State of Distressed: Mudrick on the Post-LME Maturity Wall

Welcome to FICFocus, where Bloomberg Intelligence fixed income credit currency and commodity strategists and analysts discuss their short and long-term views on debt markets and issuers. Now here's the Bloomberg Intelligence FIC research team. Welcome listeners, Phil Brendel here of Bloomberg Intelligence. Megisa Bluku and I are thrilled to bring you a special episode of our State of Distressed Podcast this month that includes our interview with Jason Mudrick at the Beard Group's Distressed Media Night on May 19, 2026. Enjoy. Good evening all. Thank you for joining us tonight. I'm Phil Brendel. Tonight, my colleague, Megisa and I, both of Bloomberg Intelligence, are thrilled to be kicking off the Beard Group's second Distressed Media Night with our interview with Jason Mudrick. Jason, welcome. Thank you, Phil. With this crowd, I'm sure no introduction is needed for Jason, but here are me a moment just as an outside observer. Jason, your career path strikes me as someone who does not waste time. You got your Bachelor of Arts from University of Chicago, your JD from, or three years later, joined Contrarying Capital Management in 2001 and there you manage money and by 2009, you launched your own firm, Mudrick Capital Management, which you continue to leave. So know that you're active in the corporate credit space, but perhaps you can just provide us a description of Mudrick Capital today and your target investment opportunity set. Sure. And thank you everyone for having me. So Mudrick Capital Management is an investment firm based right down the street. We have about 35 employees. Most of us sit here at Midtown Manhattan, but we also have a small office in London. We manage about $3 billion in all we do is stress and distress credit. So we'll talk to you today about liability management. It's a core focus of ours. This is all I've done for 26 years, not liability management. It's newer technology, but distressed credit investing. Yeah. And so one of the matters in which I witnessed your firm was party city, the first chapter of 11 and there an imposing group of four capital research silver point Davidson, Campner and Monarch Capital held the dominating 90% of the first lean notes had backstoped $150 million a dip with a 10% backstop fee. Classic case of stakeholders putting new money into a rescue company, but in this case, it was a good example of the self serving nature sometimes is you're rescuing your own big stake in the company and they were taking care of themselves. Long story short, your firm was the only one objecting to the $15 million fee and plan confirmation where nearly the entire company went to the new money. And so I'm not going to live party city, but it was one of those opportunities for me to see that much of capital is no shrinking violet. And I guess a good place to start as we're going to go segue into L.A.M.E.'s is how do you view employing litigation as a core to your strategy or is it kind of a necessary? I would say it's more of a necessary evil. Party city was for those of you that follow the stuff was a judge Jones, the Southern District of Texas. Jones is no longer on the bench as everyone knows. There was a lot of form shopping back then in terms of how aggressive debtors could be with their plans and party city was on the very far end of the spectrum. So look, when we feel like we're wronged, it's important to protect our rights, our clients rights. I think there's this is an iterative game. We're in all of these deals and I think it's important for us or people to know that we're not going to get steamroll and that we will litigate. Interestingly, sometimes better lucky than good. That case was one of the aggressive uses of backstop economics, but the creditors there that had the majority had like 91% of the credit. They were backstopping the entire facility, but they weren't really backstopping anything. As everyone knows in bankruptcy, you need to get paid reasonable compensation for services provided. They weren't really providing a service. We had told them we owned another 7% and told them that we were going to participate. They were really backstopping 2%, which was unreasonable. I said better lucky than good. The backstop economics they received was all post-rear equity. We ended up litigating and settling for cash compensation. Or art, that will happen. For about half of the value that we view that they had extracted from us. As everyone knows, party city ended up liquidating and the post-regequity ended up zero. Sometimes better lucky than good. We recovered more, getting screwed there than everybody else did, doing the screwing. Fascinating. Let's kind of expand more on the LMEs. You mentioned that that's a big focus. What crypto risks do you think make certain investors particularly valuable in the space? Maybe call off specifically? What do you think the edge comes from? Everybody's looking at the same cases. The docs are what do you think makes a difference? Library management transactions are fairly common today, but it is newer technology and