Off Topic: On Starting a Company

I was looking through the blog today for an old post, and I was surprised to realize that my last original blog post was March 14th, 2013. I've tried my damnedest to put some unique content ever few weeks and promise you I will do a better job in the future. I truly apologize for the lack of content.

March 14th, despite being a little over only 150 days ago seems like an absolute eternity. Since then, my wife has given birth to our second child (healthy baby boy), my mom has had brain surgery (battling breast cancer), and I've worked harder than I've ever worked starting a company. I've debated for some time in writing post below and decided to finally pull the trigger.

As many of you know, Reorg Research spawned from a problem that has plagued distressed debt investors, restructuring bankers, and lawyers for a long time. Principally, there was an incredible amount of time wasted navigating archaic tools to get information on bankruptcy proceedings. Whether it be claims agent sites or PACER, following multiple dockets was an inefficient process in which time could be better used actually analyzing information versus finding information. I believe, and our customers will attest, that Reorg Research is by far the easiest way to stay up on many cases at any one time on a near real time basis. I haven't logged in PACER in 7 months and couldn't imagine having to go back to the old fashioned way of tracking cases whether they be bankruptcy, adversary proceedings, patent litigation, anti-trust, etc.

Since then, Reorg Research has grown and matured our news, reporting, and research into something that I am EXTREMELY proud. We constantly hear how great our content is relative to our competitors and we strive to constantly improve our offering. I like to tell people one of my favorite things to do is read disclosure statements. When friends / family outside the distressed world ask me what our company does, I respond by saying "We are the world experts on corporate bankruptcies and distressed debt." I stand by that.

Reorg Research is not what this post is about. This post is about 3 lessons I've learned starting a company. I could probably expand this list into many many many more things I've learning via mistakes, failures, etc, but I think this list of three are paramount to building a successful organization.

Lesson #1: Hire well. Hire meticulous.

While this is really two lessons, I think it is amazingly important to starting a company. As an example, let's say you are a new organization with 5 employees. If just ONE of them is bad, productivity decreases by 20%. Further, the founder and the remaining 3 employees need to pick up the slack and therefore their core roles are compromised.

Hiring is by far my most important job. It's not even close. People argue raising capital is an important aspect of building a company. My retort is capital is plentiful while talented, excellent, tenacious, and loyal people are rare and seemingly impossible to find.

We interview LOTS of people for each job that we are hiring. The combination mentioned above (talented, excellent, tenacious, loyal) is hard to find but finding that person that can fit with your team takes a meticulous process that is rigorous but at the same time fulfilling.

My staff is EXCELLENT. I would put my team up against any out there.

Lesson #2: You have to be obsessed with what you do. 

I'm sure everyone has heard this one in the past. You have to like what you do to be successful at it. I take that a step further. You have to be obsessed with it.

Starting a company is hard. The amount of small things to do to get a company off the ground is comical. Did you know you need to keep I-9s in a different folder than other employee files? It never ends and only builds up as your company grows.

I love distressed. I love bankruptcy. As some of you have seen, my first slide whenever I teach a class on distressed starts with a slide that reads: In 20 years, what's most likely to be around? Google, Facebook, or bankruptcy.

I am the guy that gets jazzed up by marshaling issues in OSG, or deficiency claims in Cenage, or litigation value in TCEH. I'll read a filing and send off emails at ungodly hours and then people look at me strangely the next time they see me. "Are you ok?" they ask. Of course I am - Wasn't that filing I sent you AMAZING?

The days are long and to get through them you can't just love what you do. Not just that (adding a rider to Lesson #1), the people around you have to also love what they do. These are people you will bounce ideas off of and spend long long hours with and that rapport by relishing in a common topic / theme / subject / task makes the days go by easier.

Lesson #3: The reason why so many start ups fail is that they can't get to or don't know their customer

We are a B2B start up. Our customer are hedge funds, investment banks, asset managers, law firms, restructuring advisors etc. The blog, DDIC, and the network they provided and I built since 2009 was invaluable to getting momentum for Reorg Research's offering which in turn increases word of mouth effects which in turn gives you more momentum.

