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Interesting BK article from 2002
bankruptcy Doctors Are Most Definitely In
July 14, 2002
Source: The New York Times
ENRON. Global Crossing. Kmart. Soon, probably WorldCom.
For investors, these spectacular corporate flameouts represent the perfect storm. But for a cadre of Wall Street bankers, they are opportunities.
When the markets were soaring in the late 1990's, this crowd of bankruptcy reorganization specialists was praying for rain. Lately, the rain has become a downpour. "This is boom time," said Henry S. Miller, a leading restructuring guru, unabashed by the paradox that his good fortune happens because of the misfortune of others. "It's just the way it is. This is our time."
These days, when big corporate filings for bankruptcy protection seem to be made almost every week, there is a line forming outside the half-dozen corporate emergency rooms in Midtown Manhattan. And the nation's top doctors in that trauma field -- Mr. Miller, who recently turned the restructuring group he ran at Dresdner Kleinwort Wasserstein into an independent firm, and Arthur B. Newman of the Blackstone Group, and the team at Lazard -- are actually turning away battered patients.
Business is so good, so lucrative, that Harvey R. Miller, a prominent bankruptcy lawyer, announced last week that he would soon leave his post as head of the bankruptcy practice at Weil, Gotshal & Manges to become a bankruptcy banker at Greenhill & Company, a small merchant bank that jumped into the business only two years ago.
Mr. Newman, whose restructuring staff numbers about 40, is now working on two of the largest reorganizations in history: those of Enron and Global Crossing, as well as that of the Williams Communications Group. He just finished repairing Chiquita Brands International and AMF Bowling Worldwide, not to mention helping to reorganize Xerox, which brushed with but avoided bankruptcy. Mr. Miller, whose full-time staff at the newly formed Miller Buckfire Lewis & Company is a bit smaller, is trying to turn around Kmart and Polaroid as well as Reliance Group Holdings.
Last week, Lazard's restructuring group, led by Barry Ridings and Terry Savage, landed what may become the biggest bankruptcy bounty of them all when WorldCom hired them as advisors. Adelphia Communications, AES and Reliant Energy also hired Lazard this summer. Its team numbers 35.
A handful of other boutique investment banks are also busy trying to mend tattered companies and advise upset creditors. Among them are Rothschild North America, which is working for PG&E, and Houlihan Lokey Howard & Zukin, which is working for XO Communications.
The firms can make money from any angle: in some cases, the advisers represent distressed companies and, in others, their creditors.
There is no question that the business of corporate restructuring, once a backwater, has grown into a big business in recent years. With that growth has come big fees, which vary from deal to deal but are typically based on a percentage of assets sold during the process as well as a bonus if the restructuring is consummated.
Kmart, for example, will pay Henry Miller's firm 0.4 percent of the value of any asset sale, plus a monthly fee, and a $12.5 million bonus if the restructuring of the company is completed. If the entire company is sold, the bonus could reach $17.5 million.
Add up the fees, and the figure for each bankruptcy is huge. The reorganization of Enron is likely to generate as much as $400 million in fees for bankers, lawyers and consultants. Of that amount, Blackstone will get either $35 million or 0.25 percent of the restructured obligations on top of the $10 million it already received for selling Enron's trading business to UBS Warburg.
Fees from Global Crossing's reorganization are expected to top $300 million. All told, industry analysts estimate that cleaning up corporate messes will net more than $5 billion in fees this year for the firms like those of Mr. Newman and Mr. Miller.
Personally, they take home seven figures a year.
"For most of the time, us restructuring guys were on the fringe; we were niche players," Henry Miller said. "Now we're getting some respect."
ADVISERS like him and Mr. Newman are not exactly a beloved bunch, of course. "It's nice to be pretty busy, but it's not good for the country," Mr. Newman acknowledged. Outraged creditors sometimes compare them to ambulance chasers and often fight to prevent them from taking in big fees. The creditors argue that the money should be used to rescue the failing companies, not to line the pockets of Wall Street bankers. Bankruptcy court judges, too, often limit the size of the paydays.
But bankruptcy advisers respond that they earn the money, especially now.
Restructuring advisers spend their time adjusting troubled companies' business plans, cutting deals with creditors and courts, and planning and negotiating the sale of assets. Their jobs are arguably more complex, and probably more important, than the roles of the traditional investment banker, who advises a company on whether to buy another company and how much to pay.
