How to Navigate Bankruptcy and Restructuring in M&A

23:56If you're dealing with a founder of a company, that can be very challenging. but the name of the game in restructuring is figuring out how to benefit everybody in a way that works. Is there a strategy of dragging things out so it can be more aggressive to negotiate where the bank lender doesn't want to go through a bankruptcy process because it's a headache for everybody? Wait till it's sort of, hey, I need you to cut down this debt or use that as leverage to reduce the debt. Definitely. Timing is a huge element of this. Again, this is part of a plan is when do we go? It's not just, oh, go as early as possible.

24:31It's when do we go and approach them? And what is the situation that, what is the proposal that we approach them with? Companies tend to wait too long because they are usually unfamiliar with bankruptcy, are concerned about the impact of the business. Often the people, the decision makers, frankly, have equity at stake and want to preserve equity, which is sometimes a challenge to do in bankruptcy. They're often waiting. They want to drag things out as long as possible. But what we see is sometimes lenders jump the gun and lenders will go too early and they will put the company into a, the company doesn't have to do a transaction.

25:06Maybe they would in six, 12, 18 months, but going too early can actually harm the process and make it more difficult. If the company says you don't have any leverage over me right now, there's no default. The chapter 13? The lender? Yeah, they can. No, I don't mean to initiate the chapter 11 case, but to initiate restructuring discussions. What often happens is these kinds of situations. The company's doing fine. The debt is trading publicly at a fine price, not distressed, not stressed. And then something happens. The prices come down. The debt trades. It trades the people who are practiced in the world of distressed investing.

25:43They buy the debt up at a relatively cheap price. And then they're ready to act. They're ready to engage with the company to then turn their 50-cent paper into 75-cent paper. That's a whole other element. Somebody can actually sell this debt for cents on the dollar. Now you got to deal with somebody that's more ROI driven. Right. And debt trading is a whole topic that is very important. That's been a really interesting, and it's been pretty well covered in the FTX case where this wasn't financial debt that was trading, but there's just regular claims trade. Customers are able to sell their customer claims in the open market.

26:17And there's a lot of funds that very early on in the case went and bought up a ton of customer claims on the public market, on the open market, and have turned that into a very successful return on investment. But yeah, all of the publicly traded debt for large companies gets bought and sold and traded. And it usually makes its way into the hands of people who are familiar with restructuring, familiar with the bankruptcy process. Not necessarily vultures, not necessarily lenders who want to do wrong by the company, but people who know their way around the system and can use the system to their advantage.

26:55They might come in and say, okay, I'm ready to engage with the company about what a restructuring looks like. Because the debt is trading low. The company has serious problems. The company needs to face these problems. And we're here to help, but we're not going to be here to help forever. So the company needs to engage with us now. And then the company has to say, okay, what are we going to do? What are our options? What kind of leverage do we have? Are we willing to engage with them right now? Do we feel like we need to wait until something that's on the horizon has happened and then we're ready to engage?

27:24So again, this is all the strategy. And each case is different. And each situation is different. You got to know who you're dealing with. You got to know how you're going to do it. And you got to start thinking about it early. Okay. Timing is going to be a big thing. Early planning. But even with that, there's still an element of timing. Going back to our private debt case over here example, that we still try to get a sense of early of what we can do. We probably strategize, even get some outside perspectives and what are different things that we could propose. Hopefully try to clear things off early.

27:58but if that doesn't happen, one of the elements too that you mentioned, maturity. So here's a debt that sort of has an end date that needs to pay out basically. Yeah. And then that sort of, you can get a sense of planning then that, hey, here's something that's going to come up and we need to act on it. It's not natural just to try to refinance that debt. It is. The problem becomes when you can't refinance it. Because your overall picture doesn't look as good. Exactly. So they said, hey, hey, nobody wants to refinance this debt. We got a problem. Either nobody wants to refinance it or the price is not right.

28:31And for whatever reason, you can't refinance it. Then you have to say, okay, what are we going to do now? When you said liability management transaction, tell me more about that. This is something that it's become a phenomenon a little bit in this business and in the restructuring tabloids or whatever you want to call them. There's a ton of focus on all of this and it started to make its way into the more other financial press. I don't know if it's familiar to you and your listeners from the M &A side. But basically, it's when typically a private equity sponsor, although it's not only for private companies, it's also for public companies, but the owners of the business engage in some sort of transaction to manage their liabilities, as the name suggests.