People often ask me if I started the blog knowing Reorg Research was an ultimate goal. The answer is no. I started the blog because I love bankruptcy and distressed debt and a friend sent one of my early stories to a WSJ editor who linked to the blog and the rest is history. But the network that was built by the connection with other like minded people that love what we all do on a daily basis was priceless.

If you are thinking about starting a company, do whatever you can right now to start getting in front of customers. Start a Twitter feed, start a blog, optimize your LinkedIn profile, go to networking events, etc. It doesn't matter.

The reason this is so important, outside of the revenue / growth aspects, is that if on Day 0 (not even Day 1), you can't get solid and critical feedback from a handful of potential users, you are going to have a heavy uphill battle. The alpha for Reorg Research was ready for testing in 4Q 2012 where 10-20 close friends and readers of the blog got to test drive the system and crush me with their feedback . The site looks and functions infinitely better because of that feedback.

If you are considering starting a company (or fund for that matter), I would suggest you read this book: http://www.amazon.com/The-Four-Steps-Epiphany-Successful/dp/0976470705/ref=pd_sim_b_9. It's one of the few books I can say really changed the way I view successes and failures of the business / start up world.

Appendix

One of my employees has been tasked with yelling at me if I am not writing blog content on a more regular basis. While I can't promise I will be penning as many pieces I did in the past, I will do a better job of getting emerging manager interviews, legal pieces, and conference notes up on the site. Now back to that Cengage DS!

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TMA NY NextGen Event: The Shipping Industry - Navigating Distressed Waters with Wilbur Ross

Next week, Wednesday July 24, the Turnaround Management Association's New York group of young professionals, NextGen, is hosting what I think is going to be a fantastic event: a networking and education breakfast on the shipping industry with an elite panel including Wilbur Ross.

The number of distressed situations we have seen in shipping is only increasing and given the richness of each situation's capital structures, distressed debt investors have spent significant time learning the dynamics of a very complicated industry. I personally think that certain parts and verticals in the shipping industry will produce amazing returns for patient investors over the coming years.

Moderated by David Hilty, MD at Houlihan, panelists include:

• Wilbur Ross, WL Ross & Co
• Paul Leand, AMA Capital Partners
• Lisa Donahue, AlixPartners
• Steve Hannan, Evercore

More details and registration for the event can be found here:

http://www.turnaround.org/Events/Calendar.aspx?objectID=2855

I'll be in attendance and hope to see you there!

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Reorg Research Job Posting

As most of you are aware, Reorg Research was announced a little over three months ago. I have been extremely grateful for the blog's readership that has allowed us to tailor and grow a product that is meeting the needs of the buy side and sell side community in both making their lives easier in following bankruptcy dockets and alerting them of our proprietary news, intelligence, and research on distressed situations that is moving markets. Feedback has been overwhelming positive and we plan to continue to build out our product offerings and coverage. With that said, we are hiring a few more distressed debt research analysts to our team.

The ideal candidate will have 2 years working in restructuring at an investment bank or as a desk analysts at a broker-dealer covering distressed situations. He/she should be conversant and be able to analyze intricacies of legal documents including credit agreements, indentures, asset purchase agreements, etc. This person should have strong communication skills and be able to set up to the plate when we require more writing than just pumping out excel models.  And this person should  want to be part of a growing team that is building something great from the ground up.

Our material is read by the vast majority of distressed hedge funds and distressed trading desks across the Street in addition to many law firms, FAs, and other professionals in the restructuring community. This is an opportunity for a few enterprising candidates to get their name out there in the distressed community with the eventual goal to move to the buy side at an elite fund.

To apply, please send your resume and a 2-3 paragraph investment write-up to recruiting@reorg-research.com. If you have any questions on the role, you can reach out to me specifically (hunter [at] distressed-debt-investing [dot] com)

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Reorg Research Coverage of Rescap PSA

Because of Reorg Research's technology, our subscribers will be among the first to receive and review bankruptcy dockets in a litany of cases. Likewise, our reporters, analysts and I have first mover advantage in analyzing key documents in cases. We put out stories on developments in bankruptcy cases, whether for new docket filings or for court proceedings, before other services on the market. And I take pride in the depth of our analysis, about which we've heard unanimously positive feedback.

