It gives me great pleasure to introduce Jonathan Flaxer and Douglas Furth, two partners in the bankruptcy, reorganization & creditors' rights practice at Golenbock Eiseman Assor Bell & Peskoe LLP, a full-service Manhattan law firm of approximately 50 attorneys which has served its clients’ complex litigation and corporate needs for over 25 years. Golenbock Eiseman Assor Bell & Peskoe LLP is a sponsor of the upcoming The Global Forum on Investing in Distressed Debt, a conference we are encouraging all of our readers to attend.
Mr. Flaxer and Furth have represented a number of clients in many high profiled bankruptcies including Calpine Corp (for ad hoc debtholder committee), Lyondell Chemical Company (representing the Indenture Trustee in fraudulent transfer litigation), and Charter Communications, Inc (representing the Indenture Trustee) among many others.
Given what has gone on in the Tribune and Tousa cases, do you expect to see more fraudulent transfer claims pursued going forward? How can lenders protect themselves better going forward?
Absolutely. Our experience representing the indenture trustee for the Millennium noteholders in the Lyondell case as well in other cases shows that the TOUSA decision and the examiner’s report in the Tribune case both offer significant encouragement for creditors to attack leverage buyouts. Lenders can protect themselves by keeping records that demonstrate careful due diligence and by obtaining contemporaneous fairness opinions. Of course, any transaction that does not include material equity capital risks later challenge.
Do you see the role of indenture trustee expanding over the next few years as fraudulent transfers possibly become more prevalent in bankruptcy proceedings?
Given the prevalence of activist bond holders in the market today, indenture trustees will inevitably be increasingly active players both as plaintiffs and defendants in fraudulent transfer litigation. In Lyondell, indenture trustees, played both roles.
The numbers of classes in bankruptcy proceedings seems to grow with each case. Do you think this continues or do you think the various layers of debt (1st lien, 2nd lien, 3rd liens etc) will continue to complicate and lengthen bankruptcy proceedings?
The increasing complexity of bankruptcy cases reflects the complexity of contemporary capital structures. In the early to mid-2000’s, complex financial products proliferated and complex bankruptcy cases became inevitable with the market correction. Investors can mine opportunities by carefully examining collateral packages with respect to tranches of secured debt and, with respect to unsecured debt, by reviewing guaranty obligations and subordination and other inter-creditor arrangements.
What is your outlook for the restructuring market in 2011 and 2012?
The “extend and pretend” approach that prevailed in 2009 and 2010 cannot continue forever. Eventually, the day of reckoning will come. This, coupled with the enormous overhang of debt coming due in the next two years, suggests an active restructuring market.
Given the changes brought on by the overhaul of the code in 2005, do you believe that more and more cases will go the pre-pack route? How will this affect creditors' and debtors' game plan as it relates to the restructuring process?
The trend toward pre-packaged and pre-negotiated filings will continue, although this is only partly attributable to the 2005 amendments. In this respect, senior secured lenders will continue to drive the process with a goal toward accomplishing as much of the restructuring as possible prior to the actual filing of the petition, frequently with the added goal of forcing an expeditious sale.
In your minds, what have been the one or two most important regulatory or legislative changes in the bankruptcy process over the last few years?
The liberal granting of administrative claims to certain pre-petition vendors coupled with the deadlines on debtor’s exclusivity and time to assume or reject retail leases, have made true reorganizations far more difficult.
We know that both of you have participated in some of the highest profile bankruptcy cases over the last few years - which of these did you find most interesting? Why?
It may be ancient history, but, the Marvel Entertainment case was a uniquely fascinating case. It involved an epic takeover battle between three legendary corporate titans that played out in the context of a chapter 11 case. Given the evolution of the Bankruptcy Code, it is unlikely that this kind of case will be seen in the near future. More recently the Extended Stay and Innkeepers cases have involved battles between groups of investors that are likely to be repeated in other cases in the near future.
What advice would you give to distressed debt investors in the market of 2010?
In a world where takeout financing is still hard to find, junior debt and equity classes are more often out of the money than in previous cycles and investments low on the balance sheet should be made with extreme caution.