29:11And you can have liability management transactions that are plain vanilla. You would just call restructuring or exchanges of debt. But what people really mean when they talk about liability management transaction is some sort of either coercive, transaction with a subset of your lenders that favors those lenders over other lenders, involves amendments to the debt documents, involves super senior issuances, drop-down transactions, up-tier transactions, double-dip transactions. These are all the words that have come into the vernacular in the restructuring space over the last 10 years, which you can probably have a whole other podcast on, frankly.

29:50Can you tell me what some of those mean? I never heard any of them. Drop down. People love catchphrases and that's what these are. I love learning these catchphrases. Under a typical debt document, there's all these negative covenants about what you can and can't do as a company and your company group. And it's, you can't just go dividend all the money we give you up to your equity owner. And it's, you can't go out and raise a billion dollars of debt senior to us, or even Paris Passou with us, or maybe even Junior to us. What's Paris Passou? Equal in ranking. Equal in ranking, okay. This is a whole negotiation that happens when you're entering into this debt.

30:28And the negotiations are different, again, whether you're in the private credit market, whether you're in the syndicated loan market. These are all the S &C capital markets, leverage finance folks, like my partner Ari Blout and Neil McKnight. They're the ones that are typically negotiating all of these things when the debt is issued. And it's a whole negotiation between the lenders and the company about what you can do. Years go by and the company is maybe facing some distress or stress. And people start thinking, my debt, even though it's senior secured, is trading at 60 cents on the dollar. If I exchange my debt and somehow get senior on some assets that get moved, and even if I exchange that into a smaller amount of principal, I can turn my$0.60 on$100 million into$0.80 on$90 million.

31:25The question is, how do I do that within the restrictions of the debt documents? Yeah. Drop-down transaction is moving assets in the collateral package for your existing debt into typically a newly formed subsidiary that itself then issues debt to a subset of your current lenders where the lenders are exchanging their current debt. They're getting the new debt. Usually there's a new money component, which makes it worthwhile for the company because they're getting some incremental financing that they probably wouldn't otherwise have been able to get in the public market. And the lenders themselves have benefited because they've just, on paper, increased the value of their debt.

32:07And there's all these different iterations. That's a drop down. Up tier is, let's say you have unsecured debt, unsecured convertible debt. And let's say there's$500 million of it and I own$100 million. I take my$100 million of unsecured debt. I exchange it for secured debt in a lower amount, $75 million,$65 million. I give some new financing that's also in that secured debt piece. And all of a sudden, I've gone from unsecured to secured. So I've uptiered my debt. The company again has gotten some liquidity. And those parties maybe are perfectly happy. Of course, the people who are left behind might say, what's this all about?

32:52These liability management transactions, when they're super aggressive, have brought a lot of litigation. So the Serta Simmons case, which was a liability management transaction, went into bankruptcy, as often the aggressive liability management transactions do, by the way. And then there was litigation in the bankruptcy case. It went up to the Fifth Circuit. This was a case that got a lot of attention in the industry because the Fifth Circuit basically said that the transaction was not permitted. And that's just contract law. This is just interpreting the terms of the debt documents and whether what was done was permitted or not.

33:27And so this is, again, why having leveraged finance and restructuring lawyers at S &C, we have a generalist model both at the firm but also in the finance and restructuring group. the finance and restructuring lawyers are doing both the liability management transactions and the out-of-court restructuring and the in-court restructuring. We're a one-stop shop. Being able to navigate the debt documents in creative ways, but in ways that are going to work. This goes to your point about a chapter 11. You can't just do a transaction and say, well, maybe it works. It's got to work. Being able to structure these transactions has become very important to companies who are looking for ways to avoid chapter 11, bring in some liquidity.

34:05But of course, there's always a risk of litigation and that has its own. You got to make the cost benefit analysis. Yeah, quite creative between this example of a drop down and up tier. Well, I wish I had invented all of this. People have been doing these transactions for quite some time. Another famous, you know, you hear the names. Jay Crude was a very famous one of these that had a litigation over it. A lot of retail cases, frankly, but it's not just retail. This has become part of the industry. And frankly, it's become a huge part of the industry. And one of the reasons that people say bankruptcies over the last couple of years have actually not been as high as historically they tend to be is because of the rise of the frequency of liability management transactions and those largely deferring bankruptcies.