Here is our piece on Rescap's PSA that was filed shortly after the PSA hit the docket. Enjoy!

Ally Agrees to Pay $2.1B in ResCap Settlement

Residential Capital’s former parent Ally Financial agreed to pay a maximum of $2.1 billion in order to free itself from potential litigation after ResCap’s bankruptcy process has been completed.

ResCap filed the previously announced plan service agreement, the “global agreement”, the former mortgage servicer reached with Ally and multiple constituents after months of negotiations.

Ally will increase its contribution to the ResCap’s estate by $1.35 billion over the amount agreed to in the PSA to a total of $2.1 billion comprised of:

• $1.95 billion in cash
• $150 million from a settlement between Ally and its insurers (paid no later than Sept. 30, 2014), for any Director and Officers or Errors and Omission claims

The Ally Contribution, per the PSA term sheet, is capped at $2.1 billion. In exchange Ally will receive, among other things, ResCap releases and third party releases in favor of Ally. The releases do not release any claims against Ally held by the FDIC.

The contemplated plan provides for partial consolidation (for distribution purposes only) of ResCap’s estate into three groups (1) The ResCap debtors (which includes the holding company, GMAC Residential Holding Company, LLC, and GMAC-RFC Holding Company, LLC), (2) the GMAC Mortgage debtors (includes GMAC Mortgage, LLC and its direct and indirect subsidiaries), and (3) the RFC debtors (which include Residential Funding Company, LLC and its direct and indirect subsidiaries.) Plan distributions will be funded by a combination of $4.5 billion in proceeds from previous asset sales, assets remaining in the estate, the Ally contribution with certain security litigants and borrowers receiving distributions through three trusts.

Key points from the PSA also include that the creditors’ committee and supporting parties will support a partial paydown of no less than $800 million of the 9.625% junior secured notes due 2015 secured claim, provided that Ally is paid prior to any such paydown of the JSN secured claim in cash in full satisfaction of the outstanding Ally loan. The PSA term notes that the “Plan will provide payment in full on the Effective Date of the allowed prepetition claims of the

Junior Secured Noteholders” and that “The Plan will provide that the Junior Secured Noteholders are undersecured and not otherwise entitled to payment of any post-petition interest."

Also party to the settlement, Paulson & Co. may not seek to terminate this agreement if Wilmington Trust ceases to be a party to it.

The breakdown of the distributions to unsecured creditors is as follows:

• Holders of allowed private securities claims will get their share of $225.7 million
• Holders of allowed borrower claims share $57.6 million
• Holders of allowed NJ carpenters claims share $100 million
• Allowed estate unsecured claims at ResCap debtors get their pro rata share of available unsecured assets totaling $752 million
• Allowed estate unsecured claims at the GMACM debtors share in $600 million
• The allowed estate unsecured claims at the RFC debtors receive unsecured assets valued at $789.6 million

A Liquidating Trust will be established: Assets of this trust will include the Ally Contribution and Rescap’s remaining assets. From the term sheet: “Holders of allowed unsecured claims and the Private Securities Claims Trust will receive units of beneficial interests in the Liquidation Trust (“Trust Units”),allocated in accordance with the treatment under the Plan and the Allocation Percentages set forth on Annex I.

Of particular note, the senior unsecured notes claim recovery will be $351.4 million versus an allowed claim of $1.003 billion.

The plan shall provide for the allowance, priority, and allocation of the monoline claims, as follows:

• MBIA claims fully and finally allowed as non-subordinated unsecured claims of $719 million against the ResCap Debtors, $1.45 billion against the GMACM debtors, and $1.45 billion against the RFC debtors.
• FGIC claims shall be fully and finally allowed as non-subordinated, general unsecured claims in the aggregate amount of $596.5 million. The settlement and release of FGIC’s ResCap-related insurance indemnity obligations pursuant to the FGIC Settlement Agreement shall be approved by the bankruptcy court, by separate 9019 motion, and by the FGIC Rehabilitation Court

Conditions of the plan include court approval of the disclosure statement and the RMBS Settlement, a preliminary hearing for which takes place today. In addition, a termination even includes “the Examiner’s Report is disclosed to any party on or before the Bankruptcy."

