Moelis restructuring co-heads discuss the evolution of distress, LMEs and Chapter 11 filings

Welcome to the "Datware Podcast." I'm your host, Pandalina Yakov, co-managing editor of "Datware North America." I'm glad to be joined today by two distinguished guests, Zool Jamal and Barak Lian, co-heads of US-Captain's structure advisory at Mollis. Barak has over 25 years of investment banking and asset management experience, advising clients on liability management, chapter 11 reorganizations, debt financing transactions, and distressed M&A. He has also held senior-level roles in asset management and in restructuring and recapitalization, in addition to working at a hedge fund for five years. Zool has over 25 years of investment banking experience, specializing in complex in-court and out-of-court-restriplender negotiations and distressed financing. He has worked with companies, creditors, and acquirers across a wide range of industries. Zool and Barak, welcome to the show. Thank you for having us. Thank you. So you've known each other and worked together for a long time. Can you take us back to how you first started working together and how that relationship evolved over time? Zool and I met actually in University of Pennsylvania. Zool was friends with a lot of guys in my fraternity and we would hang out in the flat house back in the day. And then we ended up just working together. Jeffree's was like 10 of us in the back of office because Jeffree was starting its senior-level office. And from there, we worked together and through the entirety of our junior banking years, so we worked together on a whole bunch of different assignments. I left for the buy-size, Zool stayed, and he went to London for a couple of years. And then when the teams went to Molis, I rejoined and we'd been working together since 2009. So it's been a long time together and a lot of history. In this industry, it's known for frequent turnover. But many Molis restructuring bankers have stuck together. And you two are a great example. This is just an amazing accomplishment. What was the secret ingredient that kept this partnership so tight? I think it's more than a partnership because in addition to the two of us, a number of our colleagues, as you note, have worked together for a long time. I think it is really a testament to the team that came over to Molis. And then the team at Molis, since we've added people, has also, at the senior level, had relatively little turnover. And I think it's because we like working together. We really view ourselves as a team in terms of our success is not really individual success. It's really a team success and culturally setting ourselves up to empower the people that are coming up through the organization, doing good work for clients, and being supportive of each other's careers, I think has stood us all in good stead. And I think that's why so many of us have stayed together. I think culture is generally self-select. We talk about it like the size, the culture, but the culture is really important. We are, as Zulsa said, we are super team-oriented. And I think that self-selects the people who are into it for the team. And I think we've been able, as a group, to sustain that for a couple of decades. And I do think being at Molis where the firm prides itself on sort of one P&L model, we're all working together as a firm, the fact that our team operates that way fits very well into how the firm thinks of itself and how the firm likes to approach situations. And it's why we end up with not just close relationships with our team, but if you look at the industry bankers that we work with a lot and the coverage bankers there, as much a part of our success as our team is because we have such a good collaborative relationship with them. And for many of them have had that relationship going back to when all of us started to affirm together. Very interesting. And when did you first realize that this partnership worked also under stress, not just when deals are flowing? So I think it really, it comes back to what we've already talked about is sometimes one or the other review will be doing well or not doing well. Maybe you want a couple of pitches, maybe someone else has lost a couple of pitches or a deal is being particularly difficult. If you are not team focused and you are just focused on your own individual accomplishments, that can really get you down. And I think when I've had a tough run, generally others in the team have been doing well and being able to be invested in that success and viewing that as much a part of your success as your own individual accomplishments, I think really helps get through the ups and downs that are natural in any bankers career. Sometimes you'll be doing well, sometimes it'll feel like nothing's going right. But being grounded in the long term, if we keep doing good job, we'll all lift each other up together. I think generally helps moderate some of those tougher moments. Is there a particular like a nannick though, the moment that you might remember? You have to have, as Zul said, invested in the partnership in terms of everybody's success. You also have to trust each other to do the right thing and be able to handle everything that comes with this job, which is not the easiest. And I think if we go back to COVID where we were just catching whatever was falling our way, and really there was only a handful of us who could manage at that level, we had to have immense amount of trust across us, the firm trusting and trust trusting in the firm, because the volumes were just ginormous. So we had daily calls trying to track through everything that we were handling. But ultimately we had to make sure that everybody was full ramped, and that everything was getting handled correctly because I think one of the other things in terms of our culture is good outcomes matter. And we pride ourselves on having good outcomes and we're not just trying to push the deals across. So with that you have to be able to trust your partner and creating good outcomes for your clients. Since we have so much experience, what did restructuring look like early in your career versus today? And what would surprise the