34:49Because as I said, the aggressive liability management transactions almost always end up in bankruptcy anyway, even though they're intended to avoid it. Those cases still file for bankruptcy, but it's smoothed out the waves that we were used to seeing post-financial crisis in 2014 to 2019 with oil and gas wave, retail waves. Those are kind of in some ways been smoothed out by these liability management transactions. You mentioned earlier pre-packaged bankruptcy. The way we think about a chapter 11 is you have three types. You have a pre-packaged bankruptcy. Again, we love jargon. Pre-packaged bankruptcy, pre-arranged bankruptcy, and a free-fall bankruptcy.

35:27Free-fall bankruptcy is in some ways the easiest to understand. That's when you basically have none of your stakeholders on board with what you're using the Chapter 11 for. Often those are filed in an emergency situation. Lehman is a classic free-fall bankruptcy. FTX, classic free-fall bankruptcy, because those were filed under circumstances where the most important thing was to get the company into chapter 11, and then you figure things out from there. Pre-packaged bankruptcy is something that everybody should be thinking about when, both on the company side and the lender side, when you're evaluating restructuring options, because the pre-packaged bankruptcy is the least expensive chapter 11.

36:09And as I said earlier, bankruptcy has become very expensive. And we can talk about why, but part of it is that the company is paying not only for its advisors, lawyers, bankers, often financial consultants, independent directors, and all of that. It's also paying the fees of the official committee of unsecured creditors, which is a statutory body that gets formed usually early in the case to represent unsecured creditors. They have lawyers, they have bankers, they have financial advisors. Typically, the company's secured creditors are also having their lawyers and sometimes a banker's fees paid, the company is taking on a huge professional fee cost to do the bankruptcy.

36:50So the juice has to be worth the squeeze. It has to be worthwhile to pay$20 million,$30 million in at least in our world, chapter 11 professional fees to do the transaction. And that's a question for the stakeholders, the creditors, the lenders who might be equitizing their debt through the bankruptcy may say it's not worth all of that. And maybe they just do some sort of out-of-court transaction. Or maybe they say, we want to do a chapter 11 because we can't get everybody's consent. The secured debt is too widely held. It's going to be too hard to get 100 % lender consent, but we have to exchange all this debt.

37:28So we want to do a prepackaged bankruptcy. In a prepackaged bankruptcy, there's no unsecured creditors committee formed because unsecured creditors are just totally unaffected, unimpaired, 100 % recovery, where either they're getting paid in cash in the ordinary course, they're being reinstated and assumed on the back end of the case. And all that's happening is up top at the financial debt and what we call a balance sheet restructuring. Those cases, there was a time when I was a younger lawyer, when people were filing one day prepackaged bankruptcies, that meant you were in bankruptcy for less than one day.

38:04You'd file the bankruptcy. You would then go to court later that day. The court would approve the plan of reorganization and you would have a moment in time of bankruptcy. That's great when you can do that. And when you're, you know, because there's minimizing disruption to the business. Again, worried about employees, worried about customers, worried about all of that. That trend, one day bankruptcy, seven-day bankruptcy. That trend has gone away for a variety of reasons. But now we think about prepackaged bankruptcies as taking somewhere between 20 and 30 days at best, which is a relatively short amount of time for a company to be in bankruptcy.

38:43And it gives the most certainty to the market. It gives the most certainty to the vendors, to customers, to employees. But at the end of the day, it has to make sense economically because you're not impairing any of the unsecured debt. Can't be a terrible situation. It's one that likely going to be the business from there. The business has to be strong. Otherwise, it just has to be that there's too much financial debt on the company. The interest cost is too high. And the lenders have to agree with that. And they have to say, look, we're willing to give unsecured creditors 100 % recovery, even though we secured creditors who are senior on the assets are taking less than 100 % recovery because we're turning our debt into equity.

