change o control transaction, such as

a sale o the company, as opposed to an internal reorganization.

You once dealt with the banks as one o the primary constituencies.Now youre also dealing with sophisticated parties with much moreo a trading mentality, ~ Melissa Kibler Knoll


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Unortunately, weve seen many companies wait too long to seekadvice and by the time they do, its too late. At that point, no matterhow much we want to help them, there is little we can do topreserve value. ~ Geo Raicht

Butler denes a turnaround as a business enterprise that is acing mandatorychange, because its current mode o operation will lead to ailure. What occursin turnaround situations transcends the simple notion that a company recognizesthat it has a material problem and xes it. Most oen, companies that undergo sig-nicant restructurings o their operations or balance sheets, or both, also undergoa change o control, he said, Tat usually means that there will be changes in thecomposition o the board o directors and the management team that were guid-ing the company; in many instances, the restructuring also involves a divestiture o

some or all o the operating business enterprise to a third party with the remainingshell le to address the claims o stakeholders le behind.

Unortunately, most boards o directors have little to no experience dealing withthis level o nancial and operational triage. In the ace o such serious stakes, oneo the most important moves the board can make to prevent value rom beingcompletely eroded is to seek expert advice as soon as problems are suspected.

Controlling the ime to Market: Whatever You Do, Dont Delay!

Delay can be disastrous, according to Geo Raicht, partner in the Bankruptcy &Restructuring Group at global law rm Proskauer, No one wants to admit theyrein trouble; its hard to do, he said, Unortunately, weve seen many companieswait too long to seek advice and by the time they do, its too late. At that point, nomatter how much we want to help them, there is little we can do to preserve value.

Board members and the management team dealing with a company in decline caneasily become paralyzed by the situation or choose to take a wait and see ap-proach. Tis is a trap to be avoided, according to Chris Picone, President o

Buccino & Associates, a turnaround rm that has been involved in more than1,000 turnarounds. He advises, Be proactive; dont wait or deadlines and com-promises to be orced upon you. Outcomes can be dramatically dierent depend-ing upon when/how the company addresses its problems. According to Picone,a turnaround expert who has also served as a Chie Restructuring Ocer (CRO)or a number o distressed companies, Te boards that are proactive usually havea wider array o available alternatives, he said, Tey are better able to negotiatewith creditors, lenders and potential buyers rom a stronger position, while theystill have some leverage le.


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It sounds like logical, straightorward advice, but many companies wait until theyhave breached loan covenants, missed loan payments or have run out o cash andare unable to pay vendors or make payroll beore beginning to address turna-round issues. Once that happens, choices become very limited and the companys

value erodes quickly. In addition, any leverage that the company may have had indealing with its creditors and lenders is gone and a crisis exists. At that point, thecompanys secured lenders are generally in the drivers seat.

Te wiser approach is or the board o directors to resist the temptation to operateas usual and seek qualied turnaround advice as soon as they suspect theres anissue. According to Picone, I we can get in there at the beginning beore the crisisstage, we have a much higher likelihood o being able to turn that company aroundand doing it in a much less painul and more cost-eective manner.

Kathryn Coleman, a partner at law rm Hughes, Hubbard & Reed with 25 yearso experience representing companies restructuring their nancial aairs, also ad-

vises distressed companies to make the rst move rather than wait or the lendersto do so. Lets say youre a company that has a maturity coming up in 18 months.I you need an amendment now, pay attention to what the lenders are asking ornow, she said, Te rst amendment is the one that Id pay the most attention to,when you still have some leverage, because now is when they are going to comein and ask or changes that may seem innocuous but could cause trouble later. Ithere are two or three or more additional amendments, every single one o them isgoing to make things worse and worse. And you get this creeping document that,by the time things head south, you have no rights le.

aking this approach is wise, according to Coleman, because there is no maturity

or payment deault and the company has the ability to do something without thecreditor being able to take action, she said. Tis is when to really ocus on a long-term plan, not just put a band aid on it and kick the can down the road.