junior banker now? So I think restructurings have changed pretty significantly, primarily because the capital structures have evolved from capital structures that were light on secured debt and heavier on unsecured debt to ones where they are extremely heavy on secured debt. And there is little or no unsecured debt in the structure. So that changes the types of transactions that you can pursue. It changes companies operating flexibility in bankruptcy. It changes companies ability to attract new financing. At the same time, the secured debt that we see today, in many ways behaves like the unsecured debt that used to exist 25 years ago. If you think back when I got into the business, the secured debt layer was really bank debt driven. You didn't have as many, if any CLOs, leverage loans weren't really a thing. It was really about high yield bonds. And maybe you'd have secured high yield or unsecured high yield. You still still talked about subordinated debt and senior subordinated debt. None of those things are really that prevalent anymore. And so companies room to maneuver was much greater, particularly when it came to securing financing and operating in bankruptcy. So you saw a lot more bankruptcies that were what we would now term freefall bankruptcies were companies filed, affected operational change presented a business plan. And only then would you have a negotiation about the restructuring. The lever the balance sheet. Yeah, you can't afford to do that. You have so much secured debt. There's so much more cost, very hard to just kind of go into bankruptcy with no plan, or effect operational change and then figure it out. The lenders wouldn't tolerate it and the costs of administration wouldn't tolerate it. Go back. I would remember when we were starting, it was maintenance covenants in the bank debt, right? And that just doesn't exist anymore. We know even think about maintenance covenants and secure leverage loans. And they remember we had rolling EBITDA covenants where they're right. And all that stuff is gone. And so I think it's just a very different. The structures have manifested itself very differently than where we were mainly because originators have been able to get away and issued debt with covenant light and the rest. And I think if you think about the participants in restructuring 25 years ago, it was the banks at the top of the structure and it was the actual banks in many cases. And then the layer below that was the high yield investors, which were the high yield bond mutual funds. And then there was a very active secondary market of distressed hedge funds that would buy that debt as it got to distress level. Many of whom have now become the big bond managers of today. And if you look at today, the big drivers of transactions are the big CLO managers, big asset management complexes that have big CLO vehicles. And you don't have as much of the debt turning over into secondary hands across a wide range of investors. You have some very large repeat players in that world. But for the most part, a lot of deals today are negotiated with the original buyers inside of those CLO vehicles. Because again, for the most part, we're talking about leverage loans as opposed to bonds, although you still do have a fairly robust high yield bond market, it's just become a lot less relevant on a relative basis to the loan market. I remember when Orelius would get into the bonds, right? We would find out that that wire that they bought this huge chunk. We knew that there has to be some play because they like to look into documents and find some loopholes in the documents. And now you don't have stories to say, oh, this is distressed. has had fun has bought this big position and it has an agenda and let's find out what's the came theory here. It comes back to the fact that the structures have become so secured heavy with unsecured or secondly, and what have you. Because the price at which the debt trades is very hard to get overly creative because you have such a large tranche that you have to deal with. There's only so much embedded leverage in the purchase to create something that's valuable with convexity. That's really fundamentally the structural change. If you have huge first lean leverage layer, it is effectively the entirety of the enterprise value. The convexity is just moving with the entirety of the enterprise value instead of some type of leverage. And I think that's taken certain players out of the market. People who like to swing a little bit more and has created more debt like features of restructuring complex. And I do think by the way, the other thing that you have had happened when you move from bonds to loans and you noted it, it used to be figuring out who was buying a new owned it even as the issuer was opaque. You didn't have control over who bought your bonds and you often couldn't find out who was the owner of your bonds until they decided to raise their hand. But with the leverage loan universe, the issuer has basically full transparency setting aside for just the patience that may be done. But they have basically full transparency as to who all of their lenders are. And they have some control over who those lenders are, you have de-culeists, have approval over assignments. And so not only has the playing field changed, but the control the issuer has over the participants in that game has also increased pretty significantly from the bond heavy structures that we saw 20 plus years ago. Well, that's really changed the balance of power in restructuring basically. I think that has, when you combine it with the very flexible documents that lenders have agreed to given the makeup of the structural makeup of the new issue universe, that those two things have really given issuers a lot more leverage than perhaps they used to have. I also think funds and how they're building themselves in terms of fundraising has also changed. I think the ability to raise money to invest in debt, LPs have really gravitated towards that versus equity, a post-reorg type returns. And I think that's changed the incentive for people across the board as post-reorg equities have not performed while it's very hard for funds