39:27They have to be willing to say, this is the best way path forward. This is the best way to preserve value. This is the best way to return investment on our investment. This is the best way to pursue the interests of our investors and our LPs. Because at the end of the day, the lenders, they have their own obligations to their investors that they have to pursue. That's a prepackaged bankruptcy. We try to get in and out as quickly as possible, do the least amount of time in to minimize disruption to the business. Not always viable. Not always viable. Pre-arranged is, I would say, the vast majority of bankruptcies.

40:00That's when the company has done adequate planning, has engaged with their typically secured creditors, but doesn't have to be secured creditors, about a transaction in bankruptcy. And you come into the bankruptcy with that support, typically through a restructuring support agreement that lays out the basic terms and timeline of the case. Is it going to be a sale? Or is the company going to run a sale process in bankruptcy? Are the creditors going to credit bid? That's when you use your debt as consideration for buying the assets. Maybe you have to throw in some cash too, but it's mainly going to be debt.

40:34Is it going to instead be a plan case where there's an equitization of some sort? Is there going to be a rights offering? Is there going to be new money coming in? What's the exit financing going to look like? Those are the negotiations with the supporting creditors, and often your equity owner too, about what that bankruptcy is going to look like. And the idea there is, if you can, you try to make it a three, four-month case, which gives sufficient time to go through the due process considerations that are required to get the benefit of bankruptcy. Usually sufficient to market the transaction because one of the important things in bankruptcy is to make sure that there is an adequate process to make sure that the transaction that the company is trying to do is value maximizing.

41:18You can't just come in and say, don't worry, judge. Don't worry, everyone. We've decided. There's still business judgment. There's a huge amount of business judgment deference, but you have to be able to prove that as a matter of evidence in court. So there's somebody to come in and just put an offer to buy the company. Oh, yeah. This is in bankruptcy. Oh, yeah. Usually what happens if there's going to be a sale process, there's an organized process. People have to sign NDAs. People get access to the data room. We'll put in bids by a certain date. Maybe there's an auction. One of the interesting things for your listeners who are more in the M &A space is a little bit of unfamiliarity with the M &A process in bankruptcy.

41:57And we represent a number of potential bidders, we'll say, who don't know the process as well. And it's actually one of the things I really like is educating them about it because it's not that different. Bankruptcy is really a tool for implementing a transaction, whether it's in M &A. I have a competitor that I know is in bankruptcy. I call you. I said, Ben, I think there's an opportunity here. Yeah. I don't know anything about how we can leverage it, but teach me. What are we going to do here to seize the opportunity? Oh, exactly right. And one of the hugely important roles that a bankruptcy lawyer plays is educating the business folks about process.

42:33Because the process is a little opaque. It's complicated. There's a lot of jargon, again, being used. It does take some investment to learn the process, to learn the leverage points in the process. And it can take longer time sometimes than buyers or bidders are interested in taking. And it's all public. That's another thing. But at the end of the day, Chapter 11 is a tool for implementing a transaction, whether it's M &A, debt financing, equity finance, or a combination of these things. In any event, these prearranged cases, whether it's going sale route or a plan route, take strategy, take discussions with your lenders, there's pros and cons to each, and it's all dependent on the status of the business.

43:15And one of the things that, again, hugely important for our clients is S &C's ability, our group's ability to bring in our elite M &A colleagues, to bring in our elite capital markets colleagues, whoever it is, the restructuring folks sit at the center of it to do all of those transactions regardless of what it is. And we're there to be Swiss army knife type lawyers. We're there to implement a transaction at the end of the day. Do you want to give the example of how How you brief like this example of the competitors. Hey, I found out that they're going to bankruptcy. Like, how do I get in there and actually buy that company?

43:53Oh, sure. Yeah. Is it just, it's going bankruptcy. There's definitely a chance we can go buy it. Or is it sort of waiting for a certain flag to get lifted to say, okay, now they're taking bids on it. Yeah, there's a process. So the company files for bankruptcy. Usually right away, there's a sense of whether they're going to run some sort of organized M &A process or whether they're going a different route, like just filing a plan of reorganization to hand the keys over to the lender. So they can have a plan and they can do that. Or there is an alternative, like it goes for sale. So an insider like you could figure that out.