Earlier is denitely better in Jack Butlers opinion as well. One o the things thatproessionals like me do is try to create optionality or our clients, so they donthave to simply liquidate or sell or do XYZ, but have a chessboard o strategic op-tions they can pursue to move the restructuring orward to a successul outcome,

Focus on a long-term plan. (Do) not just put a band aid onit and kick the can down the road. ~ Kathryn Coleman


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Most company presidents would probably disagree but the seedso nancial distress show up as much as three years beore thecompany actually gets into a crisis situation. ~ ChristopherPicone

he said, Te earlier you are in the process, the more options there are. Te ironyis that many directors and ocers believe that they are capable o handling com-panies in early and even mid-stage decline without any outside help. Tey may noteven recognize that they are having problems and, i they do, sometimes shun as-sistance rom turnaround proessionals earing that any external acknowledgmento the companys problems will create a sel-ullling path to bankruptcy reorgani-zation or even liquidation.

Te bottom line is that most boards o directors o a distressed company lack theexperience, time or resources to execute a nancial and operational turnaroundo its company. Te sooner the board acknowledges that it needs help, the aster itcan begin developing an action plan and likely execute an out-o-court restructur-ing that maximizes enterprise value or all o the companys stakeholders, includ-ing shareholders.

Early Warning Indicators: Looking Sooner or Signs o Distress

What red fags should a board o directors or management team be on thelookout or as they monitor company perormance? For Picone, the signals can beound much earlier than most boards o directors and management teams wouldthink. We believe that a company that has missed its projections or two quar-ters needs to get some help, he said, Most company presidents would probablydisagree with that but our academic research and over thirty years o turnaroundexperience tells us that the seeds o nancial distress actually show up as much asthree years beore the company actually gets into a crisis situation.

Picone also noted several other red fags that management should pay attention to:

Latepaymentstovendors Riseindefectiveproductsandwarrantyclaims Missingdeliverydates Highemployeeturnover Highemployeeabsenteeism

aken individually, events such as these may be considered as troubling, yet almostroutine problems associated with operating a business. But considered in sum,


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they can serve to alert management to deeper issues, i they are heeded, beorecrisis looms. As noted by Henry S. Miller, Co-ounder and ormer Chairman oMiller Buckre & Company. Tere are instances where the onset o distress isboth sudden and catastrophic (Lehman Brothers, or example), but more oenthere are numerous signs pointing to pending trouble (GM comes to mind).2

Establishing a Successul eam

I. Analyze Existing Business and Partners

When the board identies that the company is in trouble, experts also recommendthat they take a step back to determine i their internal and external advisors havethe right expertise to address the situation. Oen, a boards rst instinct will beto rely on their existing nancial and legal advisors or advice. However, in mostcases, these advisors are not the experts the company needs.

It is also wise or the board to take a step back and avoid making assumptions

about the companys existing relationships with its nancial partners. Te num-ber one thing we see is that distressed companies assume they have better relation-ships with their creditors than they actually do, said Kathryn Coleman, I cannottell you how many times I have heard a company say We have a great relationshipwith our bank, and then a week later the bank suddenly says, We are declaring adeault. It happens all the time. People overestimate the amount by which a rela-tionship history will overcome economic reality. It doesnt.

o prevent missteps, the board o directors should engage the services o nancialand legal proessionals who have specic expertise in restructuring, bankruptcy

and/or a potential M&A event involving distressed assets. Forging ahead withadvisors who lack this experience can be a serious risk, according to Jay Greyson,Managing Director and Principal o investment bank Vetus Partners.

As an investment banker, there is oen a concern when youre embarking on a sellside process o having lawyers (and other advisors) who dont have the necessaryM&A experience to maneuver through a normal transaction process, Greyson

2 Henry S. Miller, How to Spot the Warning Signs and Stay on op o Corporate Distress, Navigating odays Environment:Te Directors and Ocers Guide to Restructuring, Globe White Page, Ltd., London, 2010.

People overestimate the amount by which a relationship historywill overcome economic reality. It doesnt. ~ Kathryn Coleman


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said, Now, add a distressed situation on top o that with the need to typically dealwith commercial banks, alternative lenders, equity holders, courts, unsecuredcreditors and various other committees and interested parties. I the advisors donthave the relevant experience and expertise, I would say that has the potential to

become a dangerous situation.