to go out and raise. And there's only a handful more focused on that than trying to just buy debt. And then it happens to be restructuring instead of buying into a structure to own the equity on the back end. You said that in the past restructuring often culminated with the chapter 11 where you would deliver them perform operational changes. When did you first notice that more outcomes were being sold out of court with chapter 11's becoming more expensive? I think it's a misdomer that things were not solved out of court. I think they've always been sold out of court. All of the tools that are now being used in liability management exercises are all tools that have existed for 30 to 40 years. I think the big difference is that used to be that those were done with bonds and because you have securities laws, you have to run these exchange offers and there's more public. There's more publicity. They're more complicated whereas with loans being able to do them privately, you can do them much more efficiently. So I don't know that the number of out of court transactions has necessarily increased proportionately. I think what we have seen happen though is the types of out of court transactions have morphed to ones where because to Baroque's earlier point, the investor universe is much more debt focused and a lot of the vehicles that own the debt are more over structured vehicles that are heavily debt focused. The motivations of predators has shifted alongside the motivations of issuers and so the securing new money, extending maturities, perhaps capturing discount, all of that done out of court has become much more prevalent and the ultimate equitization or de-leveraging event is either delayed significantly or it doesn't happen because none of the parties around the table view that as the optimal outcome from their particular seat that they're in. The sponsor doesn't want to lose control or if they do, they want to wait as long as possible. The investor would much rather have debt as currency that equity given the makeup of their investment and downsell. And by the way funds as well and protecting your downside by getting the documents to reflect limited flexibility from documents that had maximal flexibility becomes the critical driver as opposed to creating an investment by buying debt at a discount to then take ownership of the equity of a company at the bottom of its cycle or its operating performance. While that still happens, it's just the weight of transactions has moved much more to the former than the latter given the particular motivations each of those parties have. It's grown with the sophistication of the market, right? You can go back to CLO version 1.0, they couldn't even put up money in debt to protect themselves. They had to work out person but it wasn't a totally dedicated work out person sometimes. And so I think as we have gone through, I think we're probably on CLO 3.0 docs, they've also attracted talent in that transactional spot. I call it a workout spot, but it's more transactional spot because they're also involved in some of the underwriting. And that personnel and that talent has elevated and that has increased creativity and many respects and also understanding the broader perspective of what they're trying to accomplish. And so I think that sophistication level has increased. The ability to use technology is increased of creating adequate transactions. That's naturally landed for a whole host of reasons, sponsor wanting to retain control, etc., etc., that wanting debt in a spot where it's very viable to create transactions that get everybody what they want. And I don't think that would have happened absent the maturation of some of these funds and attracting forward-thinking personnel. We talked about discounts and this out-of-course transactions. We just didn't use the name that's overused, like reliability management, zoom management. It's been done forever. It's just that it became more prevalent recently. But when it comes to LMEs, people often focus on cooperation agreements, on baskets, on mechanism, new technology. You mentioned Barak. What do you think is the most important strategic decision that really determines if an LME works or fails? From whose perspective? I guess you're right. Our business is a 70% company, 30% creditor. We're in the middle of both, which we like. Anytime to an event be able to craft the best transaction. And I think we both think two to three years out is probably a sweet spot. And then you get to the baskets because the world is whether we like it or not, it's built on carrot and stick approach. I can give you this and if you don't, I'm going to hit you with this. And like the inherent baskets are available, super important. The convexity of the asset, meaning what I say is like the upside-down side ratio of the asset itself is important and how over leveraged in certain circumstances, things are so that the creditors are either fearful and want to transact because the value only runs so far. That's an aspect that is important. And then it's really the personalities who are on the ground. Not every fund acts the same, not every person within a fund acts the same. Certain people have their own predilections of what they want to have happen or what type of transactions they feel good about. And if you know the personalities on the other side with the other factors that I listed, you can craft certain things. All goes until I call the blender. And what spits out is like the good outcome, right? And that's how we view ourselves and judge ourselves. Why is investors' composition so critical to outcomes? Because all of these are geared around a coalition of the willing. Right? If you need a maturity, it's different. But if you're trying to open a basket or incentivize people to follow a group or come into a transaction, you need to get to a certain requisite percentage and how those parties interact amongst themselves and with you is super important. And some level it comes down to trust as well as we talked about earlier trusting your partners, but also you have to have enough credibility around the horn to get people to move to its transactions. So I think the