44:23Oh, yeah. The great thing about bankruptcy for someone who is looking to be involved in buying or providing financing is almost everything is public. Maybe it's not public today, but it will be public soon enough. You can't hide in bankruptcy, no matter what. The transaction has to be public. The terms have to be public. It has to be explained to the court. why this is in the best interest of the company and the company's stakeholders. Part of it is diving into the process and saying, yeah, let's see what we can do. And knowing that maybe it's not going to work out, especially a competitor, there can be issues about selling to a competitor.

44:59The company might say, if I have a bid from a competitor worth$100 million, and I have a bid from a non-competitor worth$95 million, I might prefer to sell for$95, even though the number is less because it's not a competitor. But at the end of the day, the company, the debtor's advisors are obligated to find the highest or otherwise best is the phrase transaction. Usually money talks. If you're a competitor and you see an opportunity, you got to deal with regulatory issues and whatever else is going to come from that. But corporates in particular have great opportunity in the distressed M &A space to do relatively below market purchases.

45:39We've seen a lot of companies do that in the life sciences space. And the life sciences industry has some particularities that make more sense for corporates to do it than for strategic financials. But being able to look for purchasing opportunities in a Chapter 11 context is something that is worth looking at for companies and buying them. Because, again, it's a great opportunity. You're going to buy the assets free and clear of all liens and interests and all of that. You got a clean slate, clean assets. and companies often have very strong assets, even if it's just the IP that's being sold.

46:12Have you seen it like where the company still, you can still operate it and turn it around? Oh yeah. If I give this better example, they're in bankruptcy, put an offer there. What is it? Is it my, the stalking horse? It can be. We can talk about stalking horse versus not stalking horse. That's an interesting area. Does that make sense? Am I the stalking horse? Let's break that down. I'm just trying to throw the buzzwords out there. Yeah, yeah, yeah. No, I like it. You're picking up on the jargon. Yeah, you got to teach it to me. Yeah. The thing about the jargon is usually it's not that creative.

46:37It's not cool jargon, but it's jargon nonetheless. The stalking horse is the company says, I'm going to designate this buyer, this bidder as the lead. And they're going to set the floor for this sale process. And it can be a third party buyer. Sometimes stalking horses are actually the lenders, credit bidding. But this is the floor for the sale. Anybody who wants to come in and bid, you should know that absent something significant, we're not taking less than this. Usually the bidding procedures that get filed and approved by the court that say, here's how this whole process is going to run. They'll say, when you get to an auction, they say you're only going to be a qualified bid if you are determined to be higher than the stalking horse bid or if the company otherwise determines.

47:27And then you get to an auction, and before the auction starts, maybe the stalking horse bidder is the lead bid for the auction, maybe not. But there's then a lead bid for the auction. And every bid after that has to increase over that lead bid by some determined increment, depending on the case. But the stalking horse bidder, if it's a third party, usually is going to be given court-approved stalking horse protections. And that can come in the form of a breakup fee. So you're doing a service to the company by creating a floor for the auction. You got to get paid for that. So 3 % breakup fee of the purchase price.

48:04You're going to maybe have your advisor's fees paid by the company. By the way, adding to the cost of a chapter 11. Usually there's a cap, but stalking horse legal fees are paid for. And that's designed, again, to give structure to the sale process, set a floor. It's designed to give certainty to your customers, to your vendors, to your employees that there's some path forward. How often do you see the stocking horse bid be the winning bid? Is it a situation where there's no competition when that typically happens? Or does it turn into a real auction that's competitive? It varies. And things have changed over time.

48:43In the slightly previous generation, stocking horse bid was often going to be the winner. And that was either because it almost chilled the bidding because nobody wanted to compete or because the stocking horse really wanted the asset and was willing to come into an auction, increase its bid, keep bidding up until it got what it wanted. These days, the trends probably are a little bit different. The likelihood of the stocking horse winning the bid has gone down. Part of that is because sometimes the stocking horse bidder are the lenders and the lenders are credit bidding. And the credit bid can have a lot of hair on it.

49:17You can have challenges to the debt because there's not cash coming in. You can have objections. Someone, a third party who really wants the asset can come in and put cash on the table, sometimes even less than the amount of the credit bid and still get the asset. When there is a stalking horse bid, it can sometimes create a more lively bidding dynamic. But I also think the frequency of stalking horse bidders has gone down, something we've seen a lot over the last 18 months. in our cases has been companies deciding that the stalking horse just isn't worthwhile. It's not worth paying the bidding protections, and it's not worth the risk that having the stalking horse actually chills the bidding, as I mentioned.

