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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.

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Speaker 2: Hello and welcome to another episode of the All Thoughts podcast.

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Speaker 2: I'm Tracy Alloway.

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Speaker 3: And I'm Joe Wisenthal.

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Speaker 2: Joe, what do you know about creditor on creditor violence.

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Speaker 2: I don't know anything other than it's it's a very punch.

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Speaker 4: It's a great that's literally it. It's come up a

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Speaker 4: few times in all Right. It's come up a few

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Speaker 4: times in episodes we've done about credit, and I get

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Speaker 4: the impression that, you know, lenders to affirm have different

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Speaker 4: status and some are higher up in the rank than others,

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Speaker 4: and that they would like to probably use the technicalities

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Speaker 4: of the legal code to improve their rank in some

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Speaker 4: sense when money gets paid out to lenders.

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Speaker 2: Yes, so it has come up in a number of well,

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Speaker 2: some of the fights get pretty nasty. Okay. Well, so

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Speaker 2: when I think about it, I think back to when

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Speaker 2: I covered the leverage loan market at the Ft and

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Speaker 2: this was sort of like twenty thirteen, twenty fourteen, and

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Speaker 2: I remember writing stories about how leverage loans, more of them,

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Speaker 2: were becoming covelight, so weaker covenants for lenders or investors.

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Speaker 2: What that means is companies basically had more leeway to

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Speaker 2: restructure their assets if they were trying to raise new

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Speaker 2: capital or stave off bankruptcy or whatever at the expense

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Speaker 2: of those lenders slash investors. And back in twenty fourteen,

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Speaker 2: I think the proportion of the leverage loan market that

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Speaker 2: was cove light was something like thirty percent, and that

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Speaker 2: was like a big deal that was already higher than

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Speaker 2: the leverage buyout boom in two thousand and seven. Now,

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Speaker 2: the vast majority of leverage loans I think something like

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Speaker 2: ninety percent could be called cove light. So the entire

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Speaker 2: market is basically cove light at this point, which fits

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Speaker 2: into the creditor on creditor violence theme. So I feel

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Speaker 2: like we need to we need to dive into.

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Speaker 3: This what it is.

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Speaker 4: I just my impression is that if I'm going to

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Speaker 4: be affirmed that buys leverage loans, I need a good lawyer.

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Speaker 3: For the contract.

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Speaker 2: Well, I kind of wonder, I guess, I wonder relatively

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Speaker 2: how important like legal expertise is versus valuation expertise.

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Speaker 3: This is what I am wondering as well.

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Speaker 2: All right, so let's get into it. I am very

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Speaker 2: pleased to say we have the perfect guest, we're going

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Speaker 2: to be speaking with Sujet Endap. He is, of course, uh,

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Speaker 2: the Wall Street editor over at the FT, my former colleague.

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Speaker 2: We used to double byline on at least one piece.

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Speaker 2: I think he is also the author of the excellent

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Speaker 2: Caesar's Palace Coup book, which if you haven't read, I

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Speaker 2: would highly recommend, especially on that point about distressed debt

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Speaker 2: fights getting kind of nasty sigit. Thank you so much

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Speaker 2: for coming on all thoughts.

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Speaker 5: Hi, Racy Joe, it's great to be here.

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Speaker 3: Thank you.

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Speaker 2: So, I guess my first question is, you know, we

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Speaker 2: see these headlines about creditor on credit or violence, or

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Speaker 2: you know, someone will be writing about the private credit

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Speaker 2: market and they'll be in aside about creditor on credit

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Speaker 2: or violence and how it's becoming more of a thing.

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Speaker 2: Can you give us some context around whether or not

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Speaker 2: this is becoming a bigger trend. I feel like it is,

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Speaker 2: but it's not like there's a violence index that we

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Speaker 2: can look at.

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Speaker 5: Yeah, so the idea of violence in corporate restructuring and

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Speaker 5: private equity deals is not a new idea. Imagine the

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Speaker 5: business that's been bought by the private equity firm is

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Speaker 5: just less valuable over time, the pious shrunk, there's going

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Speaker 5: to be a fight over who gets what piece and

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Speaker 5: how big those pieces are. The creditor on creditor of

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Speaker 5: violence phenomena, though, is a little bit more nuanced and novel,

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Speaker 5: And that's the idea that imagine you, Joe, U, Tracy,

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Speaker 5: and me. We are all holders of the first lean

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Speaker 5: term loan. Let's say you own five hundred million, Joe,

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Speaker 5: you've got three hundred million. Let's say I'm poor, say

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Speaker 5: worth the ft, and only have fifteen million. But there

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Speaker 5: would be the view that since we're all in the

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Speaker 5: same security governed by the same document, that our rights

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Speaker 5: are the same and we are all going to be

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Speaker 5: treated equally in this fight with the private equity firm

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Speaker 5: and maybe the junk bond holders below us. The creditor

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Speaker 5: on credit of violence nuance now is that in fact

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Speaker 5: we are not equal, and you two, as large holders,

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Speaker 5: can do things to me small holder that are not

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Speaker 5: equal in treatment, arguably unfair, arguably impermissible.