personalities matter otherwise this could totally be replaced by AI, which I don't think is going to happen. Since you are advising both lenders and companies, from the company's perspective, what are the real risks of being too aggressive, even if the transaction is fully permitted under the law? So I think the biggest, two biggest risks you have, one relates to the transaction at hand, where sometimes if you're too aggressive, the response can be equally aggressive, and each party can go off into their corner. And then ultimately getting to a deal is very difficult or made much more complicated. So sometimes the threat of the aggressive deal is more powerful than actually moving down the path of doing the deal itself that then creates the mess. Because ultimately those deals away tend to make capital structures messier. And so it's rarely the optimal outcome. It's more the outcome that you will do if you can't reach a deal with your existing lenders for the most part. And if you are too aggressive as an issuer, you can push the lenders to respond equally aggressively with litigation or other things that just become costly and a distraction for the operations of the business. At the same time, if the lenders are too aggressive, they can also push the issuer to do things that are detrimental ultimately to the lender's value by doing that deal. And so being able to show each other that you can be aggressive is a tool that everyone will use to try and bring people ultimately together. So that's in the deal itself. And then more broadly, there is the concern around if you become known as a company or a sponsor that is always aggressive, counterparty behavior could change when they interact with you. We really haven't seen the BSL market not provide financing to sponsors. It's not clear to me, there's really been a premium that any sponsor has had to necessarily pay based on their behavior. But that's always the fear. And I think particularly as we look at private credit becoming a bigger and bigger percentage of the market and because many of the private credit lenders are also the large lenders in the BSL world, there I do think it has affected lender behavior. And as that world merges and crosses over more and more, perhaps it will start to impact how BSL lenders will think about issuers. I don't know that it has yet because there's so much market depth, but that would be the sort of broader macro concern. I think if you're consistently overly aggressive, you will wear some backlash. And you've seen that in certain circumstances where even upon the drop of a rumor of the company hiring somebody, there's a 95% co-op for anything happen. And I think that is somewhat of a reputational wear based on how people have acted in the past. What do companies often underestimate about lender behavior and vice versa? What do lenders and misunderstand about company incentives? Curious, since you are on both sides of the advice. So I think that one thing lenders often underestimate is the complexity of decision-making on the company side because they just often assume if it's a sponsor own company that it's effectively one voice, but that's really not the case because you have multiple constituencies inside of the sponsor. You have the deal team, you have the investment committees, you have a couple markets people, you have senior management, and then you have the actual management team of the business itself that may have a greater or lesser voice depending on the circumstance. When you expand that to include public companies, you then have the complexity of a public company board where it's not nearly as obvious as a sponsor in terms of the behavior. And I think lenders often underestimate that there are numerous competing interests even on the company side in terms of driving to a deal and what matters and what's important and one thing may be important to a certain constituency inside of that set of actors and some things may be less important. Everyone I think tends to understand that when you have a complex lender group, you have 10, 15 institutions, there's that complexity and they will often wave away the complexity of the issuer and just treat it as a monolith and I don't think that's necessarily the case at all. I think there's complexity and a push pull on the issuer side as much as on the lender side. I think he deals all come down to prioritization, right? There's something that's going to have to happen and the question is can you get both sides prioritizations to at least line up and match so that what someone cares about the other one doesn't care about us so much and vice versa, right? I think that's the whole game and I think both sides just need to continue to recognize that and I think in each of these negotiations they're searching for where that common ground could exist and I think each situation is a little bit different but the goal our goal is getting to the right outcome regardless of who we're representing, representing a company on countryside, a lender on a side, getting to the right answer for clients and I think that has to do with prioritization and understanding how the other side is involved. I also think that both lenders and issuers will often get anchored to our bog down on precedents and comparable transactions as the basis for decision making because it's a world that everyone in the industry is used to, right? When you're pricing a new issue you'll look at where similar companies are trading when you're valuing businesses, you'll look at comps, you'll look at press and transactions and so gravitating toward what happened in the last 10 deals, what happened in the last 50 maturity extension trades, how much money or people able to raise, people will always ask about data points and I think that while those can be useful, the misnomer is that you can treat those data points similarly to how you would treat pricing benchmarking for a new issue where it's exceedingly informative when in reality why certain transactions took the form that they did and created the result that they did is often very much more situation specific in restructuring and liability management world than it is in raising