it's rapidly evolving. I do think it's a very specialized skill set, knowing how to navigate these. Structuring around an ever-changing and fast-changing legal environment as loopholes are getting closed and new ones are getting opened. I would say it's difficult to participate in liability management as a tourist. You need to be a specialist. That's one. Two sizes important. The deals are more mainstream and the percentage of them that are non-parata or then involve disparate treatment among similarly situated creditors is rare than it used to be because the technology is evolved. Defense mechanisms, the cases have worked their way through the system and loopholes have been closed. But it's still the biggest risk in liability management besides the credit selection is that you're on the wrong side of a non-parata deal. And the best way to insulate yourselves from that is to be large because you need to get to requisite lender consent and the best way to do that is to focus on the largest lender. So if you're a $3 million CLO in a $2 billion capital structure and you need to get to 51%, nobody really cares. But if you have $200 million of a $2 billion capital structure, it would be challenging for them to exclude you from the LME and they would certainly have a lot and curl a lot of litigation risk. So it sounds like you favor more concentration as opposed to diversification in the portfolio as somewhat. Yeah, you can't be in LMEs and be small. You have to be large and you have to be sophisticated and it helps to be a repeat player. The advisors are the same advisors, the same legal advisors, the same financial advisors, oftentimes a lot of the same creditors. So it's like I said earlier, it's an iterative game and I think that helps if your view is a constructive participant in these things. Someone that leads the deals and not follows, someone that's creative around structuring and again, someone that it's painful to not include. So being in that large position, how do you think about maximizing the benefits of joining a co-op is having this all encompassing deals that you mentioned, but also preserving severability to maximize your own economics. Is there ever a concern that maybe you'll get in box then before the opportunity is that is clear if you are organizing thoroughly, is there such a thing as organizing thoroughly? It depends on what you're trying to accomplish. If you're trying to accomplish a non-pro-radity transaction, then cooperation agreements generally aren't going to help you. You want to find a small group of lenders that control 51% and just work with that group. If the idea is to do a parrata deal, cooperation agreements insulate you from sponsor on credit or violence, that's the primary reason you'd want to co-op up is to lock arms and all joint forces against the sponsor so they know they can't divide and conquer or offer one group of certain deal and another group of different deals. Do you think it's becoming, the market has become, is becoming more collaborative among those repeat players? Yeah, for sure. I mean, this technology is relatively new. I mean, liability management or similar type of transactions have been around for a long time, but they were few and far between like one a year or two a year. I think we did one of the first true LMEs back in 2013 and not your daughter's genes, but it was like the only one that year. During the pandemic, there was a spike and they've really become quite prevailing since interest rates started to normalize in 22. Okay, so what's happened is you had very aggressive transactions early on, sort of the wild, wild west, the J crews of the world, what we tried to do with not your daughter's genes. And what's happened is a number of things, but passive investors have gotten smarter. The legal franchises that help facilitate these deals have gotten smarter. So what ends up happening now is groups form earlier and they're more inclusive. Because the advisors want to be hired. So there's usually a story leaked in Deadwire or on Bloomberg or on Reorg Research. And now everybody knows you need to be in the group and not out the group. So every lender, including passive lenders, call up Gibson Don or call up Davis bulk, whoever's rumored to be organizing the firsts and you want to get in the group. You want to get in every group because you don't want to be excluded. You also have cooperation agreements. Cooperations agreements have been around forever, but the use of them and transactions like this is a newer phenomenon. So you have these defense mechanisms evolve. And then you have loopholes being closed. You have cates being appealed and remanded back. And the law is changing. Like I said, the lawyers will always figure out new loopholes and new ways to effectuate these transactions. But it's less wild, wild west. You're seeing more parrata transactions. But non-parrata transactions are still common when we did a very aggressive non-parrata transaction in tropical Canada just last year, about a year ago. So they still happen, but they're less frequent. Do you have a sense as you've done many