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Sunday, 19 November 2017

US Restructuring Adviser

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  • Restructuring Adviser

Back to Blackstone: Blackstone returned to form in 2012, taking top spot in the restructuring league table by fully blending traditional debtor side advisory roles and a variety of creditor work. There was almost no deal beyond the firm’s reach, no matter which party the firm advised. Blackstone is IFR’s US Restructuring Adviser of the Year.

To see the full digital edition of the IFR Americas Review of the Year, please click here.

The Blackstone restructuring group was founded by legendary restructuring adviser Arthur Newman in the early 1990s. At the time he and a select few were essentially inventing that modern restructuring practice and taking the lion’s share of the assignments.

The world is different now with upstarts popping up every couple of years and peeling off plum assignments. Newman, who passed away in 2010, had already passed the leadership mantle to Tim Coleman who had been Newman’s right-hand man since the early days.

The practice that exists today is also different. Blackstone has adroitly managed to expand its first-class debtor-side brand to cover a variety of creditor assignments that have rounded out the practice and ensured Blackstone a role in almost all of the most substantial restructurings. It has also expanded globally with Martin Gudgeon leading in Europe.

The shift began in 2007. “You’re not going to win every debtor side assignment,” said Coleman. “If you limit your options, you are giving up a lot of business.”

In 2012, Blackstone performed a variety of restructuring transactions that included some that went to court and some that didn’t, debtor and creditor mandates, international deals, and a mix of distressed industries.

The firm advised on 63 closed or on-going deals in 2012, including 50 mandates in the Americas, representing US$183bn in liabilities.

High-yield humming

With the high-yield market still humming along, default rates have remained low and distress confined to pockets. Still, Blackstone has managed to build its brand and expand market share in the quiet period advising companies in large, highly complex restructuring transactions.

The firm’s US roster includes Houghton Mifflin Harcourt, Kerzner, LA Dodgers, Lehman Brothers, Mohegan Tribal Gaming Authority and TerreStar.

“Every restructuring we are in, it’s a negotiation,” said Coleman. “It’s pulling people together finding strengths and weaknesses of various positions and arguments. Doing the analytics and finding solutions.”

Among its biggest out of court deals, Blackstone performed a global juggling act to keep developer and luxury hotel operator Kerzner International Holdings from collapse. Kerzner’s flagship brands include the Atlantis, The Palm in Dubai and the One&Only luxury resort properties.

Kerzner, a privately held company owned by the Kerzner family, Istithmar World, Goldman Sachs, Colony Capital and Baron Funds, is the largest private employer in the Bahamas, which made the Bahamian government a key constituent for any restructuring.

The company faced more than US$2.6bn in CMBS maturities in 2011 which it could not meet.

That failure would have triggered cross-defaults globally in seven or eight countries and would have led to a morass of in-court restructurings and potentially the foreclosure and liquidation of the company.

When Blackstone was retained, the prevailing view was that equity sponsors were deep-pocketed and would step up and facilitate the refinancing, said Blackstone senior managing director Steve Zelin. “That couldn’t have been further from the truth. Most of the investors were easing back from commitments in the area,” he said.

The task for Blackstone was to keep equity holders in place without putting new money in. The final deal allowed CMBS holders to take possession of Atlantis, Paradise Island while granting a lucrative management deal to the Kerzner holding company. Negotiations with the Bahamian government won concessions on transfer taxes, which were guaranteed by the holding company and would otherwise have added a layer of complexity to any restructuring.

As part of the deal, Kerzner sold a 50% stake in the Atlantis Palm and used US$250m of the proceeds to pay down a portion of US$1.1bn in Dubai-based debt. With the debt paid down, creditors agreed to amend and extend the first and second-lien debt.

In all, the restructuring eliminated nearly US$4bn of liabilities, improved cashflow through new management agreements and helped existing shareholders retain substantially all of the equity while investing no new capital.

Blackstone also won a prize mandate advising Patriot Coal, a thermal and metallurgical coal company in Appalachia and the Illinois Basin, on a US$3.4bn bankruptcy restructuring.

The firm closed its long-running assignment advising the Mohegan Tribal Gaming Authority, owner of the Mohegan Sun casino. The casino is located on sovereign land in Connecticut, about 125 miles from New York City and 100 miles from Boston. The fact that the casino was on sovereign tribal land meant the MTGA could not leverage the protection of the US bankruptcy code, but neither could creditors.

Blackstone was able to finesse a restructuring that allowed the casino operator to simultaneously extend a US$675m credit facility, offer US$225m in new secured debt, and effect an exchange offer on its existing senior and subordinated bonds, pushing back maturities. The deal allowed a US$50m annual distribution to the Mohegan Tribe.

Doing it by the book

Blackstone, meanwhile, set a blistering pace in the restructuring of troubled textbook publisher Houghton Mifflin Harcourt, pulling the company out of bankruptcy with a pre-packaged deal in a mere 30 days. It was the second bite at the apple for Houghton, which went through a debt restructuring a couple years earlier.

This time, the restructuring was more aggressive. Some US$3.1bn of secured debt was swapped for equity. Reaching a deal with bank debt-holders allowed the company to hit threshold targets to get a pre-packaged deal approved by the bankruptcy court.

Another Blackstone success story is provided by TerraStar, which the firm is advising on parallel Chapter 11 restructurings. Blackstone was able to maximise the price spectrum licences and other assets sold to Dish Network, ultimately fetching US$1.375bn.

Blackstone also proved its worth in the auction process when advising the Los Angeles Dodgers baseball team. Using the protection of the bankruptcy court, team owner Frank McCourt with the backing of his advisers won the right to run a sales process – usually the iron-clad prerogative of Major League Baseball.

In March 2012, McCourt successfully sold the Dodgers and a 50% stake in surrounding land to a group led by Guggenheim and basketball legend Earvin “Magic” Johnson for US$2.15bn, more than twice the previous record, but within the valuation range worked up by Blackstone.

Not forgetting FIG

It was a similar story of shrewd advice in the FIG world.

When acting for Financial Guaranty Insurance Co, Blackstone developed a pre-packaged rehabilitation plan with the support of policyholders and the New York State Department of Financial Services to balance the competing interests of policyholders and provide a fair and equitable outcome for all stakeholders. The deal, the first ever pre-pack and rehabilitation for a monoline, could serve as a framework for future insurance restructurings.

In Washington Mutual, the largest bank failure in US history, Blackstone stepped in well after the bank collapsed and creditor constituencies and regulators were at war. 

After the bank had failed, the Federal Deposit Insurance Corp seized its assets and sold them to JP Morgan. But in order to get the company out of bankruptcy, valuation issues needed to be addressed. Blackstone was initially hired to do a valuation on WaMu’s remaining assets, including net operating loss carry-forwards, but later assumed a more traditional advisory role, helping to manage the reorganisation process.

In the case of Lehman Brothers, Blackstone advised Lehman Brothers Specialty Finance creditor group consisting of holders of US$40bn in derivatives claims.

The group was among the most powerful in Lehman’s bankruptcy and at the heart of a battle over substantive consolidation which figured prominently in how the final creditor pay out was structured. Within the group, Blackstone also helped create a protocol to determine and settle derivatives claims.

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