new money for a new issue or even valuing a business compared to a bunch of other businesses because the facts and circumstances are so different deal to deal and because you have companies that are under some degree of stress, if not distress, what's going on inside of those enterprises is vastly different in many cases situation to situation and so there's a risk that you can get anchored to or gravitate towards comps as the basis for both your negotiations as well as your expectations and it can lead to either a more difficult negotiation or a miss setting of expectations by both parties as to what the right answer is for this particular transaction. That is a 100% correct and it's a very important point. These situations are very unique, you're structuring very unique securities who are asking for very unique things and each situation is very different and it comes down to like I said the prioritization. When people get anchored on presence because I did this in this transaction over here that works until it doesn't and the end either we're going to transact we're not going to transact and what happened over here doesn't really matter. Say I wanted to ask you if across the cycles and you've seen what is the mistake that people do again and again and maybe this is one of them that they get anchored into these comps but if you have an example of you think some mistakes that are done that people can learn from or if you have on the opposite side a positive example or a restructuring that you can talk about that you've worked on. So I would say two mistakes and this is a generalization and they're not necessarily mistakes because often they are a function of the motivations of the parties but people I think have generally speaking tended to put more debt on companies than is optimal because companies that are going through financial challenges often need more operating flexibility and more access to capital to fix their problems than the average company at the same time because as Brock had mentioned earlier post-reorga equity has been such a challenging asset class you can understand why people would like to put as much debt on companies as they can because that form of recovery is more tangible and easier to monetize than getting a bunch of equity in a company that is reorganized. Now one could argue that becomes a self-fulfilling prophecy because you end up with over-loved businesses and therefore they don't perform well and therefore the post-reorga equity doesn't perform well and it becomes this cycle but I think that generally speaking if you asked almost any market participant they would say these businesses should have come out with less debt than they do but because of the various motivations and constraints you often can. I'm not saying that they're over-lovered they just have more debt than they should so that's a point one. The other mistake or the other issue is these negotiations can often get very bogged down arguing over minutia points and those arguments can sometimes take longer, cost more and create more friction than the negotiations that have hundreds of millions of dollars of impact on enterprise value and recovery. But they go out for example what minutia points. So how people argue about covenants on the debt that's being put in place on a post-restructured basis. How people argue around all of the various puts and takes of a warrant package and all the various provisions. They will torture themselves over the edge case one percent probability outcome and making sure that outcome will work out in their favor. Now that overall I think ends up costing more money in creating very little value. Again the counter to that just like my first point is the one time someone focused on it and it actually created a bunch of value because there will be examples where a minutia point resulted in a return to one party or the other which is why everybody finds it very hard to let go of what should be small issues because everyone remembers the one time it resulted in a oversized return and not the 1000 times it made no difference because that's just how we're all wired to think. And so I think deals could be done much more efficiently if people wouldn't let things go and be more reasonable over issues that everyone knows don't matter that much. But it's a very hard behavior to change because everyone around the table is paid to be the smartest person in the room and sometimes being flexible is viewed as being someone who's getting out smart. I think there's two lessons. I think from the company side, start early, these negotiations can sometimes take various paths and you sometimes need to step away to come back. When you have to plan that in when you start thinking about when you want to start the process and I know that's hard that's sometimes the hardest part getting companies started to get their heads wrapped around. You have less sponsors and usually the pub goes, but you're two, two and a half years out. You need to start thinking about this pretty rapidly and three years is better than two years. And we've had cases where take Carvana, for example, we had to step away for a bit and then come back to it and we had enough time to do it and we had everybody to do it. It was an amazing transaction. It's amazing. We got to the right transaction both for the company and for the creditors. It was the right transaction for everybody, but that took time. And if we had started, if we'd known where the world would have been, but if we would have started later, maybe we would have had the chance to step back. I remember when we were looking at it in the beginning and we thought it's going to be a restructuring. And then it turned out it's a great example of successful out-of-court restructuring. What made that transaction so successful when you look at the other? There you had an owner, right? It was not a sponsor. You had the family, phones. So there's a couple things going on at the same time. We had flexibility, we had time and the company was performing. So you had everything going up into the right. And so it was very clear. We were prioritizing. It was also very clear what they were prioritizing. We were