Since the last big economic downturn, in the early 1990's, the bankruptcy business has changed fundamentally. It is no longer just a matter of working out new financing. "The cases have gotten so big, and all of these cases have many more problems than before," Harvey Miller said. "Ten years ago, all you had to do was deleverage the company and that was it."
More than ever, companies seeking bankruptcy reorganization suffer from a web of corporate problems, not only an overload of debt. Scandal, potential legal liabilities and complex accounting sometimes push companies over the line.
The latest crop of companies in reorganization is beholden to a much expanded array of constituencies with interests in the outcome, including banks -- with collateral and without -- bondholders, shareholders, suppliers, partners and vulture capitalists who buy debt from others at distressed prices.
As a result, the work is ever more complex.
"The business of restructuring is now a professional business" with people whose careers are devoted exclusively to it, said Mr. Newman, who started in the business in 1966, while he was director of the corporate finance group at Ernst & Young. "It has professional lawyers, professional bankers, professional accountants and professional distressed players. It used to not be like this."
Mr. Newman and Henry Miller are the elder banking advisers of this small but growing restructuring circle, partly because they have specialized in it for so long.
Mr. Newman, 58, became very active in reorganizations in 1976, while still at Ernst & Young. There, he would work on the bankruptcies of companies like Eastern Airlines and Texaco during the 1980's. He headed the reorganization group at Chemical Bank for two years before jumping to Blackstone in 1991. He has been adviser to debtors or creditors in bankruptcies including Caldor, Dow Corning, R. H. Macy, Loehmann's and Marvel Entertainment.
"Art is the dean of financial advisers," said Steven G. Warshaw, the former president and chief executive of Chiquita, which underwent a successful reorganization -- led by Blackstone -- and emerged from bankruptcy court in March. The company was hurt by a glut of bananas and a long battle over European banana import quotas. Blackstone helped form a settlement among five groups of creditors that reduced Chiquita's $950 million debt load by $700 million. Instead of the money owed them, holders of senior notes received 88 percent of the equity in the reorganized company.
Henry Miller, who is 57, made his name in the 1980's as the head of the private finance group at Lehman Brothers, mainly working for airlines. Their problems in the late 1980's propelled him into bankruptcy workouts. In the 1990's, he ran the restructuring groups at Salomon Smith Barney, Prudential Securities and, most recently, at Dresdner Kleinwort Wasserstein. He has worked on the reorganizations of Pathmark Stores, Montgomery Ward and Trans World Airlines, among others.
He said the new group of creditors -- all with different agendas -- has made his job that much more difficult. "They're more antagonistic," he said. "They are getting in the company's pockets much more quickly."
In fact, some creditors now organize into committees and seek high-priced advisers like Mr. Miller and Mr. Newman even before the companies file for bankruptcy.
"The bondholders are now organizing themselves faster than the company," said Scott Bok, a partner at Greenhill. "They're more sophisticated."
One prominent bankruptcy lawyer who has represented several creditor committees against many of Mr. Miller's clients contends that the creditors' committees have to be more aggressive or risk not getting a fair settlement. "We're having to get in there earlier because these characters are always trying to squeeze us," he said, speaking on condition of anonymity because he said he could not afford to alienate the advisers.
At WorldCom, where management has hinted at a potential bankruptcy filing but has not gone to court, three sets of bondholders tapped separate law firms last week and have begun interviewing financial advisers.
Harvey Miller, who has been the main legal adviser on several of the biggest bankruptcy restructurings, including those of Texaco in the late 1980's and of R. H. Macy in the early 1990's, suggested that companies are also moving more quickly these days.
"The burn rates are so high," he said, referring to the speed at which distressed companies spend more than they take in, that those companies need to become organized early enough to protect themselves, especially "as the availability of refinancing quickly dwindles."
AES and Reliant Energy fall into that category.
With many major banks like Citigroup and J. P. Morgan Chase suffering from big exposure to bad loans, banks are significantly less lenient about refinancing than in the early 1990's, Henry Miller said.
"They are being more aggressive than they have ever been," he added, suggesting that there is too much "preliquidation planning" -- an unhealthy emphasis on preparing for insolvency rather than focusing on saving the company. "Unfortunately, it can become a self-fulfilling prophecy," he said.
Mr. Newman, Henry Miller and, now, Harvey Miller have another thing going for them. The business of advising on restructurings has been left mainly to small boutiques like theirs because the large Wall Street investment banks have too many potential conflicts of interest. For them, the profit margin -- no matter the current size of fees -- is too small.