Court enters the PSA Order;” From the PSA Term Sheet “The Examiner Report shall be sealed through and including the earlier of (a) the date the Bankruptcy Court approves the Plan Support Agreement, and (b) July 3, 2013, provided that if the Plan Support Agreement is terminated, the Examiner Report may be filed publicly the next Business Day after the effective date of such termination.”

PSA milestones include:

    July 3 - deadline to file plan and disclosure statement, receive court approval of the PSA

    Aug. 19 - court approval of a settlement agreement with FGIC and RMBS trustees

    Aug. 30 - approval of adequacy of disclosure statement

    Earlier of 30 days post-confirmation order and Dec. 15- plan effective date

Prior to the closing of ResCap’s court-approved asset sales, the company and its non-debtor affiliates operated the fifth largest mortgage servicing business and the tenth largest mortgage origination business in the U.S., according to the company description in the PSA.

For those looking for more information on Reorg Research and our product offerings, here is a direct link to our trial request: http://www.reorg-research.com/trial_signup.php . You can also reach me at hunter[at] distressed-debt-investing [dot] com for additional questions

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Emerging Manager Series: Bowery Investment Management

Over the last few months, we have profiled a number of managers sub $250 million of assets that I have come to meet through various channels. I met Vladimir Jelisavcic over 5 years ago when he was co-portfolio manager at Longacre. He has always impressed me with his incredible analytical abilities and knowledge of the trade claims market where he is regarded as one of the most prominent players out there. This is an incredible interview. For more information on Bowery, you can visit their website here: http://www.boweryim.com/

Could you please give us a brief run down on your background?

I received my BS from NYU in 1987 and my JD from the University of Iowa in 1993. After graduating from law school, I began working at Bear Stearns trading distressed claims and loans where I became a Vice President. In 1998, I left Bear to found Longacre Fund Management with 2 partners, also from Bear. We ran Longacre from 1998 to 2012, where I served as co-portfolio manager, building assets from $1 million to $2.7 billion. In 2012, when my partners and I decided to return capital to Longacre investors, I founded a new firm called Bowery Investment Management where I continue to manage the Opportunity Strategy. In all, I have been in the distressed debt investment business for 20 years.

How has the investment strategy for Bowery evolved over time, or how is it different from previous iterations?

Longacre’s strategy was a fundamental, bottom-up, value-driven approach to distressed debt investing. We could invest up and down the capital structure in bank debt, bonds, trade claims and some reorganized or leveraged equities. By mandate we could invest up to 20% of the capital managed in trade claims. The Bowery Opportunity Strategy takes a similar approach to distressed debt investing but with a greater focus on niche assets. The Bowery Strategy allows us to invest in less liquid assets where we think there are better return opportunities. We focus on overlooked or underfollowed capital structures, smaller companies and issuances, and can invest up to 50% of our capital in trade claims. Bowery also focuses more heavily on risk management and volatility control than did Longacre, taking a systematic, top-down approach to hedging.

Vlad, you are well known in the distressed space as an expert in analyzing and investing in claims. Can you talk about how that market is changing and where you see it going in the future?

Trade claims are one of the purest forms of distressed debt investing and a natural byproduct of the bankruptcy cycle. During and immediately following the financial crisis, we saw an abundance of claims available for purchase at attractive prices, as creditors desperately needed liquidity. Now, with default rates at an all-time low, the claims market is less robust than it was 4 or 5 years ago and many of the largest bankruptcies (Lehman, Madoff, etc.) are finally distributing what assets remain in their respective estates. That being said, there are still plenty of opportunities to purchase claims if you know where to look. Large companies such as American Airlines, MF Global and Eastman Kodak have all filed for Chapter 11 within the last two years. A number of smaller companies have recently filed or soon will file, which will further improve supply. Moreover, having an in-house sourcing team, as Bowery does, allows us to locate untapped creditors and smaller counterparties which our counterparties cannot.  While the popularity of claims investing continues to rise among hedge funds, most transact in the largest “on-the-run” cases like Lehman, unwilling (or unable) to devote the time and resources to smaller cases. When interest rates rise, so should the number of new bankruptcies, which will give firms with experience buying claims, like Bowery, an edge in finding attractive opportunities.