of these? What may be the tell tell signs early on that an LME may be successful? And I mean, that obviously depends on what type you define success and maybe different for you than for the sponsor. But is credit or occasion part of it? Are you able to tell how does it evolve across this world? How are you defining success? I don't I'm curious how you want to define it. I know the participant is defined differently. That's why I'm curious how it's IDF is presumably it's making money. So why is an LME successful if the goal is making money? There's two ways you can make money. You can get refinanced out. Right. Look, all in LME is is effectively kicking the can down the road. It almost always involves a maturity extension. Sometimes it involves a liquidity injection. That's what the sponsor gets. They get more time and they get more money if they need it. What we as and sometimes they'll get discount capture of the exchanges down at 90 cents or it's 70 cents or something more aggressive. What what lenders get is covenants. Right. Sometimes they'll be backstop economics of changing coupons like that. But usually what we're trying to do is solidify where we sit in the capital structure. And that's the quid pro quo that we live in a covenant like world. And that's why you can effectuate LMEs because there's no covenants. So you can make it particularly punitive to not participate in a deal out of court. Right. The reason LMEs can happen without covenants is you don't need bankruptcy. Traditionally with covenants you would need to go into bankruptcy court. Get your two thirds vote and then you could force the other third into your deal. You have to do that in court because you need a court to tear up the contract. It's a court of equity. It's bankruptcy. Out of court, every lender has their contractual protections. So you have a holdout problem. Right. Like if I mature next year and everybody else wants to extend for two years, I don't know. I just sit around and be the first maturity. Well, what LMEs allow you to do because you don't have covenants is you can make it so punitive for that person to not participate at the better off participating. You can extract all the assets dividend them out into an unrestricted subsidiary and then let everybody that participates in the maturity extension exchange back into the collateral they thought they had. Right. So what we get when we do these LMEs is we put covenants back into the documents to make an LME 2.0 impossible or much more challenging. You move the lender thresholds, the requisite lender thresholds higher, you close the loopholes, you put surrogate protection, move into protection, j-group protection, etc, etc, etc. And what then it gets back to distressed 101. Like distressed investing historically was valuing the business, putting the capital structure on the business. Then you say, well, this senior debt's covered and this debt's the full groom and this debt's out of the money and you pick your risk tolerance. Problem today is you do that analysis, you value the business, which is hard enough because you're not valuing what it's worth today. Your value would, it might be worth three to five years from now, post the restructuring. You lay around the capital structure, but then you wake up tomorrow and you thought you were creating the business for a billion and it turns out you're creating for a billion five because they borrow 500 million from Angela Gordon and slot it in senior to you and your first lean debt is now second lean debt or you wake up and half the first lean debt is swapped senior to you and now your second or third lean debt. So sorry, was drawing the question. No, that's perfect. The question was about what's successful. Oh, yes. And so then you go back to distressed investing and then the question is what are you trying to accomplish? Are you trying to own the business? Okay, or are you trying to get refinanced? And it's a very company specific analysis, right? So we did an LME last year in Cox Media and we thought Cox was solvent. They just needed more time. Okay, we gave him an extension, we gave him some more money. As soon as we announced the deal, took the risk of non-pro-rata treatment out of the market, put covenants in the document, gave the company the financial flexibility and the time to address their capital structure and the loan traded up 15 points. And with a year of coupon and 15 points, we made 25% out of year and moved on, never owned the business. Okay, compare and contrast that to another LME. We did a year and a half ago incision. That post LME debt is trading at 40 cents. The document's been tightened up. So the 40 cent analysis is the creation value. It's about a billion dollar creation value. And we expect to own the business. That's a platinum equity owned business. We don't think they'll ever be able to refining out some will on it. We think we'll make much more money incision than we did in Cox. But it's going to take a lot longer and we're going to own the business as opposed to just selling the debt in the secondary market when it traded from 80 to 