II. Establish a Dedicated Internal urnaround eam

Experts also recommend that, i possible, the company create an internal teamo employees whose ocus is to deal with the distressed situation, removing themrom the responsibility o day-to-day operations. Tis enables the company to re-spond quickly to provide the distressed advisor team with all o the inormation asit helps the company through the reorganization process. It also helps to keep the

rest o the company ocused on running the business, one o the most importantundertakings the company must manage while working through the distress is-sues. Nonetheless, its an undertaking that advisors are continually mindul o withtheir clients. Without that, there will be no value to protect.

Another best practice is to organize the internal team to work closely with externaladvisors. Te two teams should keep each other appraised o activities, privatelydiscuss options and agree upon the message that all will convey to outside parties.Tis is important because stakeholders will oen assess the situation by talkingto people in certain parts o the company as well as the members and advisors onrestructuring team. It is much more persuasive i each parties message adds up toa consistent story and commitment to a specic direction.

III. Determine Which Outside Advisors You Need

Te board should consider augmenting their team with the ollowing:

urnaround specialist or chie restructuring ocer. Te distressed boardshould proactively seek out the services o a turnaround specialist rather than

waiting or its bank or other lenders to recommend their own advisor. Tis ap-proach can be instrumental in helping the company identiy hidden value, ad-dress operational issues, and identiy debt resolution strategies that will mostbenet the company and its stakeholders. It also sends a positive signal to thecompanys lenders about its commitment to building a viable recovery plan.

Investment bank with pertinent experience. Te board should interviewseveral investment banks with directly related experience in working with dis-tressed companies. Additionally, beyond considering the banks credentials, the


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company should also scrutinize the credentials o the lead proessional on theteam, as this individual will play a pivotal role in marshaling all o the requiredresources and balancing the timing and negotiations between the company, its

various creditors and other stakeholders.

Legal counsel. Te board should, at a minimum, augment their generalcounsel with supplemental legal counsel experienced in advising distressedcompanies. M&A experience is also important i the company is consideringselling or buying assets as part o its turnaround strategy.

Accounting expertise. Again, this should be a rm with directly relatedexperience in helping companies o a similar operational prole, in similarnancial circumstances.

I having a turnaround team staed with the right expertise is critical, hiringspecialists who can exhibit the right commitment level is even more crucial. Ac-cording to Peter Kauman, president and co-ounder o the Gordian Group, aninvestment bank that specializes in advising distressed companies, the single mostimportant thing a board o directors can do is nd advisors who are unquestion-ably allied to the companys best interests. Distressed companies have very littletime and very little room or error, he said, It is critical that the board identiyadvisors who will serve as passionate, dedicated advocates to helping the companymaximize its value and achieve whatever it has dened as success.

Its a sentiment shared by other senior advisors and corporate executives such asSkip Prichard, president & CEO o Ingram Content Group, Inc. In turnarounds,nd people who are engaged in them, Prichard said, I ound that I absolutelyloved it; I loved the crisis, the energy, the ability to make a bit o a dierence. Inaddition to nding management who can inspire, nd people who just love thatbecause thats what will drive them. You dont want someone who is just interestedin making the dollar, but someone who is interested in making the dollar and re-ally transorming that company or the long term.

Identiying Problems and Solutions

Oen, by the time the company realizes it is in crisis, liquidity problems anddeadlines are rapidly encroaching or have been missed. Gaining a realistic pic-ture o cash fow and liquidity is critical, but this is oen dicult or a troubledcompany. I this is the case, a turnaround specialist can help the company get anaccurate picture o cash fow and liquidity in a relative short period o time. Eveni a companys reporting mechanisms are weak, turnaround specialists can usually


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4 Dueld Meyercord, Preserving and Recovering Value in Illiquid imes, Navigating odays Environment: TeDirectors and Ocers Guide to Restructuring. Globe White Page, Ltd., London, 2010.

go in and quickly build a picture o the companys cash situation and operationalchallenges.