You launched the Opportunity Strategy very near the end of the crisis period of 2009. Can you talk about investing then versus the current market environment?

2009 represented a historic market dislocation, and there was an unprecedented amount of distressed assets available for bargain prices. We didn’t have to look very hard to find attractive investment opportunities. Now, the opportunity paradigm has shifted as US companies’ corporate balance sheets are strong and persistent monetary policy intervention suppresses interest rates. Distressed capital is concentrated in the same few troubled names (Lehman, TXU, etc.), but there are plenty of smaller companies in distress, as well. In order to differentiate ourselves from other investment managers (and old Longacre), we focus on mid-market companies whose capital structures are too small for many of our distressed debt peers to build meaningful positions. This requires us to be more creative in sourcing opportunities, but this is what distinguishes the Bowery team. We especially like counter-consensus themes, such as old-media, European financials and shipping. Since we consider ourselves process experts, we can apply the same fundamental analysis to a company worth $100 million or $10 billion. Our method in 2009 versus now is the same, we just cast a wider net now, focus on the underfollowed names, and are more cognizant of the political and macroeconomic landscape.

Bowery has $125 million in assets under management yet it has invested in many of the well-known names targeted by megafunds and still managed to outperform the DJ-CS Distressed HF Index. What are the advantages and/or difficulties a smaller investment manager has compared with larger managers?

Over the last 5 years, assets in the distressed debt space have become ever more concentrated. The large investment managers have gotten larger and the largest have gotten super-sized. There are certainly advantages to this for these managers—scale, pricing power, coverage, perceived safety. But, this has also hindered their ability to access some of the most attractive opportunities in the form of smaller companies or issuances. In such cases, the large managers can’t source enough product to create a meaningful position in their portfolios that will “move the needle,” or in doing so they will move the market on the way in and out. This leaves many opportunities undiscovered which of course works to our benefit as a smaller player since it allows us to source a significant amount of product for our portfolio at an attractive price. Not only do these opportunities enhance returns, but they allow us to differentiate our book from those of our peers. A great example of this is the Tribune bankruptcy. Most distressed debt managers bought securities of the holding company, which there were plenty of. Bowery bought the trade claims of the operating companies of which there were only $80mm outstanding, inaccessible (or irrelevant) to larger managers. We started buying the claims at 40 cents on the dollar and received a par recovery
.
Can you talk about your investment process? How does an idea go from being a potential investment to become a portfolio holding?

Our investment process is a time consuming and rigorous approach, but one which has historically generated significant alpha. The process starts with the idea generation phase. Ideas are derived from weekly team meetings, buy and sell side relationships, news runs and bankruptcy filings, all viewed through a macroeconomic and thematic lens. We focus on finding unique, underfollowed opportunities with significant asymmetric return potential. We rely on our extensive industry contacts and market experience to source and vet only the best opportunities. Next we perform a deep, fundamental research analysis of the company, financials and industry in conjunction with discussions with management teams, other analysts and knowledgeable industry contacts. We then select the most compelling opportunities with what we perceive to be the highest risk-adjusted return potential. We evaluate possible catalysts and exit strategies in selecting the appropriate securities in the context of overall market fundamentals. Finally we determine the appropriate size of each position taking liquidity and technicals into consideration. The portfolio is monitored in real-time and positions are hedged, adjusted and traded around on an ongoing basis.

Nearly all of Bowery’s major investments have been in U.S.-based situations. Would you consider more global opportunities? How do you view the opportunity set in Europe?