95. So both made money. Each analysis is what are you trying to accomplish? How will you make the most money? What's the best risk adjusted approach to the investment? No, it's a great point because LMEs when you think about success of an LME, it depends on your perspective. For a company, it's about staying alive, maximizing the enterprise value. And for a distressed investor, it's really about, yeah, I'm putting money in, what's my rate of return? And maintaining the flexibility that maybe I'll exit tomorrow, maybe I'll exit three years from now. It's kind of fascinating. But I think it's something that everyone should be considering when they get involved in LMEs or approving them or not approving coming court. One question, AMC was a name that you were really active in. And I'm really curious because I don't think it's fully appreciated, but they're having a public equity. You really was a huge windfall for AMC and all the stakeholders there. And I'm curious, is that underestimated by the restructuring committee now that in this world of private equity and we're just seeing companies not necessarily issuing public equity? And I'm curious what your thoughts are on that because that it's a nice avenue to have for findings. Yeah, look, I think what happened during the post-COVID with the whole meme stock phenomenon, the markets aren't going to forget that, and we see pockets of it. But I do think it was for the most part of moment in time. And the reason it worked for AMC was usually we have a publicly traded equity of an insolven company. Okay, so AMC's second lean debt was trading for five cents on the dollar, five cents, not 55. This company was two weeks away from going bankrupt when we rescued them the first time. There was four transactions we did with AMC, the last of which was an LMA, the first of which was a rescue financing, but they had an irrationally high equity value because it was beginning to become a meme stock. And then it became the poster trial of meme stocks along with GameStop. At one point, AMC was being valued at higher at a higher valuation than 60 percent of the S&P 500. And it was insolven. And today, the equity value is diminimous. And that's after all the equitization that they did. So they issued a tremendous amount, billions of dollars of equity to pay back debt. And that created a situation that most of us have never seen. Could it happen again? Sure. I think it's, I think it was mostly a moment in time. Most companies that are insolven are going to have $50 billion market caps for you can issue billion dollars of equity in days to pay off debt. One other aspect of that restructuring, and I'm curious if you can comment on, is like, you had a relationship with the management team there. And I'm curious from a restructuring point of view, how important is that as an investor to have a direct relationship with the management teams as opposed to a lot of times it's through advisors and I'm curious what your thoughts are and the importance of that. It's a stylistic thing. We think it's very important. More than most distressed firms tend to get very close to management teams, but we're also a distressed for influence distressed for control type strategy. So I've served on over 20 boards of directors and close to 100 creditors committees. It's an active style as opposed to a passive style. So again, I think it's a stylistic thing. Oftentimes when you get very close to management, you get restricted. So you have to have a capital that can have longer lock up investments. But at the end of the day, it's harder in LMEs because most LMEs are private equity owned businesses. And sponsor usually tells the manager team not to talk to creditors. AMC was a public trade-accompanied. They had an investor relations department. They had a CFO. So it was easier to get close to management and try and understand what their motivations were, which was important in AMC because what drove our initial investment there was a belief that management would do basically anything to avoid bankruptcy. And the only way you could really, usually these management teams, they want to avoid bankruptcy. But then they're looking at their long term incentive plan. They realize it's underwater. They know that if there's a de-leveraging event, the management will get a new long term incentive plan that will be valuable, whereas their old one is invaluable. So at some point, everybody, usually the advisors that will make the most amount of money in the restructuring, everybody's telling them, you're about better off putting this company in bankruptcy. And the board wants it in bankruptcy to cover themselves. So there's a lot of momentum once Kirkland analysis hired and others to get these things into bankruptcy. And in AMC, you had a management team that desperately wanted to avoid bankruptcy for whatever reason. You would not have known that if you weren't close to the management team. So I think it it helped us there. But oftentimes you don't have access. You have access through the normal channels of management presentations to creditors and financial visors