Also at this point, it is critical that the turnaround team move quickly to assess thecompanys options and develop an action plan. Melissa Kibler Knoll o MesirowFinancial Consulting recommends doing a core analysis that encompasses the ullrange o possibilities so the company can come to the table and bring the partiestogether to nd a viable restructuring strategy. Tat strategy might just involve

restructuring some debt; it may be selling to or merging with a nancial inves-tor or a strategic investor; it might involve liquidating. But you need to have gonethrough these processes to really have the inormation necessary to make the bestdecisions.

She added, An overlay to all o this is to understand value under each o these di-erent circumstances, because that determines where the ulcrum security3 is, whoreally has the strongest voices at the negotiating table, and even what the liquida-tion value is. Many times, one o the most powerul negotiating tools is helpingpeople understand what the results o ailure would be, to enhance their under-standing o the value brought to the parties by having the company remain a viablegoing concern in an improved state versus liquidation.

Evaluating urnaround Strategies

Te restructuring plan is the cornerstone in a distressed companys turnaround.Te development o a restructuring plan must ocus on achieving three primarygoals: 1) implementation o operational changes to reduce cash burn and/orimprove protability; 2) the raising o immediate additional liquidity to und the

required changes; and 3) the dening o a timeline or when the process will be ap-propriately refected in the companys nancial perormance.4

Distressed companies have very little time and very little room or error, hesaid, It is critical that the board identiy advisors who will serve as passionate,dedicated advocates to helping the company maximize its value and achievewhatever it has dened as success. ~ Peter Kauman

3 Fulcrum security, also known as ulcrum debt, is the security most likely to convert to (or receive) equity in a reorganizedcompany aer it emerges rom Chapter 11 o the Bankruptcy Code. Some investors purchase this security as part o a strategyto take ownership o the company. While in the past, the ulcrum security was unsecured debt, today it is increasingly secureddebt. For example, lenders may provide DIP nancing as part o a loan-to-own strategy, based on an analysis that the debtrepresented by the DIP nancing may ultimately result in a controlling ownership position in the company. Source: http://usl.practicallaw.com/8-383-9148


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Moreover, the restructuring plan must be based on thorough consideration o allpossible options. It is important that the board and the management team take anobjective look to identiy all o the opportunities available to maximize value andobjectively consider them all. Experts emphasize the importance o putting all othe options on the table, or several reasons. Sometimes, the best options are elimi-nated rom consideration beore the team has legitimately evaluated them, leavinglesser ideal options to be considered. Objectivity in presenting all options is essen-tial, according to Jack Butler o Skadden Arps, You need to put the ull continuum

o options on the table, not just the options you think are easible and desirable,he said, Ten you can look at each and assess its easibility, whether it maximizesvalue or all stakeholders, and careully consider risks, benets and complexity oexecution o each option.

Tis practice helps all members o the team make more ully inormed decisions. Italso aords the companys board members and ocers with some level o protec-tion that they exercised loyalty and care when executing their duciary duties.From a corporate governance perspective, boards and ocers can best protectthemselves by creating a business record that, when evaluated down the line in acritical retrospective review, demonstrates that directors and management were in-ormed, and careully considered the ull range o options, said Butler, It is muchmore dicult to successully attack the decisions o a ully inormed, deliberate

board that thought through all o the options.

Summary

Certainly a distressed companys board o directors and management aces adaunting task in leading the turnaround. o urther complicate the situation, the

board and the management team must also keep the day-to-day business operat-ing in order to protect the companys value. Underlying this is the real risk thatthe turnaround may not succeed. But the good news is that companies can and domake it back rom the brink by acting early and heeding the advice o experts whohave rsthand experience in creating a realistic, pragmatic turnaround plan.

You need to put the ull continuum o options on the table, notjust the options you think are easible and desirable ~ Jack Butler


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But it takes the right kind o experience. o some companies, the costs associatedwith engaging specialists, well beore a liquidity crisis is obvious may seem pro-hibitive. But in many cases, the alternative waiting until the company has littlechoice but to le or bankruptcy or liquidate the company is ar worse. By taking

an early approach to identiy the potential red fags o distress, seeking the adviceo experts, and being proactive in resolving the crisis, the company is in the bestpossible position to maximize its value.