able to cross those actually pretty easily once we got to the right spot. But to get the chess board set up so that you could actually have that negotiation to get people to yes, took some time and took us eight to ten months to get there. But I think once the chess board was set up right and the asset was in the right spot, we had very smart people both in credit side and the company side sitting across the table. And it was relatively easy to get done because it was the right deal for both. On the second part though, I think to Zool's point, what I see people doing frequently is being too cute by half. And I think this whole on the smartest guy in the room really does bog things down. I think more people can get away with that and just get to the deal. The better it'll be. We always had personalities in our restructuring world. But you feel like now we are. I actually think we have fewer personalities, but you have more people trying to outsmart each other. Like when I got into the business, it felt like the personalities were loud, they were screamers, they used to threaten people. It was a different world. It was a world that was born out of bankruptcy court almost where and there was a lot of lawyers. I think now it's more investor types. I'll just try to outsmart each other. I think that's right. If you look at people's backgrounds that came from what they've grown up on the buy side now, they understand they're fighting for that last half point. Very hard. And that's what they've been tasked to do by their partners or their founders. And I get it. It's just a juice worth to squeeze type stuff. But ultimately, they've made that decision. That's where they want to take this. And we'll see. Over time, as litigation bills pile up and all the rest of stuff, we'll see where it goes. That's where people's sweet spots are. And people go back to their DNAs. One of the things, because we grew up at Jeffries, our DNA tends to be very capital markets. If you can see where our mindset comes from, our structuring, we were trained around capital markets issuance. We weren't, they just trained around bankruptcy or anything like that. So I guess, train to look for solutions. Yeah, exactly. I think that's trained as well or whatever. It's been good training ground for us. And it's made us flexible in terms of whatever the solution set is, we can figure it out. And we've also been trained around bankruptcy law. Everyone in our group can testify. If testified is experts in chapter eleven, which is not the most fun thing, but it's a skill set that you have to have if you want to get to the end game. And so I think all of those things have been super additive towards us. So now if we zoom out a little bit from the company versus land or dynamic and just look at the, what the market is signaling more broadly right now, I just want to ask you a little bit about software, right? Because for years software is viewed as one of the best credit investments. We had low default strong cash flow significant equity value. And I'm curious to see what you think about the current pressure in software. Do you think it's more about uncertainty about exit valuation equity cushions rather than about credit fundamentals? I think that's right for the most part. I think what you really have seen is because of everything that is happening around the risk associated with AI on business in general. And because people have come to the realization that AI may have a dramatic impact on a vast wealth of the SaaS marketplace. There's been a fundamental revaluing of all of those companies. I wouldn't say it's without regard as to how impacted they're going to be by AI or not, but you have seen a massive rewriting in some cases fairly, in some cases probably unfairly. And it's mostly about refinancing risk and enterprise value in the future as opposed to all of a sudden people woke up and said there's no cash flow. So I would contrast it if we go back and think about the great financial crisis, for example, where you had a dislocation in the economy and you had a bunch of cyclical businesses, all of a sudden after restructure, it was because fundamentally they're demand dried up and their earnings power collapsed rapidly, thinking chemicals, metals, building products, etc. Software hasn't had that happen where all of a sudden everyone woke up and a bunch of software companies have lost lots of contracts. But rather people are sitting there saying these businesses used to be worth 20 times EBITDA or some multiple of ARR. And now with everything that's going on, how should we think about what multiple this business will sell for three years from now when my debt potures? No one knows the answer to that question. And so it's a challenge of, is this company going to be worth the debt? Is it going to be worth less than the debt? Is it going to be a business that has a long tail, a short tail? And these questions are questions with, it's not even like what I'll call the evolution that we saw in media, right? Where it used to be that we were a world of newspapers, magazines, yellow pages, radio and television. Those businesses 25, 30 years ago were fantastic cash flow monopoly businesses. The local newspaper was a great business that you could add a lot of leverage to. And Craigslist came along, disintermediated. And those businesses have solely gone from being great businesses to becoming okay businesses, to becoming businesses that in many cases like yellow pages no longer exist. And I think people look at software and have some of the same fears. I don't know that anyone knows yet how to pick exactly the winners and losers, which is why you've seen this broad selloff. And also while there was a lot of equity in these deals. And so you may have a business that seven or eight times levered, but it has eight turns of equity invested in it. It wasn't that it was a 50% loan to value deal when it went to market. The problem is the day after the deal closes that equity's gone, right? It's like the cash is in the company. It was used to buy the company. So the only risk dollars left inside the enterprise is that loan. And I think you also have a setup where the interest