Making hard decisions
Restructurings were rare in 2021 but PJT Partners followed a record-breaking 2020 with another strong year. Landmark assignments closed and new mandates were won as the pandemic continued to upend economic assumptions underpinning capital structures. For helping clients through uncertain times, PJT Partners is IFR’s Restructuring Adviser of the Year for the second year running.
2021 was a year in which PJT Partners advised debtors and creditors across diverse sectors from high technology to natural resources on complex issues where it was far from easy to reach a solution to suit the broadest constituencies.
“We are not afraid to make hard decisions,” said Steve Zelin, global head of restructuring and special situations at the firm. And there was no shortage of hard decisions to be made in cases such as Puerto Rico, Purdue Pharma and Premier Oil.
In Puerto Rico, PJT advised the oversight board responsible for pulling the Commonwealth out of a one-of-a-kind municipal bankruptcy process created by the US Congress for the express intention of resolving the island’s debt crisis.
When Puerto Rico entered bankruptcy in May 2017, it had more than US$70bn in bond debt and over US$50bn in unfunded pension obligations. The scope of the deal dwarfed the 2013 bankruptcy of Detroit which collapsed under the weight of US$18bn in debt.
A year earlier PJT helped engineer what was hoped to be the island's final restructuring plan. Hurricanes and earthquakes had destroyed previous reorganisation plans and the pandemic in turn helped destroy the foundation of the latest.
“We had to start over again in August 2020 but by June 2021 we had a consensual deal with a greater set of creditors than on the first deal,” Zelin said.
The restructuring will reduce the largest portion of the Puerto Rico government’s debt by about 80% – to US$7.4bn. The deal will also save the government more than US$50bn in debt payments ending, after five years, the largest public-sector debt restructuring deal in US history.
In the private sector, PJT faced a struggle cutting a deal for Purdue Pharma, maker of opioid OxyContin. This was the drug at the centre of an addiction crisis in the US that spawned more than US$1trn in claims, forcing the company to seek bankruptcy protection.*
The proposed restructuring agreement saw the Sackler family, owners of Purdue, agree to pay US$4.5bn into a bankruptcy trust for Purdue claimants in exchange for litigation releases that would grant them immunity from future lawsuits for their role in fuelling the opioid crisis.
“We got it to a good place,” said Jamie O’Connell, partner at PJT. The final agreement was ultimately to be a transfer of value to the American public. “What we did was structure a trust which is essentially owned by the US states,” he said.
Under the proposals the business will continue as a going concern producing pharmaceuticals that have legitimate value in pain management. The states will get the excess cashflows of the business and divide it among themselves – the outcome of intensive negotiations.
The restructuring agreement also has fixed settlements that are paid out over time to hospitals, personal injury claimants and other trusts. But for now, despite the financial agreement being concluded, the deal is on hold.
A few holdout states not party to the agreement sued to block the restructuring, after it was approved by the bankruptcy court, arguing that bankruptcy courts do not have the power to release the Sackler family from all future litigation.
They won that argument. An appeals court essentially ripped up the reorganisation saying the bankruptcy court overstepped its authority. That decision is currently being challenged by Purdue and will have wide implications.
“These releases have been used in many mass tort situations over the years,” said Zelin. It is a fundamental underpinning of this type of bankruptcy and it will be interesting to see where it shakes out.
It may not have finally closed but the transaction, and the landmark agreement between the nearly 40 US states, thousands of municipalities, winning support from 96% of creditors, serves as a testament to the work of PJT and will serve as a blueprint for others.
Textbook publisher McGraw Hill was under the gun amid concerns over disruptions to its business due to the growth in remote schooling following Covid-19 restrictions. The company’s entire capital structure was under pressure as it stared down rapidly approaching maturities.
In October 2020, the company released preliminary results, significantly beating market expectations. Covid-19 accelerated the transition to digital learning – unlocking the opportunity for a more efficient cost structure.
PJT seized the chance to engage with various creditor groups to revamp the credit structure, pushing out maturities and issuing new notes just above the second-lien debt to infuse the structure with new liquidity.
Three months after the transactions, without the maturity overhang and with the debt trading level on the rebound, private equity owner Apollo was able to sell the company for US$4.5bn to Platinum Equity, taking US$2.5bn in equity for themselves.
PJT also helped single asset coal plant Sandy Creek Energy Station leap over a maturity wall, outfoxing investors looking to make a killing in an out-of-favour asset class. After all, who wants to be seen lending to big coal in 2020?
For Sandy Creek, facing a maturity wall in late 2020, that spelled likely disaster. The ESG dynamics, not the fundamentals, made it very difficult to refinance the debt or sell the asset.
Some US$1bn in secured debt was trading at 70 cents on the dollar as the company struggled to find lenders. For the buyers of that debt who understood that the loans were oversecured from a credit perspective, Sandy Creek was cornered.
PJT, however, was able to negotiate a long-term forbearance and restructuring agreement using the threat of bankruptcy and all the tools such a filing would allow. In June 2021, the company successfully completed a consensual out-of-court restructuring with 100% creditor support.
In Europe another landmark deal was Premier Oil. The company’s problems started soon after the pandemic struck when the oil price dipped below zero in April 2020. That meant the original plan to restructure its US$3bn debt, which had already met opposition, was steered completely off track.
PJT was hired and came up with an innovative solution, engineering a reverse takeover by rival oil explorer and producer Chrysaor, which saw creditors repaid at par. The outline of the deal was agreed at the end of 2020 but took months to complete.
PJT did well to keep all creditors on board. Some had been offered an alternative which would have seen some divestments take place alongside an amendment of the current debt. Others wondered if the rising oil price meant Premier could simply refinance. But the takeover completed.
“It was the right answer, the company couldn’t raise equity and do a standalone restructuring. So we did a reverse takeover,” said Martin Gudgeon, head of European restructuring at PJT.
Elsewhere in Europe, the firm remained busy in Spain, arguably the most active jurisdiction in 2021. It advised creditors of gaming company Codere on a US$1.5bn workout and acted for creditors on the US$985m restructuring of construction company Obrascon Huarte Lain.
PJT continued to work closely with clients hit directly by the pandemic, such as cruiseline Carnival and cinema chain Cineworld, both of which required multiple rounds of fresh finance to tide them over the vagaries of the economy in 2021.
“We work very closely together especially when there is a mix of stressed and distressed situations,” said Jessica Kearns, partner in the capital markets advisory team. “Companies could go both ways. We take a holistic approach.”
Looking ahead the firm is acting for the Gupta Family Group as the steelmaker seeks to shore up its balance sheet following the collapse of major finance provider Greensill Capital. This assignment is complicated as GFG is also being investigated by the UK’s Serious Fraud Office.
That type of mandate is not unusual for PJT. The firm is a rare beast that is prepared to take on some of the thorniest and most controversial financial problems in an effort to try and reach an acceptable solution for all parties.
* This sentence was corrected to make it clear that PJT was not representing shareholders.
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