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Avoiding Potential Detours on the Road to Recovery: Te Very RealImpact o Conicts o Interest

In an ideal world, we all want to see a distressed company get back on the path to

success. Te question is, what does success mean, especially to the mixed constit-uency o stakeholders who are acutely aware that the companys value is in steadydecline? Te board o directors may be ocused on protecting its equity holders;management may want to save the company in a way that saves their jobs. Banksmay want to divest their portion o the debt, while new investors may be interestedin securing a control position in the company. Creditors want to be made wholeon the money they are owed.

Given these inherent conficts o interest, how do you balance the wants, needs

and desires o all these parties, while maintaining a air and equitable economicvalue? In addition, is success dened solely by minimizing economic loss or arethere other considerations that need to be taken into account? Tese questions canbe answered only i you handle these conficts o interest.

Te Seeds o Conict

Not surprisingly, conficts o interest may come into play as these parties lobby ortheir preerred outcome. Business conficts o interest exist in the gray area, ininstances where a nancial or legal advisor nds themselves dealing with severaldierent constituents their distressed client (the debtor) and the advisors otherclients such as management, employees, customers, the board o directors, and,even more worrisome, the supplier, bank or other creditors. In these scenarios,the advisors may be dealing with very real business conficts, but are not legallyobligated to disclose this to their client. I this sounds like a red herring, its not.According to many experts, this is a very real issue that a board o directors needsto be aware o and prepared to manage.

For example, a distressed company may rely on its existing bank or guidance in

dealing with its nancial problems. However, that investment bank may not bethe companys best advocate, according to Peter Kauman o the Gordian Group.Most investment banks work both sides o the street. Frequently this means ad-

vising borrowers on occasion and bondholder groups on a regular basis, he said,In many cases, the existing investment banker will have placed, as agent or under-writer, the companys debt and equity securities with many o its investor clientsor it may advise the borrowers creditors on other matters. As well, it may sell and


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trade securities with a borrowers creditors on a regular basis. I any o these arethe case, is the investment bank motivated to protect itsel and its ongoing broker-age advisory trading clients rather than advance to the detriment o its ongo-ing client base the interests o the distressed company, a one-time client with a

potentially dim uture?

Its an issue a board o directors should consider careully as it determines who toengage as a nancial advisor to lead them through distress. Te issue is, asKathryn Coleman o Hughes, Hubbard & Reed puts it, Have we hired someonewho always has their eye on the next deal? Is my investment banker going to besuciently aggressive in representing me in this deal and not worry about, is thecreditor going to hire me next time? I I am perceived as being too much o anadvocate here, am I going to encounter problems?

Te investment banker who tries to serve bothsides o the street will nd it dicult to navigatein this arena without encountering overlap. Teconficts o interest arise, according to Henry S.Owsley, Co-Founder and Chairman o theGordian Group, largely due to the repeat natureo the opportunistic investors that tend to getinvolved in distress situations. Many o the sameplayers appear again and again in the capital

structure, he said, I you are a company-side ad-visor in a certain situation but you also represent those creditors requently as well,then you put yourselves in a situation whereby you may not act as a disinterestedperson would in advising that company.

Avoiding Te Inevitable

Te process or addressing potential conficts o interest when seeking legal adviceis more straightorward, as a law rm is legally bound to disclose any potential

conficts o interest to its client and potentially to the court beore taking on a legalmatter. However, law rms also encounter what is not technically considered alegal confict o interest, but more accurately termed a business confict o interest.Tere is a distinction between a legal confict and a business confict. It maybe that your rm will absolutely be approved by the court, said Geo Raicht oProskauer, But rom a rms perspective, working with this client may angeranother o your clients so much so that as a business matter you wont want to takeon the engagement.

Henry S. Owsley onConicts o Interest
http://www.youtube.com/watch?v=0ZWRK5rrKYM&feature=youtu.behttp://www.youtube.com/watch?v=0ZWRK5rrKYM&feature=youtu.behttp://www.youtube.com/watch?v=0ZWRK5rrKYM&feature=youtu.be


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You cant think about conficts in a pre-bankruptcy contextwithout also thinking o them in a post-bankruptcy context

Some conficts o interest issues are addressed by the legal system, others are not.Some business proessions such as the legal and accounting industries have im-plemented an industry-wide practice o checking or potential conficts o interestbeore they even consider advising a particular client. For others, such as turna-round specialists and nancial advisors, the matter is not so clearly mandated. Temost reputable turnaround specialists have established their own organic confictspolicy and make it a requirement o doing business.