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Speaker 4: Just to be clear, in this theoretical setting in which

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Speaker 4: all of us are quote equal in the in the

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Speaker 4: firm's liabilities, did we all have the exact same language

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Speaker 4: did we all enter into the same contractual language when

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Speaker 4: we purchased the debt or when we lent money to

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Speaker 4: the company. And furthermore, if we did all have the

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Speaker 4: same language, what are the tools that we use to

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Speaker 4: change our change our priorities?

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Speaker 5: Yeah, so we do. We all are governed by the

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Speaker 5: firstly in credit agreement. Maybe you bought in the original

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Speaker 5: LBO and maybe you're clos an i'm or you are

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Speaker 5: a distressed debt hedge fund which bought in later at

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Speaker 5: a different price, but we're all governed by the same

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Speaker 5: document and in concept have the same rights and protections.

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Speaker 4: So then where how do I do something to you guys?

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Speaker 4: If we're what are the basic tools at my disposal

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Speaker 4: if I want to somehow gain an advantage for me

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Speaker 4: that doesn't accrue to you.

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Speaker 5: Yeah, So let's talk about why that scenario was first arise.

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Speaker 5: And imagine the company is running into trouble. There's a

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Speaker 5: maturity coming up, but there's some liquidity challenge. As you

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Speaker 5: said earlier, these documents now since the financial crisis are

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Speaker 5: covenant light or no covenant, so there's a lot of

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Speaker 5: flexibility for the borrower, which is the company and the

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Speaker 5: private equity firm that owns the company, and rather than

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Speaker 5: just declaring bankruptcy and going to bankruptcy court and finding

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Speaker 5: out there, which is messy, it's time consuming, it has

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Speaker 5: its own restrictions on what you can do in the

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Speaker 5: private equity firm will typically if the equity holder will

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Speaker 5: get wiped out. Bankruptcy is like not an attractive option

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Speaker 5: for those reasons, and so what you can try to

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Speaker 5: do is raise new capital. And you're going to raise

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Speaker 5: new capital, often from the existing lenders. Those lenders in

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Speaker 5: exchange for giving you more money are going to ask

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Speaker 5: for some things. What are they going to ask you for? First,

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Speaker 5: the company itself is probably going to want to reduce

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Speaker 5: the principle balance, So they want people to take haircuts.

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Speaker 5: So there's gonna be some haircuts involved, and then there's

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Speaker 5: gonna be brought this new money, brought in that new money. However,

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Speaker 5: if I'm giving you new money into this troubled company,

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Speaker 5: I'm gonna want some things to do. That gota and

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Speaker 5: those things I'm gonna want is the most senior priority,

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Speaker 5: which calls super priority. Okay, that's all sort of standard,

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Speaker 5: that's not new. The nuance is the company itself has

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Speaker 5: some amount of value it can pass out as cookies

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Speaker 5: to these in this new financing process. And in the

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Speaker 5: old world, what they would do is, let's say I've

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Speaker 5: got one hundred million dollars and I'm making that number

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Speaker 5: up of value to allocate in this new transaction that

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Speaker 5: I'm going to raise new money in. Rather than splitting

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Speaker 5: that up pro rata amongst the three of us, I'm

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Speaker 5: just going to give it to two of you. And

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Speaker 5: so why is that From the companys point of youw

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Speaker 5: it's one hundredllion dollars. How the three of us divide

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Speaker 5: it up? They don't really care about But you too,

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Speaker 5: care about getting as much as you can since you

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Speaker 5: own the mo what we all care about it? But

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Speaker 5: you guys have the possibility of being let's say, a

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Speaker 5: fifty one percent group and saying I can take all

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Speaker 5: the cookies for me and leave Sejeet behind. And that

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Speaker 5: is the idea of creditor on creditor of violence. We

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Speaker 5: are theoretically PARTI pursue. We are in the same place

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Speaker 5: with the same document, but you, because you choose to

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Speaker 5: and the sponsor wants to doesn't really care where responsor

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Speaker 5: will just go to you it's easier to deal to

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Speaker 5: cuts if there's two of you, not three of us

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Speaker 5: negotiate with and that is the nuance of creditor on

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Speaker 5: credit violence. You two theoretically standing with me, but the

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Speaker 5: same document can impose pain on me simply because you're bigger.

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Speaker 2: Super priority kind of reminds me of double secret probation,

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Speaker 2: right like that, I wonder, can you have like super

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Speaker 2: super priority that would I guess you could like keep

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Speaker 2: doing it forever pretty much, or at least until all

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Speaker 2: the collection.

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Speaker 5: It's kind of like one point five. Yeah, I mean

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Speaker 5: that's kind of put between first and second. And then

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Speaker 5: there's been double creditor on creditor violence cases, so there

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Speaker 5: is like this spiral, uh and kind of like through

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Speaker 5: the looking guests violence squared. Yeah.

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Speaker 2: So one thing I don't really get about the creditor

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Speaker 2: on creditor violence is its connection with private credit. And

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Speaker 2: I've seen people talk about private credit as a response

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Speaker 2: to creditor on creditor violence in the sense that, you know,

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Speaker 2: maybe it's easier to be a single lender to a company.

