Restructuring Adviser

IFR Review of the Year 2012
13 min read
Philip Scipio, Christopher Spink

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

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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.

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 did not, debtor and creditor mandates, international deals, and a mix of distressed industries.

The firm advised on 63 closed or ongoing deals in 2012, including 50 mandates in the Americas, representing US$183bn in liabilities; 11 mandates in EMEA, representing more than US$355bn in liabilities (including Greece’s debt restructuring which boosted Blackstone’s league table into the stratosphere); and two mandates in Asia, representing over US$442m 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 roster includes Houghton Mifflin Harcourt, Kerzner, LA Dodgers, Lehman Brothers, Mohegan Tribal Gaming Authority and TerreStar in the US, Deutsche Annington, Greece, Klockner Pentaplast and Viridian in Europe, plus Dana Gas in the Middle East and Covalent in Asia.

Since 1991, the US team has been involved in more than 325 distressed situations involving more than US$1.1trn of liabilities. Since beginning its European practice in 2007, the team has been involved in more than 50 transactions involving more than US$500bn of liabilities.

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

The firm is advising 30 in-court deals and 33 out-of-court deals.

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

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

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 pay down, creditors agreed to amend and extend 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, 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 of 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 they were 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.

Other side of the pond

In Europe, Blackstone, under senior managing director Martin Gudgeon, beat off competition for the prize mandate of the year: advising the private creditor investor committee on Greece’s €206bn restructuring. Lazard, as the pre-eminent sovereign adviser, was already acting for the debtor. Blackstone, which in the past had acted for the Ukraine, achieved quite a coup in winning the mandate to assist the creditors in this high-profile situation.

The appointment, in October 2011, came at a critical juncture in the negotiations. Greece had been told by its official sector creditors – the IMF and eurozone nations – that, in order to receive an amended €130bn bailout package, it should halve its private sector debt to help reduce overall liabilities to 120% of its projected GDP in 2020. Creditors had volunteered to take this hit but wanted to ensure the details of the package were as painless as possible.

“You had to have someone drive this process and think about the value of Greece and what creditors could get,” Coleman said. “There needed to be a judgement as to when to compromise.”

Having a second pair of eyes to vet the agreement was vital. Blackstone was part of the team that ensured the new notes offered in exchange for the old ones were written under English law and were effectively guaranteed by the European Financial Stability Facility. That essentially meant it would be hard for further cuts to be made to this debt. In addition, creditors received GDP warrants and outstanding coupons on the old notes.

Elsewhere in the sovereign field, Blackstone was also brought in to advise the Irish Bank Resolution Company, the state-owned body managing the rumps of Anglo Irish Bank and Nationwide Building Society, both of which have been nationalised. The mandate was to advise on strategic options for the organisation’s assets.

Germany has also proved an increasingly rich territory for Blackstone. The firm appointed former Morgan Stanley and Leonardo corporate financier Jan Weidner as senior managing director in Frankfurt to further establish its presence there. Over the last year, Blackstone has advised the debtor in two landmark transactions: Deutsche Annington and Klockner Pentaplast.

The refinancing of the former’s €4.8bn GRAND CMBS has proved simpler than many imagined. Helped in part by errors in the documents, Blackstone convinced investors across all six classes of the securitisation to accept major amendments to the structure. This was achieved by clubbing all of the notes together to vote on an English scheme of arrangement. The four and a half year extension has cost the issuer a 40% rise in interest costs.

The Klockner Pentaplast transaction was less clean, since Blackstone was the sponsor of the packaging business’s leveraged buyout in 2007 which had effectively sparked the financial problems. The mezzanine and junior lenders eventually succeeded in taking control of the company, whose debts were halved after the process.

Blackstone has also continued to develop a significant presence in the Middle East. The firm led the complex negotiations to refinance Viridian, the Irish energy provider owned by troubled Bahraini financial investor Arcapita. This involved the sale of Northern Ireland Electricity to the Irish Republic’s state-owned Electricity Supply Board. The proceeds paid off some senior lenders, which helped unlock a wider refinancing through a high-yield debt issue.

The firm is currently advising Dana Gas on its US$1bn convertible sukuk restructuring, the first time such an instrument has faced this process.

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