When considering areas that may indicate potential conficts o interest, it is cru-cial to look at long-term scenarios and outcomes. I not, the board may nd itselhaving to change advisors midstream and go through the costly and time-con-suming process o choosing another. Tis is a risk that most advisors would preerto avoid as well.

For example, according to Geo Raicht, You cant think about conficts in a pre-bankruptcy context without also thinking o them in a post-bankruptcy context,he said, I you play by one set o rules on the idea that, We wont be in a ormal

court process, so we wont worry about the disinterestedness issue or now. Butast-orward three or our months and guess what, you have to le or bankruptcy.What happens i at that point you nd out, Oops, the rm cant pass the disinter-estedness requirement and now I cant take you in. Tat has got to be one o themost dicult conversations with a client you could ever possibly have. Becausenow you cant be there or them at a moment when they need you most.

I a company les or bankruptcy, the court system will provide some avenuesor confict o interest resolution. However, i the distressed company is workingoutside o the realm o the bankruptcy court, that saety net is removed. In these

cases, the distressed company itsel must put a process in place to ensure that ithas suciently vetted all o its advisors to identiy and eliminate any advisors orwhom a confict may arise.

Te Best Deense: Choosing Loyal Advisors

Te distressed companys best deense is to hire advisors who are both confict-reeand unequivocal in their loyalty to serving the companys best interests. Ideally, the


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Christopher L. Picone is President and General Counsel oBuccino & Associates, Inc., a legal, nancial and operationalproessional services rm. Picone has signicant experiencein all phases o nancial restructurings, operations, turna-round situations, bankruptcy, litigation support matters, realestate development, construction and asset management. Hislegal and business career encompasses over 30 years, servingin various executive management positions in the real estate

and general contracting industries. Picone began his careerwith a Chicago law rm where he ocused his legal practice in the areas o RealEstate, Federal Income ax and Corporate ransactions. Following a decade o pri-

vate law practice, Mr. Picone moved to the corporate sector serving as President,Chie Operating Ocer and General Counsel or several large Chicago based realestate and general contracting rms. Among his other recent roles, Picone was theChie Restructuring Ocer in the Sea Launch Company Chapter 11 proceeding.He also served as Financial Advisor to VI Corporation in its Chapter 11 pro-ceeding. Picone has served as COO/General Counsel o one o the nations largest

privately held real estate brokerage rms where he also managed the restructuringand renancing o the companys $500 million real estate portolio. He has servedas President o a Chicago based general contracting rm specializing in retail andoce construction. Picone earned his Juris Doctor (with Distinction) rom theJohn Marshall Law School, Chicago, Illinois and also holds an LLM (axation)rom DePaul University o Chicago. Picone earned his Bachelor in Business Ad-ministration rom Loyola University o Chicago and is a member o the urna-round Management Association (MA), Te American Bankruptcy Institute

(ABI) and the International Council o Shopping Centers (ICSC).

Meagan Hardcastle is an award-winning turnaround andcorporate nance specialist with a background in commercialbanking. She assists middle market companies with peror-mance improvement, crisis management, bank workouts,

nancial restructuring, business valuations, commerciallitigation support, nancial due diligence, and other relatedservices. She also serves on the Board o Directors o theDetroit Chapter o the urnaround Management Association.Meagan is a Certied urnaround Proessional (CP), aCertied Fraud Examiner (CFE), is Accredited in Business

Valuation (AVA), and holds an MBA rom the University o Chicago. She hasbeen the recipient o several proessional awards rom M&A Advisor, CrainsBusiness Detroit, and D-Business Magazine, and was named M&A Advisors 2011

urnaround Proessional o the Year.