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Speaker 2: You're higher up in the payment waterfall, you don't have

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Speaker 2: to worry about getting into fights with a bunch of

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Speaker 2: other investors. But then I also see headlines saying that

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Speaker 2: creditor on credit or violence is becoming more of a

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Speaker 2: thing in private credit too, So basically I'm confused.

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Speaker 5: Yeah, so let's just take a step back and just

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Speaker 5: think about that. I think there's two factors that are

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Speaker 5: behind the generalized credit or on credit or violence concept.

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Speaker 5: One is what we hit on before, which is just

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Speaker 5: the technical aspect of these credit agreements, which is the

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Speaker 5: legal contract that governs like a leverage loan. And then

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Speaker 5: you know, what are the restrictions or covenants that are

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Speaker 5: in that document that prevent this kind of creativity and

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Speaker 5: like refinancing and exchange offers. And there is like a

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Speaker 5: real legal dispute about whether these changes can be done

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Speaker 5: with or without unanimity, whether you need one hundred percent

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Speaker 5: of the group, all three of us to agree to

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Speaker 5: a change an interest rate or pull maturity. It does

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Speaker 5: are called the so called sacred rights, if you will,

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Speaker 5: And that's like a legal question that's been liting at it,

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Speaker 5: and we can talk about that more if you want.

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Speaker 5: But then there's also the social aspect. And the social

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Speaker 5: aspect is the idea that me private equity forms they

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Speaker 5: may have the legal ability for this mischief, but they

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Speaker 5: ultimately wouldn't pursue that. And they wouldn't do that because

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Speaker 5: they are a repeat player in the leverage finance markets.

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Speaker 5: And if they get a reputation as a firm that

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Speaker 5: gets too cute, that will cause them to borrow at

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Speaker 5: higher interest rates and down the line and the next deal,

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Speaker 5: the deal after that, the different partners who are not

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Speaker 5: in this deal are going to face the consequences. So

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Speaker 5: there's a social aspect and also within the deal itself.

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Speaker 5: If you ultimately antagonize your creditors down the road, you

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Speaker 5: may need to have restructure again. And if they remember

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Speaker 5: you as the person who is rough with them, they're

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Speaker 5: not going to be so kind when you need their help.

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Speaker 2: And yet Argentina exists exactly.

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Speaker 5: So that brings us to the private credit point. And

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Speaker 5: you were obviously a lover's finance reporter and a lover's

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Speaker 5: loan mayven. And you know how that market works, which

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Speaker 5: is it's really big. It involves banks who underwrite these

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Speaker 5: deals and then they sell them on in the syndication process,

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Speaker 5: and that's a whole kind of machine. And you know,

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Speaker 5: in in a big leveraged loan credit, there's going to

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Speaker 5: be dozens of clos and regular way mutual funds and

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Speaker 5: then hedge funds, and it's like a wide, widely dispersed

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Speaker 5: kind of group, and that dynamic affects how the document

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Speaker 5: is negotiated and just you know, all the kind of

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Speaker 5: interactions down the line. And a private credit deal where

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Speaker 5: you truly have like a club or maybe even a

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Speaker 5: single lender, whether there's you know, four or five or

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Speaker 5: three or two, maybe one firm that's providing a loan

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Speaker 5: to a private equity backed company, that group is just

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Speaker 5: much smaller. The negotiations around that document are much more intimate.

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Speaker 5: And again for those social reasons, there was the idea

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Speaker 5: that in a private credit deal, the private equity firm

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Speaker 5: sponsor who owns the company is not going to declare

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Speaker 5: war or go to deaf Con five or deaf Cone

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Speaker 5: one with whichever the highest one is, to pursue their

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Speaker 5: own ends. It's going to be much more of a collaborative,

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Speaker 5: collaborative and.

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Speaker 2: Kind friendly come by a relationship.

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Speaker 5: And so this again now we go to the examples

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Speaker 5: of the credit or on credit violence that has arisen

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Speaker 5: down the private credit market and The examples are relatively

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Speaker 5: sparse so far because private credit is relatively new and too,

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Speaker 5: I do think this kind of social dynamic actually is true.

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Speaker 5: There's this case called plural Site, which Bloomberg has covered.

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Speaker 5: The ft is covered, where in fact, there was one

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Speaker 5: of these aggressive kind of reef financing transactions that happened

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Speaker 5: using kind of a loose document, and the private credit syndicate,

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Speaker 5: which was four or five firms, was reportedly indignant that

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Speaker 5: this had happened. In fact, this credit or on credit

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Speaker 5: of violance situation was extremely mild. It was like one

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Speaker 5: very small refinancing to make an interest payment. And then

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Speaker 5: ultimately what happened was the sponsor handed the keys to

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Speaker 5: the private credit firms to take ownership in a very

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Speaker 5: bloodless way. And in fact, I wouldn't even like that,

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Speaker 5: and I wouldn't even put this even close to the

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Speaker 5: real like headline grabbing violence cases.