49:58Sometimes the company says, if you came up$50 million or whatever it is, maybe we would make you the stalking horse. But when your bid is at this price level, it's just not worth it. We'd rather have a naked 363, as we call it, go into an auction and see what kind of bidding dynamic we can have. And that's also when it's really important to have good advisors on all sides, including good bankers, who can really have a finger on the pulse of the market and to say, look, this bid is okay. But I think if we go out, there's going to be enough bidding interest to have a bidding environment at auction without it.

50:28Interesting. Do you see it? It's like nowadays there's more visibility. That's why you see more likeliness of credit bids, third parties getting involved. Yeah, I think that's an interesting idea that there's more visibility and more sophistication, more willingness to come into the process and participate in a Chapter 11 sale process. I also think that the dynamics of being a stalking horse, people have psychologically changed a little bit about it where they're worried about overpaying. That bidders are less willing to put forward their best price as stalking horse because they're worried that best price, they're not actually going to have to pay it.

51:04They're saying, okay, I'd rather put my best price forward at auction than when the company is filing. There's that disconnect between what the company is looking for in a stalking horse and what maybe the best bidder is actually willing to do at that time. When these auction processes happen, how do you assure that you're getting the most value on these deals? Because I'd expect this to be a great opportunity, but then you mentioned it's auction process. I know how things can get competitive. It sounds like a big variable if it's competitive versus not. How is that going to get played out in terms of maximizing value?

51:36In some ways, it's no different in bankruptcy than it is outside of the bankruptcy context. There's a lot of uncertainty about how the market is going to respond to buying some assets. And so really important to have good advisors, really good bankers marketing the asset who understand the dynamics in Chapter 11. And there are a lot of great bankers out there who specialize in this kind of thing and who know the assets and know the buyers. But at the end of the day, I think the best way to create a dynamic auction is as much as possible, start pitting people's pride and arrogance and emotions against themselves and against each other.

52:14The best way to do that is you get two, maybe more, but really two people in the auction and get both of them feeling like they have to have that asset. They're in the same room. So yes, different auctions are structured different ways. You usually have breakout rooms so that parties have spaces where they can discuss by themselves. And usually what happens is there's a lot of back-channeling where the company and the company's advisors are going room to room, having side conversations. And then there's an auction room. That's just a conference room, but everybody comes into that. And that's where everything happens that's on the record because all these auctions are public record.

52:48You get two people in the auction and you say, look, you better buy this. If you're not going to buy it, then they're going to get it. And you don't want to let them get it. You start to play up those psychological elements. That's a big part of it. And being thoughtful and strategic in how the company responds to bids because bids can take different forms. That's the other thing about bankruptcy is that these bids aren't always just increasing dollar by X amount. There's different ways to structure these things. You can structure it by assuming more liabilities that can give more value. You can structure it by giving different forms of consideration.

53:22So being strategic and agile in meeting the bidders where they are and then creating that psychological element, I think, is the way to do it. And we saw that happen exactly in the nanostring bankruptcy from last year, where you had two bidders in the room, both really wanted the asset. The auction went on for just about 18 hours, and the bidding price doubled from something like$200 million to$400 million over the course of those 18 hours. So it was a little bit drips and dribbles. We had a stocking horse bid, so there was like a floor set, and then... And then we had an auction. Heat of the moment, some egos.

53:57That's exactly right. I don't know if it was heat of the moment. It was heat of the 18 hours. Okay. But over those 18 hours, we got there, and it was a great outcome. Is there some fatigue and delirious happening or some after-hour cocktails? I don't know about after-hour cocktails, but there were some Shake Shack burgers that were brought in late night. It was an impressive auction and well done by the company and all the advisors, and it was a great outcome for creditors. And that's a little bit of an unusual situation, but it can happen. It's all about trying to find the right path forward for the case.