We are very opportunistic, so while the portfolio has historically skewed towards North American opportunities, we are also active in Western Europe. We don’t do a whole lot of investing outside of these two regions because those are where we best understand bankruptcy case law. At the close of March 2013 we were 80% net long; 56% in North America and 24% in Europe. This significant European weighting is reflective of the current market environment in which fundamentals of American companies are relatively strong compared to those of European ones. I expect the opportunity set in Europe to remain attractive for the near term until sovereign debt issues are fully resolved and austerity measures absorbed. Nonetheless, we are never at a loss in finding unique opportunities domestically.

With so many people having differing opinions, we'd like to hear your thoughts on the credit markets today. Is high yield in a bubble right now?

I am not sure I would call the high yield market a bubble, but it is certainly overbought. The average yield on speculative grade bonds fell below 6% for the first time ever in recent months, and spreads are at historic lows. Treasury rates can only go up from here. This will tighten spreads even further before risk premiums undoubtedly rise, and the high yield market cools off. When and to what extent this happens is more difficult to say but a correction is likely.

How do you manage your book? Claims generally have a lower liquidity profile than on the run credit? How do you balance illiquid vs liquid?

Our strategy is constructed to match the duration of our book so we are not forced to sell out of a position prematurely and take a haircut. The strategy accommodates the less liquid trade claims part of the portfolio which can be up to 50% of capital (35% in claims at the end of March). We invest the rest of the book in more liquid distressed bonds and bank debt which generates a significant amount of alpha, but also provides liquidity and diversification away from claims. Furthermore, most of our claims portfolio is invested in liquidations where the distributions are in the form of cash, so there is little market risk associated with this type of exposure. The main risk of a claims position is process and time risk (that the bankruptcy will drag on for longer than expected), but we factor this probability weighting into the price we bid for a claim. In the case where a claim position results in reorganized equity, we may short sell an equity index, or buy a put on an individual name as a hedge. Away from our claims exposure, we characterize and hedge our portfolio in a number of buckets, from equity like risk (ex- unsecured bonds) to lower beta credit risk (ex- secured bank debt) and will express hedges using various indices like the HYG, LQD, and JNK.  Our book is constantly monitored in real-time by our head of risk management, and our smaller size allows us to be dynamic in adjusting hedges up and down as necessary.

Can you describe a specific situation where you have passed on a compelling idea because you couldn’t get comfortable with the risks?

One of the most popular shorts in the distressed space in recent months has been JC Penney (JCP). In fact, as of April 15, 36.8% of JCP’s equity float was short. New CEO Ron Johnson failed to transform the chain from a coupon-driven discount retailer to a higher-end, boutique shopping destination. Meanwhile, competitors such as Macy’s and Kohl’s continue to outperform. JCP was burning through cash, but also held unencumbered assets, like real estate, which could potentially be used to secure new financing. This was enough to make us wary of an investment from the short side. Sure enough, within the last week JCP secured a $1.75B financing package from Goldman Sachs, boosting the stock and buying the company time to get back on the right track.

Can you talk about an investment you find particularly compelling today that fits into Bowery's strategy?

We are very bullish on our first lien bank debt holding in R.H. Donnelley (RHD). The investment fits our strategy for a number of reasons. First, the company is a yellow-pages business, and as most people know, print media is out of favor with the advent of smart phones, tablets and digital publications. As I mentioned, we like counter-consensus themes. Secondly, there is only $750mm of the bank debt outstanding, trading today at about 72 cents on the dollar, half of which is held by long term holders. So, there is only about $375mm face value of float. As I also mentioned, we like smaller issuances. So, what is there to like about this company besides the fact that it fits into our investment criteria? First, while print businesses are in secular decline, the rate at which RHD’s business is shrinking has moderated. Second, with little overhead or fixed cost, the business produces an abundant amount of free cash flow which goes to first lien bank debt holders. Thirdly, RHD is “bundling” a digital component with its print renewal offers where the digital component will continue to grow and generate even more free cash flow. Finally, RHD’s parent company, Dex One, recently merged with Supermedia, a competitor, which provided a number of business synergies to reduce costs at both firms. But most importantly, the merger provides tax benefits to RHD which will benefit its creditors. We initiated the position in February 2012 at 39, and the bank debt now trades in the low-70’s. We expect it to be worth par by the end of 2014.


*Disclosure: Bowery is a client of Reorg Research

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