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Speaker 4: So let's say I am I don't know a small

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Speaker 4: there's sub sort of club dealer, there's subsort of deal

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Speaker 4: and I am a small holder, and I am aware

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Speaker 4: of the existence of creditor on creditor violence as a risk.

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Speaker 4: I perceive me as being the one who might get screwed,

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Speaker 4: so to speak, at some point in the future, what

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Speaker 4: am I doing, along with my law firm, to write

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Speaker 4: that document into such a way so as to reduce

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Speaker 4: my odds of finding myself in that position.

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Speaker 5: If you're a small player in the leverage finance market

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Speaker 5: now and or a CLO, which is basically a passive instrument,

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Speaker 5: as you guys know, things that just accumulate loans and

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Speaker 5: turned in securities, and you're not like a shark hedge fund.

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Speaker 5: This leverage loan market has changed quite a bit. And

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Speaker 5: so if we just take a step back, leverage loans

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Speaker 5: are the most senior part of a capital structure, even

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Speaker 5: in a levered company. And so what that means is,

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Speaker 5: even if things go south, the recovery rates and leverage

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Speaker 5: loans historically have been very high, like eighty ninety one

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Speaker 5: hundred percent, and so the people who hold these relatively

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Speaker 5: risk averse institutions. And so two things have happened. Of

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Speaker 5: like one is this credit on credit of violence common concept.

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Speaker 5: But also, as you alluded to earlier, this market is

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Speaker 5: huge now. Leverage loansally speaking, it's exploded in the last

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Speaker 5: ten years, and there are a lot of loan only companies.

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Speaker 5: There is nothing below the leverage loan other than the equity.

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Speaker 5: There's no high yield bond, and so the recovery rates

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Speaker 5: have become lower because there's less loss absorption below you.

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Speaker 5: And this idea that conservative buyer over leverage loan have

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Speaker 5: bought the safest security and you have the first lean,

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Speaker 5: the first claim on the assets. That idea has been eroded,

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Speaker 5: and that's actually very profound, and that this market has

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Speaker 5: become much riskier than it used to be for the

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Speaker 5: technical reasons and the social reasons. So getting your question

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Speaker 5: on what you should do about it, one, you have

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Speaker 5: to ask yourself, do you want to be in this business? Okay?

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Speaker 5: And there's a lot of people who, now you know,

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Speaker 5: unless they're like one of a handful of really big

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Speaker 5: players that can impact of a distress situation and actually

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Speaker 5: be in the negotiating room, they're thinking long and hard

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Speaker 5: about being in this business. And two, you do hope

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Speaker 5: that the documents themselves are being tightened over time, and

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Speaker 5: there are ebbs and flows in the market. You know,

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Speaker 5: there's supply and demand, and you know there's there's waves

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Speaker 5: of when the documents are tight and when they're loose,

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Speaker 5: and now you hear these terms about there's a j

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Speaker 5: CREU blockers, Yeah, there is, and there are these like blockers,

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Speaker 5: these blockers, like the J crew blocker, the sort of blocker,

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Speaker 5: and that just means that in the in the document,

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Speaker 5: the lawyers will negotiate tighter terms and restrictions that prevent

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Speaker 5: j crue transaction the sort of transaction. And we can

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Speaker 5: talk about this more in detail if you want. There

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Speaker 5: is again this push and pull about you know, the

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Speaker 5: documents and how title loose there are and how people

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Speaker 5: push back. So you know, but the thing is, though,

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Speaker 5: like everyone tends to be a price taker in these markets,

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Speaker 5: and you kind of take the document that is the

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Speaker 5: market at the time, and if you are a firm

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Speaker 5: that tries to push back in the negotiations, they can

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Speaker 5: just pass you over.

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Speaker 2: Right, There's plenty of others someone else.

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Speaker 5: Will take the bad document when you won't. And that

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Speaker 5: is just that's the difficult dynamic right now.

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Speaker 2: So there's this great bit in your book where the

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Speaker 2: lawyers are arguing over the meaning of and in a

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Speaker 2: contracts end or like whether and means a bunch of

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Speaker 2: conditions have to be met or maybe only some.

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Speaker 4: Of them, you know, I've always thought in language, this

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Speaker 4: is a weird term because it's exactly right, it's off anyway, Yes,

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Speaker 4: I didn't, I've always thought this is a weird term.

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Speaker 2: Sorry, keep going so personal aside, But my husband is

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Speaker 2: a former corporate lawyer, and it takes him ages to

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Speaker 2: send a text message, Like he will spend twenty minutes

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Speaker 2: writing a text message that's like two sentences, and he

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Speaker 2: blames it on his legal background and the fact that

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Speaker 2: you really have to consider the meaning of every single word.

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Speaker 2: The thing I don't get about covenants and indentures and

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Speaker 2: things like that is I would have thought a lot

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Speaker 2: of it nowadays is like standard boiler plate. But I

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Speaker 2: mean the fact that these issues arise and that there

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Speaker 2: can be arguments over them suggests that maybe it isn't. So.