In a landmark case in 1993, a federal appeals court said Goldman, Sachs could not advise Eagle-Picher, a maker of automobile components and industrial products in Cincinnati, on its bankruptcy reorganization because it was not a "disinterested person." Goldman had been the lead underwriter of Eagle-Picher's $39.8 million initial public stock offering in 1986 and had been the company's investment adviser.
Goldman had argued that because of its experience with the company, it should be considered the most qualified to help in the reorganization. In fact, the court appeared to agree, at one point apologizing for its decision. "Although it may make little sense to the bankruptcy court and Eagle-Picher -- or for that matter, to this court -- that Goldman, Sachs is not permitted to serve as financial adviser, the statute requires that result," the appeals court said. "This court is bound to apply the plain meaning of the statute even when the application apparently results in an apparent anomaly."
IN a case in 1995 that eliminated virtually all big banks from advising on major reorganizations, Lehman Brothers was forced by a bankruptcy court to return $1 million in fees for advising Federated Department Stores on its bankruptcy reorganization. Lehman received $250,000 a month in those proceedings, according to court filings, but the court sided with trustees that argued that Lehman had a conflict of interest because it had "numerous holdings of Federated securities" and had been the lead manager in a $200 million offering of Federated bonds.
It was the potential for conflicts that influenced Henry Miller, no relation to Harvey Miller, to take his Dresdner group independent. He had been forced to turn away business because of Dresdner's relationships with potential reorganization clients. "The Chinese wall doesn't hold for the adviser," he explained.
Moreover, he said, the economics of running a restructuring department -- which is a cyclical business -- do not make sense for a big bank. "It's not a big-enough business if you're a Goldman, Sachs," he said. "The internal economics are hard to reconcile. A $70- or $80-million-a-year business would be a bad performer for a big investment bank."
Even so, those involved in bankruptcies always seem to be fighting over fees. In the last five years, experts estimate that total fees have ballooned nearly 25 percent, in part because so many advisers are being hired.
For example, Global Crossing, the troubled telecommunications company, has already racked up bills from 20 firms totaling more than $18 million. They cover everything from hourly legal charges and faxes to plane tickets, Internet searches and phone calls since late January, when Global filed for bankruptcy protection, people close to the company said.
Mr. Newman's group alone is taking in $250,000 a month and stands to make millions more in so-called success fees if the company emerges from bankruptcy.
Lawyers and consultants are Global Crossing's biggest beneficiaries, at least so far. KPMG, the large international accounting firm, has billed about $4 million since February just for work related to operations in Bermuda, where Global is based.
KPMG has charged more than twice as much for its services as had Arthur Andersen, Global Crossing's accountant in the United States, which billed more than $800,000 for a month of work after the filing. Deloitte & Touche, which is working directly for the creditors' committee, has not yet submitted its fee requests.
Weil, Gotshal & Manges, the lead bankruptcy counsel, and Simpson Thacher & Bartlett, which serves as litigation and tax counsel, have together billed Global Crossing more than $2.2 million so far.
"No one would dispute they get paid a fair amount of money," said Mr. Warshaw, formerly of Chiquita. "But there is a lot of value there to protect. And these firms basically get success fees, so if they fail they get basically nothing."
LATELY, some law firms have tried to charge extra fees, too -- the way that some do for the successful completion of a merger on which they advise, a charge beyond their usual hourly fee. Wachtell, Lipton, Rosen & Katz and Weil, Gotshal are among them.
"The bankers are getting an outrageous sum of money," said one bankruptcy lawyer, who did not want to be identified because he sometimes works with them. "Why shouldn't we get a cut? Half the time we're doing more of the work than them."
Henry Miller disagreed. "People in glass houses shouldn't throw stones," he said. "They are being paid by the hour. Their fees are rarely at risk."
Some judges apparently agree. Judge Mary F. Walrath of the Bankruptcy Court in Wilmington, Del., recently rejected $1 million in success fees in the case of the bankrupt United Companies Financial Corporation, a once-prosperous lender to borrowers who could not qualify for traditional loans, for both Wachtell, Lipton and Weil, Gotshal.
Zitatende
MfG.L:)
"Ein jeder gibt den Wert sich selbst"
"Der Schein regiert die Welt, und die Gerechtigkeit ist nur auf der Bühne".(Parasit)
Und es herrscht der Erde Gott, das Geld.(An die Freude)
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