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Mr. John Wm. (Jack) Butler is a Partner at Skadden, Arps,Slate, Meagher & Flom LLP. During Jack Butlers time atUniversity o Michigans law school, the bankruptcy codeo 1978 was passed, ortuitously providing him with theopportunity to learn the revolutionizing discipline oreorganization o distressed business. Aer a decade spentgaining legal experience at two Michigan law rms, he

joined Skadden in 1990 as a partner and developed, what istoday, one o the worlds most respected restructuringpractices. Since then, Butler has been identied as one o

the nest dealmakers by leading notable transactions such as the restructuringprocess o Delphi Corporation in 2010. oday, he is consistently recognized as aleading lawyer as he continues his ocus on corporate restructuring and reor-

ganization. In addition to his notable business accomplishments, Butler is alsorespected or his generous contributions to the Chicago area.

Geofrey Raicht is a Partner at Proskauer LLP. He servesin the Bankruptcy & Restructuring Group in the New Yorkoce. His practice ocuses on debtors and creditors rightsin large, complex Chapter 11 cases, representing debtors,creditors, ocial creditors committees and lenders, as well

as issuers and backstop purchasers o rights oerings imple-mented in Chapter 11 proceedings, investment managers ohedge unds and structured investment vehicles, and assetpurchasers in section 363 sales and receiverships. Recent

and signicant bankruptcy cases in which he has represented clients include:BankUnited, Lisbon Valley Mining, Advanta Corp., Chesapeake Corp., CircuitCity, Eclipse Aviation, General Growth Properties, General Motors, RadLAXand River Road. Georey has been recognized by Legal 500 as one o the leadinglawyers in his eld. He served as a Law Clerk to the Honorable Jerey H. Gal-

let, United StatesBankruptcy Judge or the Southern District o New York, rom1997 to 1999. He received his J.D. in 1997 rom the CUNY School o Law, earned

both his M.P.A. in 1992 rom New York University and his B.A. in 1990 romNew York University.


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Henry F. Owsleyis a Co-Founder and Chie ExecutiveOcer o the Gordian Group. Since co-ounding GordianGroup in 1988, he has led many o the rms nancing,

advisory and merger transactions, as well as expert witnessengagements. Mr. Owsley has also co-authored the leadingbook in his eld, Distressed Investment Banking: o theAbyss and Back. Prior to co-ounding Gordian Group, Mr.Owsley was at Goldman Sachs, where he ounded the rmsWorkout Group. While at Goldman Sachs, he was also aounding member o its echnology Group. Mr. Owsley

received a B.S. in Engineering, summa cum laude, rom Princeton University anda M.S. rom the Sloan School o Management, Massachusetts Institute o ech-nology. His honors included Phi Beta Kappa, au Beta Pi and Sigma Xi.

Kathryn A. (Katie) Coleman is a Partner at Hughes,Hubbard & Reeds New York oce, and is a Member o theCorporate Reorganization Group. Ms. Coleman has over25 years experience representing companies restructuringtheir nancial aairs, both in and out o court. Ms. Cole-man has advised clients on, and litigated at the trial and ap-pellate levels, the signicant legal issues inherent in modern

restructuring and nancial practice, including contestedplan conrmation, prepackaged plans, credit bidding,exclusivity, use o cash, debtor-in-possession nancing,

valuation, adequate protection o security interests, and cash collateral usage.Ms. Coleman requently speaks on bankruptcy law and distressed investing,participating in programs sponsored by Practising Law Institute, the AmericanBankruptcy Institute, Caliornia Continuing Education o the Bar, the AmericanBar Association, the Pacic Bankruptcy Law Institute, the Western MountainsBankruptcy Law Institute, and the Norton Bankruptcy Litigation Institute. Ms.

Coleman graduated magna cum laude rom Pomona College. She earned herJ.D. rom U.C. Berkeleys Boalt Hall School o Law.