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Speaker 2: I guess my question is like, how much of this

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Speaker 2: is standardized versus customized for particular companies.

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Speaker 5: Yeah, I mean, I think if we just take a

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Speaker 5: step back and think about like the industrial organization of

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Speaker 5: these markets, and to your point, I think there was

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Speaker 5: a sense that these documents are standardized and there's some

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Speaker 5: kind of like template which you downloaded, and they're all

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Speaker 5: kind of the same more or less. What's happened is

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Speaker 5: there has been now this arms race amongst the law

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Speaker 5: firms and the investment banks to read these documents really

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Speaker 5: carefully and then in their laboratories in the basement come

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Speaker 5: up with crazy transaction structure. So the big credit or

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Speaker 5: on credit of violence techniques. There's something called the drop down.

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Speaker 5: There's something called the up to exchange. There's something more

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Speaker 5: exotic called the double dip. It's called pari plus. And

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Speaker 5: these are like designed by these law firms and these

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Speaker 5: investments and when you do one of these transactions, you

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Speaker 5: are not just checking a boxing. I want to do

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Speaker 5: up to your exchange, and something like it just happens.

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Speaker 5: There's like five crazy things you have to do which

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Speaker 5: are kind of unnatural and combine together create an up

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Speaker 5: to her exchange or a drop down, and the result

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Speaker 5: is all the same, which is you, senior lender, suddenly

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Speaker 5: in the left behind group, collateral that you owned now

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Speaker 5: is somewhere else and is not reachable to you. And

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Speaker 5: I've described our different techniques to do those things. And

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Speaker 5: so people realize not only are the documents sort of looser,

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Speaker 5: but the creativity that lawyers and bankers try to exploit

357
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Speaker 5: has been accelerated and ratcheted up, and there's this idea

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Speaker 5: that we're going to ask for forgiveness, not permission. We'll

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Speaker 5: do the transaction. If someone wants to sue, we'll see

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Speaker 5: them in court. That'll go on forever. And what you're

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Speaker 5: ultimately trying to do in all these cases is create

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Speaker 5: negotiating leverage for the actual settlement where everyone will come

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Speaker 5: into a room and sort it out. But in fact

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Speaker 5: who has the leverage is determined by you know, who's

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Speaker 5: in the group and who's not. The actual transaction may

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Speaker 5: or may not be important, but what it does is

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Speaker 5: does set the parameters for the ultimate negotiation.

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Speaker 2: So we've been talking a lot about behavior on the

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Speaker 2: borrower and the lender side, but there is a sort

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Speaker 2: of third party here, which is the court itself and

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Speaker 2: the judges. And speaking of great books on credit, there's

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Speaker 2: a great book on the Argentina restructure that came out

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Speaker 2: relatively recently called Default, The landmark court battle over Argentina's

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Speaker 2: one hundred billion dollar debt restructuring. And one of the

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Speaker 2: takeaways that I got from reading that book is so

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Speaker 2: much depends on the judge that is put in charge

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Speaker 2: of a particular case, and there are moments in that

378
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Speaker 2: book where like the judge is just really tired and

379
00:20:22,320 --> 00:20:24,719
Speaker 2: fed up with everyone, and so he kind of like

380
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Speaker 2: does things kind of hastily, I guess. But what's been

381
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Speaker 2: the response from the courts to more aggressive creditor on

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Speaker 2: creditor in fighting.

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Speaker 5: So that's a great question, and not just the actual

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Speaker 5: writing of the document the lawyers are doing is part

385
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Speaker 5: of what the service they're offering. They're offering an entire

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Speaker 5: kind of choreography on how this chess match is going

387
00:20:51,160 --> 00:20:53,120
Speaker 5: to like each chest move is going to in florid,

388
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Speaker 5: We're going to the document to the actual creditor on

389
00:20:56,280 --> 00:20:59,720
Speaker 5: credit of violence transaction, and then ultimately the litigation and

390
00:20:59,760 --> 00:21:01,399
Speaker 5: how we game out each of these moves.

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Speaker 2: So like we'll be in this jurisdiction, we can expect

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Speaker 2: maybe to get like this particular judge and the company

393
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Speaker 2: or the other lender will respond this way.

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Speaker 5: Yeah, And so these documents are all now almost all

395
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Speaker 5: of them are written under New York state law, but

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Speaker 5: that doesn't mean they always end up in New York

397
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Speaker 5: state court. Sometimes they end up in New York State court.

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Speaker 5: Sometimes they end up in federal court where the federal

399
00:21:23,040 --> 00:21:26,200
Speaker 5: court is interpreting New York state law. And then sometimes

400
00:21:26,200 --> 00:21:29,359
Speaker 5: they end up in bankruptcy court, which is a federal

401
00:21:29,400 --> 00:21:33,320
Speaker 5: court as well and has its own, like very kind

402
00:21:33,359 --> 00:21:37,360
Speaker 5: of unique powers, and they end up interpreting the document.