54:27Very interesting. Anything else around structuring considerations when you're buying a bankruptcy or business out of bankruptcy? This is really important for your regular way, M &A listeners, to think about. Because even when the company is nowhere near bankruptcy, if you're buying a company and you're trying to bring it into the rest of your company, You got to think about what happens in a downside scenario. It's really important to be thinking about that from a structuring perspective. Is this a company that has a lot more risk than the rest of your business? Do you want to try to figure out ways to keep that business a little bit separate in case there are some liability issues?

55:05Is this a business that selling football helmets where you could end up with all these lawsuits about how your football helmets were not safe? You don't want that to infect your business manufacturing microphones, which are pretty low risk, I hope. We work very closely with our M &A colleagues, with our M &A bankers to advise buyers hand-in-hand about how to maximize the benefits from the transaction, but also be thinking about what happens in the downside. Strong point. Having a holistic view on the structure post-transaction. Yeah. Naked 363, another cool bankruptcy term. 363 asset sale, same thing as a naked 363?

55:41Naked 363 is basically a 363 asset sale without a stocking course bidder. Okay. So going to ultimately any sale is a 363 in the chapter. Fundamentally, we call it a 363 sale because section 363 of the bankruptcy code is what authorizes the sale of assets in a bankruptcy proceeding and sets out what you have to do, what the requirements are, what protections are for creditors, secured creditors, all of that. So we call it 363 sale, but it's just an asset sale. And if you do it without a stocking horse. That's what we call it. That's the terminology we use. My partner, Ari Blout, and I actually wrote an article with the heading Naked 363 about this trend, especially in life sciences cases, which is something we've had a lot of experience in.

56:23And I insisted on using that word naked because I figured it would get a lot of attention when you send it out in people's emails. They'll at least look at it and wonder what that is. People are going to listen to this and start Googling it. Exactly. Let's talk about common mistakes. And I'm curious because you mentioned earlier the biggest thing is planning. I get that. You got to get early, get a sense of this, plan early, have more options. Besides that, are there any other common mistakes that you make going through a bankruptcy process? Planning for sure and not ignoring problems, thinking that problems are going to solve themselves.

56:54That's bucket number one. Bucket number two that people struggle with is bankruptcy is a means to do a transaction. And that process requires litigation. And sometimes you luck out and the deal is structured in a way that there's enough value that you can get by without too much litigation. That's an example in a prepackaged bankruptcy. You're minimizing the litigation by giving value to unsecured creditors and trying to keep the litigation costs, the overall timing bankruptcy down. But bankruptcy is inherently a litigation exercise. Every transaction needs to be court approved. Anything that needs to be court approved, people have an opportunity to object to.

57:31And anybody who doesn't like what's going on or has their own interests, they might come in and object. And then you have to, the debtors and the other proponents of whatever transaction it is, they have to carry their evidentiary burden. It's just a litigation exercise. When you're going into a bankruptcy, you got to understand that there's going to be litigation. There's going to be challenges. And you got to be able to fight through all of that. And again, this goes hand in hand with having the right advisors who are able to bring you both the litigation expertise and the transactional expertise.

58:00And of course, at S &C, we pride ourselves on being able to provide the best of the best across the board. Right people, right time, embrace yourself. I'm going to put that on a bumper sticker. How about on the buy side? What are common mistakes companies make when they're buying a business out of bankruptcy? One of them is thinking the process is going to go totally smoothly, no challenges, no issues. And again, it's understanding the process, that there's going to be bumps in the road, there's going to be some issues to deal with. And that's all part and parcel of the process. I also think that sometimes buyers overestimate the transaction costs associated with all of that.

58:40They get scared by the process and part of it is unfamiliarity, but they just get turned off by the idea of having to do everything out in the open. That's a little bit of the pay to play. You have to pay some cost in order to get all the benefits of bankruptcy. And it's the same when you're a buyer. You have to do things out in the open. Bids have to be subjected to higher and better in order to be able to buy assets free and clear of liabilities and to be able to pick and choose which contracts you want to take with you. And that's a huge advantage for a buyer coming out of bankruptcy. And not only it's that you get to pick and choose, but you can use that leverage to renegotiate contracts.

59:16Even if you're going to take it, no matter what, contract counterparties, they don't want to be left behind. They want to go with the new business because there's a future there. But they're going to be willing to make concessions to you as the buyer, making sure that you're thinking through, okay, how much leverage do I have? How do I use this leverage to really set the business up on a go-forward basis on the best foot that it possibly can come out of? Adds a lot more dynamics and complicates things in terms of how you negotiate and put an offer together. Oh yeah. It's a hugely important piece of it is what contracts you're going to take and thinking creatively about what that business looks like and what you want it to look like.