and conversations with the sponsor and often management is sort of kept kept away from lenders. Until there's a point in time where they realize there's going to be a change in ownership. And then you see him flip. But that's not happening with enemies. There's an extension of maturity. When there's a restructuring at some point they sort of realize there's going to be new owners and and you know it's usually in their interest to friend you. Looking forward, I'm wondering what you think could be the large could have the largest impact in the LMEs phase over the next few years. I don't think the technology that people use to affectuate LMEs is going to be forgotten or go or go away. But I do think that the prevalence of LMEs is somewhat of a moment in time. It's not one year probably is a five to seven year phenomenon, but all of these over leveraged balance sheets. So most of the LME candidates are pre-2022 leveraged byouts. So this was an environment where the market was comfortable with more leverage than they are today because the cost of debt was much lower. It was 50 basis points 1%. Now it's 4% or 5%. You can afford less. So six turns debt to EBITDA was the norm before 22. I had new issue and now it's closer to four. So you have a lot of impaired balance sheets that aren't refinanceable today. But you have public equity valuations that are still very high. So the sponsor is saying, I can't refinance this today, but my equity is in the money. So I need more time. I need more time for rates to come down and need more time to grow into the capital structure to run an M&A process and sell the business for 12 times. So your six turns lever, you can't refinance, but the business is worth more than six. You don't have a solvency problem. You have a liquidity problem. You have a refinancing problem. So that's the dynamic that we're in today. And with a covenant light nature of the loan market, most of these better quality businesses can orchestrate this extension one time. Okay. The problem is when you get to that new post LME maturity wall, it's going to be much more challenging if we do our jobs right to do another LME. So at some point, all of these LMEs, all of these legacy LBOs that are going to get one extension are going to either file bankruptcy, where they're going to get refinanced. And I think the biggest thing that's going to impact the LME world is the new maturity wall and not the maturity wall of pre-LMEs because a lot of those will extend, but the post LME maturity wall will look like traditional distressed investing. These companies will either file or they'll pay you back. And then there'll be no more LMEs. I want to get one last question and I'm going to kind of do it as two questions. But I want to hear your outlook for what you think is going to be happening in the restructure world maybe for the next year. You probably have a good idea. But then also, you know, from your experience here, like managing money and distressed space, could you have a rule of thumb that like you never cross? And you know, this is something that, you know, someone might argue this is a great investment, but you're like, if it doesn't meet this, I'm not going to do it. So your first question, the next year, I think we're in a world of LMEs. The economy is still robust. We'll see for how long. If we go into recession, I think they'll be, you know, spike into faults. They'll be more defaults. But as long as things stay as they are, I think most of the higher quality bigger businesses are going to get extensions or maturity. And I think that if you look at our pipeline and what we've been working on, almost no debt for equity, you know, situations, everything is an LME. We're working on paratin right now. Everything in the pipeline are situations that are pre-LME, post-LME, but not imminent default. So I think the default wave is a few years out unless the economy changes. In terms of rule of thumb, I mean, there's a lot of rule. There's no hard rule of thumb because you have to be opportunistic and there's always exceptions. But there's hard, expensive lessons that we've learned over the years that obviously guide our investment thinking. One of them is in distressed small companies are challenging. I used to have an entire business investing where the oak trees didn't go because we were smaller and could be more nimble. These bankruptcies cost a lot of money today. When I started in the business, a bankruptcy would cost two or three million dollars and now it costs 30 to 50 million dollars. So if you have a small cap company doing 20 million of EBITDA, you can't restructure that. And a lot of the mistakes in our portfolio, there aren't mistakes in that we've lost money. There are mistakes in that we can't exit them. And our holding period, which is spark supposed to be three years turned out to be 10 years. So we try and avoid small cap. I think it's very challenging to do distressed and small cap. And we define small caps as anything less than a billion dollars. So these are bigger businesses now. That's great. Thank you so much, Jason. That's a pleasure.