403
00:21:37,440 --> 00:21:40,440
Speaker 5: And there's a whole again art and science deciding, you

404
00:21:40,520 --> 00:21:42,560
Speaker 5: know how you think it's going to involve. The state

405
00:21:42,560 --> 00:21:45,120
Speaker 5: court and the federal courts are relatively slow, bankruptcy courts

406
00:21:45,119 --> 00:21:47,679
Speaker 5: are relatively fast. So like one case, it's really interesting

407
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Speaker 5: and I followed closely. Is this sort of Simmons from

408
00:21:50,720 --> 00:21:53,919
Speaker 5: a couple of years ago, which was which is one

409
00:21:53,960 --> 00:21:57,800
Speaker 5: of the emblematic creditor on creditor. Oh yeah, and so

410
00:21:57,840 --> 00:22:00,159
Speaker 5: this is a mattress company. Obviously we all heard of

411
00:22:00,160 --> 00:22:03,080
Speaker 5: it got into trouble during the pandemic. They in an

412
00:22:03,119 --> 00:22:06,560
Speaker 5: effort to raise more capital, essentially went to their existing

413
00:22:06,640 --> 00:22:10,040
Speaker 5: lenders and said, we need more money. Who can give

414
00:22:10,119 --> 00:22:12,560
Speaker 5: us a deal? And this is a fun case because

415
00:22:12,880 --> 00:22:15,920
Speaker 5: they end up being two competing groups and they each

416
00:22:15,960 --> 00:22:19,280
Speaker 5: propose their own deal. One is an uptier exchange. One

417
00:22:19,320 --> 00:22:22,440
Speaker 5: is a drop down essentially accomplishing the same things, which

418
00:22:22,480 --> 00:22:25,600
Speaker 5: is new capital in the company, the exchange of debt

419
00:22:25,600 --> 00:22:29,760
Speaker 5: for a discount, and the company essentially had an auction

420
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Speaker 5: for new capital. They picked one so one group one.

421
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Speaker 5: One group lost.

422
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Speaker 3: Wait was it the up tier the so the up.

423
00:22:38,280 --> 00:22:41,840
Speaker 5: Tor exchange group one. And there's a whole a side

424
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Speaker 5: about this where the drop down group, which is Apollo

425
00:22:44,720 --> 00:22:46,960
Speaker 5: an Angela Gordon, very aggressive smart firms that are in

426
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Speaker 5: this market all the time. You know, think the actual

427
00:22:49,720 --> 00:22:53,119
Speaker 5: up tier structure is something that actually is actually legally

428
00:22:53,160 --> 00:22:55,359
Speaker 5: offensive in a way a drop down is not. And

429
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Speaker 5: that's a rabbit hole we can go down. That's sort

430
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Speaker 5: of at that point is actually very interesting.

431
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Speaker 2: Theoretically essentially add like a new layer of debt to

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Speaker 2: the capital step.

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00:23:03,760 --> 00:23:05,399
Speaker 5: Yeah, they both do the same thing. You end up

434
00:23:05,400 --> 00:23:07,040
Speaker 5: in the same place. There's this whole question of whether

435
00:23:07,119 --> 00:23:09,720
Speaker 5: the up to exchange is something that's actually contemplated in

436
00:23:09,760 --> 00:23:12,320
Speaker 5: the original document, the drop down kind of is or

437
00:23:12,359 --> 00:23:13,959
Speaker 5: not in that we can go down that rabbit hole

438
00:23:14,000 --> 00:23:17,080
Speaker 5: if you want. But the point is, eventually STA had

439
00:23:17,080 --> 00:23:21,120
Speaker 5: to file for bankruptcy. The Apollo angel Gordon group had

440
00:23:21,200 --> 00:23:23,800
Speaker 5: sued in New York state court, and I can't recall

441
00:23:23,840 --> 00:23:26,480
Speaker 5: that ended up in federal court or not for jurisdiction reasons.

442
00:23:26,560 --> 00:23:28,280
Speaker 5: But anyway, there was some lawsuit kind of going through

443
00:23:28,320 --> 00:23:31,240
Speaker 5: the court. There are multiple lawsuits about the transactions. One

444
00:23:31,280 --> 00:23:34,280
Speaker 5: the company went into bankruptcy. The company and the winning

445
00:23:34,320 --> 00:23:37,159
Speaker 5: group sought to have the bankruptcy court to declare the

446
00:23:37,200 --> 00:23:41,359
Speaker 5: transaction permissible, and the court bankrupt court, which was very fast,

447
00:23:41,440 --> 00:23:44,439
Speaker 5: the Houston Court at the time, very very fast, blessed

448
00:23:44,440 --> 00:23:47,000
Speaker 5: the transaction, the deal, the bankruptc deal got done, and

449
00:23:47,000 --> 00:23:48,679
Speaker 5: the people in the winning group ultimately the kind of

450
00:23:48,680 --> 00:23:50,959
Speaker 5: took control of the company. The people left behind, you know,

451
00:23:51,080 --> 00:23:54,320
Speaker 5: got hoosed for dimes on the dollar. So yes, So

452
00:23:54,359 --> 00:23:56,200
Speaker 5: to answer your question, yes, the whole kind of legal

453
00:23:56,200 --> 00:23:59,239
Speaker 5: game theory, the judicial is actually very important, and these

454
00:23:59,320 --> 00:24:02,240
Speaker 5: questions are kind kind of often left outstanding and hanging

455
00:24:02,240 --> 00:24:05,320
Speaker 5: because what happens is people ultimately settle out before they

456
00:24:05,400 --> 00:24:06,080
Speaker 5: get vial ruling.