59:51Because at the root, you're buying assets and you're picking and choosing what comes along with it. And being strategic about that, having, again, advisors who can help you think through the process for implementing the business decisions, that's a hugely important piece of it. And you got to be thinking about that anytime you're in a 363 process. How about trends? How's the trends in distressed lending and debt trading affect corporate restructuring? So we've talked about liability management transactions, And that is the trend du jour, du mois, and much more. The last few years has been an explosion of this liability management transaction activity.

1:00:28And that will continue. It's a little bit of a nascent industry or area. You're getting court decisions that really affect how people are thinking about those kinds of transactions. And then you have advisors and smart investors and smart private equity sponsors and smart companies saying, okay, now that we have this information, now what are we going to do? How are we going to change the way documents are written to be able to do transactions that we want to do? How are we going to take advantage of the way the documents are written when we need to do some sort of exchange to take advantage of a discount, to get more liquidity, whatever it is?

1:01:03That is a continuing trend and it's morphed over time. And for good reason, the courts have an impact on how all of that is done. That is certainly a huge trend that will continue. Getting more complicated. Earlier you talked drop down and up tiers. Oh, yeah. I'm sure there's more to come, more jargon for you as everybody tries to get more and more creative. Do you see any upcoming changes or reforms in bankruptcy laws that could affect corporate restructuring? It's always hard to predict what reforms there will actually be, including given sometimes some paralysis in making law and changing laws.

1:01:37But two areas that get a lot of attention when you think about reforms are the cost of bankruptcy. We've talked about that a bit. And venue has been often on people's radars at different times over the last 10 years in bankruptcy. There was a lot of attention put on it during the Purdue bankruptcy for reasons that are probably too wonky for your listenership. But venue will continue to be an issue where companies file and why they're allowed to file where they file. And differences in different jurisdictions in the law and how the law is applied can have a big impact on how a bankruptcy is going to go.

1:02:10And then on the costs, the costs are big for a bankruptcy. And there have been some good developments, including making bankruptcy streamlined for smaller businesses. And that's a very important development. And I personally hope that there are more changes like that to distinguish between a bankruptcy for a company that has$10 million in revenue versus$100 million in revenue versus a billion dollars in revenue. Those chapter 11 cases really shouldn't be the same. It shouldn't be a one size fits all. There's more case discrimination in a good way between those cases that could be improved on. But even in the large cases, the costs are unfortunately out of control.

1:02:48And I don't know how to solve it, but I anticipate that people will continue to talk about ways to do so and considerations about that. I'm glad you're on top of it, so I don't have to be. I don't know if I'm on top of it. I would say more I'm in the middle of it. Ben, I got to ask, what's the craziest thing you've seen in M &A? So I don't know if it's an M &A situation, but the craziest thing I've seen in bankruptcy and M &A is there was once a situation when I was a clerk in the bankruptcy court where a party had to be arrested on site for reasons that we won't get into. But having a party in interest in a bankruptcy court, getting arrested real time as a young clerk starting my law career was something I'll never forget.

1:03:30Someone lost their shit, didn't they? It happens. It happens, you know, people's money and lives sometimes are at stake here and people get emotional and I understand it, but this one crossed the line for sure. I remember I had like a business litigation in court is next to divorce and you would hear like these screams. Oh yeah. Oh yeah. Yeah. That could happen here in bankruptcy too. Yeah. Ben, this has been a great conversation. I appreciate you taking the time helping me become a better M &A scientist. Those of you still listening. Thank you. If you have more questions about bankruptcy, don't send them to me.

1:04:02Go track down Ben. Send it to him. Mention M &A Science. He gives you a fee discount. Friends and family discount for M &A Science. Mention M &A Science. Listeners, beyond that, I appreciate you getting this far in the interview. You are a true M &A scientist. Value your feedback. Connect me on LinkedIn. Love to hear your thoughts, opinions on the content we're creating here, ideas on topics, or just the criticism. That's how I get better at doing this. So until next time, here's to the deal.

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