of the equity and the interests of the lenders may diverge pretty significantly because the equity may need to invest significantly in order to create a new moat in an AI world. And the lenders may say, I don't know that I want you to do that because it's got a high degree of uncertainty. And if you just run this business for cash, I think I can get repaid. Maybe you can, maybe you can, but that is going to create, I think, a lot of tension as we see this wave of, and I don't think it will be LM's like we saw in this past couple of years. It's going to be a lot more around what do I do with the maturity in 2028, 2029, 2030? Do I extend two, three, four years? And what am I extending into? And what are the terms of that extension look like as opposed to I need a bunch of new body because the business is bleeding and I'm waiting for the cycle. It's always hard to disprove a negative. We have 22 software bankers. Molyce may be your prepared. Yeah, we brought over the team from SVPA a couple of years back. And we spent a lot of time with them. And the one of the great things being a capital structure banker at Molyce is I don't really need to know a ton about an industry. I have an industry partner. He's with me on every deal. I need to know my product. He knows his industry and we go at it and attack together. I think it's going to be very difficult to figure it out. This is going to be about time. These are tough businesses to kill, right? The cash loads are still occurring for until they're not. So I think this is going to be about a play for time. And I think what you heard between the lender point of view and the sponsor point of view is probably going to come to fruition. And now if we stack back a little bit from where the market is today, I'd love to spend a few minutes with you and ask you about your outlook. What could shape the next phase of restructuring? Without making any forecasts, what are you watching more closely? and that today's market is changing direction, both in terms of credit conditions or the pace of restructurings. - So I don't think what drives restructurings has really changed over by 25 years. It's what is economic sentiment, outlook, look like? What is availability of capital look like? And where is the overall rate environment? And then industry-specific wise, what disruptive factors are going to impact one industry or another, that's separate from sort of cyclicality. That is more structural. So we're all talking about software today. We could have been talking about-- - The income. - How long have you been talking in 1999 and 2000? We could have been talking about old media. That really was a great financial crisis. It was the catalyst around a lot of those situations like newspapers, magazines, radio television, etc. There's always technological disruption that is affecting one industry or another. That's always a little hard to forecast. We knew the answer to that. Again, we were doing something else. But it's something you always want to keep an eye on. But then I think the broader macro factors are the same that they've always been. - I think there's a question of when the pushback against the documents is going to happen from the investors. This is not about what is the next injury to hit what have you. I wonder if there's going to be technological changes as people try to on the original investor side pushback against documents. I'm keeping an eye on that because I have heard some rumblings around that. I think that plus-- - In the primary market, you mean right? - Yeah. - That has obviously trickled down effects. I think that plus how lenders deal with the increasing process costs and the face of AI technology is going to be the two things that are interesting to me going forward, like a very macro perspective, and how it affects our industry specifically. But then we're always going to have episodic issues. When the question is, can this economy hold on long enough? Is it recession? How does that play out, job loss? All those things are-- - You're just racing higher. - Of course, all that. That some economists could probably come in here and round a lot. But from our industry, how structuring the manifest is going to be what's the setup of the documents, where the capital structures change from this fat, first layer to something else, and then what, if anything, is going to be done around process costs going forward? - I think the process cost point is a really important one, because-- - You talk about LME, because we already know about chapter 11 being pretty expensive. You're talking about the LME process. - No, I'm talking about chapter 11. - Chapter 11, okay. - Because I think part of what has driven so many LMEs-- - Is the cost of expensive? - It's cheaper to do an LM transaction than a chapter 11. - Exactly. - And chapter 11's have become so expensive, that you now have people reaching for other alternatives, right? NFEs or UK restructuring plan. The idea that US LMEs would ever consider a form of restructuring implementation that wasn't chapter 11 is shocking, right? - Exactly. - Because if you think chapter 11 was always viewed in many ways as the poster child for how restructuring should take place, because it was a rehabilitative process and not a foreclosure process, right? The criticisms of many other-- It's all Vincere James was that they were not rehabilitative. They were more-- - More liquidation mode process. - Correct. And so the fact that people have now looked at chapter 11 and it's now we should go find somewhere else to implement is staggering. And because there are such powerful tools available to companies and stakeholders in chapter 11, I think the global automatic stay that is generally respected is such a powerful tool. The sophistication of dip financing is such a powerful tool. - Rejecting lease is a conversation. - Yeah, there are things in chapter 11 that are still way better than what you can do in other jurisdictions, although other jurisdictions have tried to copy some of the things in chapter 11, but the costs are such that it is forcing people to either look elsewhere or to implement chapter 11s in what I would call suboptimal ways, because