457
00:24:06,320 --> 00:24:09,160
Speaker 4: Well, I'm to add on to Tracy's question, has there

458
00:24:09,160 --> 00:24:13,960
Speaker 4: been an evolution over time? So okay, lawyers are racing

459
00:24:14,160 --> 00:24:17,159
Speaker 4: to come up with new ideas and new interpretations of

460
00:24:17,240 --> 00:24:21,200
Speaker 4: words and oh, but in the dream world, you do

461
00:24:22,440 --> 00:24:25,879
Speaker 4: transactions without ever really having to like red down to

462
00:24:25,920 --> 00:24:29,280
Speaker 4: the document itself. Right, everyone is operating good faith. We

463
00:24:29,359 --> 00:24:31,320
Speaker 4: know what all these things mean? Hopefully you don't have

464
00:24:31,359 --> 00:24:32,840
Speaker 4: to spend the time a lot of time look at

465
00:24:32,840 --> 00:24:36,200
Speaker 4: where commas are or what and or actually means. Has

466
00:24:36,200 --> 00:24:40,000
Speaker 4: there been an evolution among judges in courts in terms

467
00:24:40,000 --> 00:24:42,639
Speaker 4: of the degree to which they say, look, we know

468
00:24:42,680 --> 00:24:44,359
Speaker 4: what all we know what these words mean, while you

469
00:24:44,400 --> 00:24:48,480
Speaker 4: guys trying to redefine words versus I guess like a

470
00:24:48,520 --> 00:24:50,919
Speaker 4: more literal like what do these words mean in the

471
00:24:50,920 --> 00:24:53,520
Speaker 4: English language as described in the original document.

472
00:24:53,640 --> 00:24:55,600
Speaker 5: Yeah, that brings up an interesting point if you read

473
00:24:55,600 --> 00:24:59,160
Speaker 5: the actual complaints that, like the losing group will write

474
00:24:59,160 --> 00:25:01,480
Speaker 5: in their lawsuits, go through all their contrastual points that

475
00:25:01,520 --> 00:25:03,760
Speaker 5: you can't actually do this up to her exchange and

476
00:25:03,800 --> 00:25:06,000
Speaker 5: the five crazy things to get it done, and the

477
00:25:06,119 --> 00:25:08,920
Speaker 5: very last count that they'll add to their to their

478
00:25:08,920 --> 00:25:13,200
Speaker 5: complaint is something called the covenant of good faith. And Yeah,

479
00:25:13,240 --> 00:25:15,320
Speaker 5: and that is the idea that let's just put the

480
00:25:15,320 --> 00:25:18,040
Speaker 5: wards aside. What do these actulety parties mean when they

481
00:25:18,040 --> 00:25:21,600
Speaker 5: struck this transaction? Like, what was the actual intent? Was

482
00:25:21,600 --> 00:25:22,560
Speaker 5: the spirit of the document?

483
00:25:22,720 --> 00:25:22,840
Speaker 2: Right?

484
00:25:22,880 --> 00:25:24,280
Speaker 4: Because in the end, we don't want to have to

485
00:25:24,400 --> 00:25:27,800
Speaker 4: live in a world right. I assume many investors lawyers might,

486
00:25:27,840 --> 00:25:29,919
Speaker 4: but investors probably don't want to live in a world

487
00:25:30,560 --> 00:25:34,960
Speaker 4: where every comma and word is being challenged as it's definition.

488
00:25:35,000 --> 00:25:37,760
Speaker 4: And I'm curious if there's been some erosion of norms

489
00:25:38,160 --> 00:25:42,280
Speaker 4: about the degree to which we sort of accept good

490
00:25:42,520 --> 00:25:43,960
Speaker 4: people investors accept.

491
00:25:44,240 --> 00:25:45,920
Speaker 3: Yeah, we all knew what this meant, good faith.

492
00:25:46,040 --> 00:25:48,160
Speaker 5: Yeah, And I think there is some level of exhaustion.

493
00:25:48,840 --> 00:25:52,119
Speaker 5: And you know, there have been some subsequent rulings where

494
00:25:52,600 --> 00:25:56,040
Speaker 5: court frowns upon the credit or on creditor violence transaction.