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Peter F. Kauman is President o the Gordian Group andheads the rms Restructuring and Distressed M&A prac-tice. Mr. Kauman has been at Gordian Group since 1990.Prior to joining the rm, he was the ounding Co-chairman

o the Committee on Investment Banking o the AmericanBankruptcy Institute (ABI). With Henry Owsley, GordianGroups Chie Executive Ocer, he is the co-author o thedenitive work in the eld, Distressed Investment Banking:o the Abyss and Back. He is national Vs go-to author-

ity or restructuring and bankruptcy views. Prior to joining Gordian Group,Mr. Kauman was a ounding member o First Boston Corporations DistressedSecurities Group. As an investment banker and attorney, he has more than 25years experience solving complex nancial challenges. Mr. Kauman received a

B.A. with honors in History and Art History rom Yale College. He also receiveda J.D. rom the University o Virginia School o Law, where he graduated in thetop quarter o his class.

Paul Steven Singerman is a Co-Chair o Berger SingermanLLP. Mr. Singerman concentrates his practice in troubledloan workouts, insolvency matters and commercial transac-tions. He is active throughout the United States in large

and complex restructuring, insolvency and bankruptcy cases.Although best known or his representation o debtors incomplex restructuring cases, he is also experienced inrepresenting creditors committees, lenders, large unsecuredcreditors, asset purchasers in 363 sales and trustees. A signi-

cant portion o his work has involved companies with international operations orEuropean or Asian parties-in-interest. Mr. Singerman is a ellow in Te AmericanCollege o Bankruptcy and Te American Bar Foundation. He is a member o theSpellman-Hoeveler American Inn o Court, Te American Law Institute, Ameri-can Bankruptcy Institute and Commercial Law League o America. He received a

J.D., with honors, orm the University o Florida Frederic G. Levin College o Lawand B.A., with highest honors, rom the University o Florida.


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Jay Greyson co-ounded and serves as a Managing Direc-tor & Principal in the investment bank o Vetus Partners, thewinner o seven M&A industry Awards in 2009 (Te M&AAdvisors 8th Annual M&A Awards) including the coveted

Boutique investment Banking Firm o the Year. Personally,he was named Dealmaker o the Year, the highest individualhonor in investment banking. Jay is also a Co-ounder &Partner in Supply Chain Equity Partners (SCEP), theworlds only committed capital Private Equity rm ocused

exclusively on making investments in the Distribution & Logistics industry. Ahighly experienced corporate nance and advisory proessional Mr. Greyson hasa strong background in analyzing, structuring, negotiating and executing complexnancial and capital raising transactions, both domestically and internationally.

He ocuses on sourcing and leading the execution o private and public companysell-side Mergers & Acquisitions, corporate carve-outs and divestitures, man-agement buyouts, buy-side programs, distressed and bankruptcy process sales,and international transactions. Uniquely, Jay combines his nance backgroundwith over a decade o extensive experience in the manuacturing, marketing anddistribution o industrial products and services. Collectively, Jay has over 25 yearso combined investment banking, private equity and business experience duringwhich he completed numerous M&A transactions, including a signicant numbero cross border deals.

Melissa Kibler Knoll is Senior Managing Director in MesirowFinancial Consultings Chicago oce. She has over 20 yearso experience providing nancial ad visory and litigationservices in workouts, bankruptcies, receiverships and otherorums. Ms. Knoll has led engagement teams in numeroushigh-prole cases, such as Chrysler, Enron, Kmart, BethlehemSteel and Singer, as well as various condential and other mat-ters in a broad range o industries. Ms. Knoll was previously a

partner in KPMGs Corporate Recovery practice aer start-ing her career at Price Waterhouse. She holds the CPA, CIRA,

CP and CFF designations. She is a President o the American Bankruptcy Insti-tute and is a Fellow o the American College o Bankruptcy. Ms. Knoll earned herBBA in accounting summa cum laude rom exas A&M University and her MBA,graduating rst in her class, rom Southern Methodist University. She was namedthe 2003 CIRA Gold Medal Winner and one o Crains Chicago Business 2004 40Under 40.


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Proling the proven strategies and unique experiences o the leading M&A practitioners,

Te Best Practices o Te Best M&A Dealmakers series is distributed in regular

installments or M&A industry proessionals in both print and interactive electronic

media. Previously published eatures and chapters are also available in the online library

o Merrill Datasite and Te M&A Advisor.

Best Practices of the Best DealMaKers

Documents

97 Road to Recovery