they don't want to incur the burn rate of staying in bankruptcy one day longer than they have to. Even if it means you forego the optimization of the business as a result and you'll say I'll figure it out later or I'll just live with the higher costs or whatever it may be, because the offsetting process cost burden is so significant. And for the most part has to be funded by the full-chrome security. - Security is whiting all those checks. - I'll get out quickly because you're eating a hundred recovery. - That goes back to the fat-first thing, layer, right? If it wasn't the full-chrome and it was just funding dip. - Right, they wouldn't. - They wouldn't, exactly. And so I think what's going to happen is eventually somewhere in the milieu, someone is going to put pressure on the process cost and I don't know where it's going to come from yet. - I was also starting in 2010 covering this market and there was no talk about chapter 11 being inexpensive then at that point. People were not saying, oh, we're not going to fall because it's expensive. There were a lot of fighting. Peabody, TXU, ArchCole, all the companies that just went through that process, Jenner. - So Peabody, Peabody I represent the same thing, right? The dip lender wasn't the one who was wearing that. - The way it's a different set up. Value was below at the end. - I have two more questions. If you were advising a sponsor or a board today of a stress company, stress this stress, what months had with you encouraged them to adopt, heading into the next 12 to 24 months? - Flexibility. I think you have to be very thoughtful about understanding all of your options because given all of the external events, we have seen, it seems like it used to be one big external event every five years. It feels like we have one big external event every six weeks, right? We went from SaaS apocalypse to the Iran War, to the maybe the war's ending, to maybe the war not ending, to the disruption that we're all going to see from generative AI, to Venezuela. There's something that seems to be a big macro factor happening almost on a monthly basis. And so being flexible in your approach, so that you don't get too anchored to any one path, so that you have the ability to change your approaches to the facts on the ground change, I think is going to be very important. And then knowing how to balance the desire to be constructive and collaborative with your lenders, while making sure you have alternatives away from them so they can't take advantage of you, it's no different than it would have been 12 to 24 months ago, right? I want my clients to have a clear view of what their prioritizations are. Now that can change that, but you want to have that list of do I want term, do I want liquidity, do I want discount, do I need something else, asset sale, flexibility, whatever it may be, you have to have that and that should be on your whiteboard and keep thinking about those things. And then we'll find the right time to transact, but know what you want. I'm curious on this, not what keeps restructuring intellectual interesting for you after all these years. It's a quick question if you have a quick answer. I think it's just for me, it's learning about new businesses and new industries and having watching the deals evolve. It's not you're not talking to the same tan issuers about the same thing every day. It's like a different company, different industry every day. I don't like knowing too much about the industries to know an inch and nothing more. I think what keeps this interesting is going back to the culture for me, being part of a team success, having a team that and partners that I care about is interesting to me. And I think no one's ever going to hire me to go sell their company. It's not by DNA, it's not who I am. It's not what I do, right? It's not my personality. But I think this kind of fits with what I like to do, a multi-party negotiation, games of strategy, that's what this all is. And if you can wrap that in a culture where you're winning alongside friends and teammates and a firm that has that mentality of going out and winning as a wolf pack, that's what does it for me. If it was just me, a solo, shingle guy, I would probably have been gone a long time ago. And finally, what advice would you give a young banker entering restructuring right now that you wish you had received earlier in your career? Yeah, I think as I do the same advice I did get earlier in my career, that's good. It's good. Which is, you got to be intellectually curious. You got to really care about what it is that you do. And you got to find ways to connect with people because I think Brock said it earlier. Ultimately, this is a business of trust. And it's very hard to trust someone you don't connect with. And so being someone people could connect with and can feel comfortable with a really important attribute to have. I was actually going to call with somebody today who was just starting out looking for advice. It's one of the things I like doing. You got to, it's kind of like the company with the prioritization, right? You got to prioritize what's important in your life and get to know what you're good at and see if you can cross with those prioritizations. And if it works, it's great. And if you're not built for it, go find something that you're built for. But I think finding out who you are, what you like, being in a culture, I've used that word too much. But he being a culture which you feel comfortable, which is going to bring the best out in you is super important. And then you got to figure out if you like what you do. And if you can hit like all those check marks, congratulations. You won some kind of lottery. I'm not sure that this is the lottery payoff that we have. something and so go with it. That would be my advice. Thank you so much for everything on this note. We're going to wrap up today's conversation. Thank you for your insights and for your perspectives. Thanks for having us. And thanks to everyone for listening. As always, you can subscribe or to download every episode on Apple or Spotify and find thousands of articles with insights, research and more from our team at thatwire.com.