495
00:25:57,200 --> 00:26:00,200
Speaker 5: There's just now this idea of also cooperation groups, which

496
00:26:00,240 --> 00:26:03,400
Speaker 5: is this idea where the creditors, instead of like doing

497
00:26:03,400 --> 00:26:05,520
Speaker 5: this fifty one to forty nine kind of fight, they

498
00:26:05,560 --> 00:26:07,600
Speaker 5: all sign a contract to say we're going to be

499
00:26:07,680 --> 00:26:10,280
Speaker 5: one single block and we will negotiate as group with

500
00:26:10,320 --> 00:26:13,240
Speaker 5: the company and there can be no drawing credit violence

501
00:26:13,240 --> 00:26:14,919
Speaker 5: because often what will happen in these deals is the

502
00:26:14,920 --> 00:26:17,560
Speaker 5: sponsor will find the fifty one percent group and they're

503
00:26:17,600 --> 00:26:20,720
Speaker 5: in cahoots to do this thing. Right now, they're saying, you,

504
00:26:20,880 --> 00:26:23,959
Speaker 5: financial sponsor, don't do that, because we're all one group

505
00:26:24,400 --> 00:26:25,960
Speaker 5: and you can't pick and you can't.

506
00:26:25,760 --> 00:26:28,399
Speaker 3: Say separately from the separately from the bond doc or

507
00:26:28,440 --> 00:26:28,760
Speaker 3: the low.

508
00:26:28,840 --> 00:26:30,680
Speaker 5: Yeah, we'll say, well, is that we are not going

509
00:26:30,720 --> 00:26:32,760
Speaker 5: to sign into a deal for the next six months

510
00:26:32,840 --> 00:26:34,760
Speaker 5: or a year or to the maturity. And if the

511
00:26:34,760 --> 00:26:37,199
Speaker 5: company wants to negotiate, they negotiate with all of us

512
00:26:37,200 --> 00:26:41,080
Speaker 5: as a block. So that's one thing. And there is

513
00:26:41,160 --> 00:26:44,880
Speaker 5: now an effort to actually do what are called still

514
00:26:44,920 --> 00:26:48,040
Speaker 5: called pro rata transactions where there is a refinancing, but

515
00:26:48,080 --> 00:26:51,720
Speaker 5: the entire group Tracy, Joe, Sujit all get a chance

516
00:26:52,040 --> 00:26:52,720
Speaker 5: to participate.

517
00:26:53,920 --> 00:26:58,320
Speaker 2: What happened to the leverage lending guidance because you alluded

518
00:26:58,359 --> 00:27:02,040
Speaker 2: to how big this market is earlier, and it's huge

519
00:27:02,080 --> 00:27:06,040
Speaker 2: and it's been booming since like the twenty tens, and

520
00:27:06,119 --> 00:27:09,640
Speaker 2: I remember at one point regulators seemed concerned, and so

521
00:27:09,720 --> 00:27:13,720
Speaker 2: they issued these guidelines of how to do leverage loans

522
00:27:13,800 --> 00:27:17,280
Speaker 2: and you know, like what kind of leverage you should have,

523
00:27:17,760 --> 00:27:20,520
Speaker 2: and I remember a bunch of bankers freaking out about

524
00:27:20,560 --> 00:27:23,679
Speaker 2: them at the time, but it doesn't seem to have

525
00:27:23,720 --> 00:27:26,320
Speaker 2: had much of an impact. Uh.

526
00:27:26,359 --> 00:27:29,920
Speaker 5: Yeah, So that was the idea that a bank couldn't

527
00:27:29,960 --> 00:27:32,639
Speaker 5: extend a leverage loan where the DEBTIBA dollar issue was

528
00:27:32,640 --> 00:27:35,840
Speaker 5: more than six times, and that was because you know,

529
00:27:35,880 --> 00:27:38,159
Speaker 5: it's a bank and they can't do RESI shouldn't do

530
00:27:38,200 --> 00:27:40,800
Speaker 5: these risky these risky deals. So a couple things happened. One,

531
00:27:40,840 --> 00:27:42,960
Speaker 5: there's just a whole non bank market too. You know,

532
00:27:43,080 --> 00:27:45,840
Speaker 5: there's some banks like Jeffrees that are not subject to

533
00:27:45,880 --> 00:27:48,800
Speaker 5: these guidance lines. Three, there's this private credit which is

534
00:27:49,119 --> 00:27:51,879
Speaker 5: a whole different world which is obviously not regulated by banks.

535
00:27:53,000 --> 00:27:58,199
Speaker 5: And four I think banks found ways to push the

536
00:27:58,240 --> 00:28:01,920
Speaker 5: limits or change the definition bit dah. But even six times.

537
00:28:01,920 --> 00:28:03,159
Speaker 5: I mean, if you go up to six, that's like

538
00:28:03,160 --> 00:28:05,840
Speaker 5: a lot of leverage. And you know, even if you're

539
00:28:05,880 --> 00:28:08,440
Speaker 5: doing it six and banks themselves. I think there's a

540
00:28:08,480 --> 00:28:12,600
Speaker 5: story in somewhere about City Bank or City Group, which

541
00:28:12,680 --> 00:28:14,800
Speaker 5: hasn't been a big player in leverage loans, it has

542
00:28:14,840 --> 00:28:16,720
Speaker 5: been kind of usurped in the market share now suddenly

543
00:28:16,760 --> 00:28:18,520
Speaker 5: has a new guy from Jacone Morgan. There's a story

544
00:28:18,560 --> 00:28:20,520
Speaker 5: yesterday in the journal I think about how he's going

545
00:28:20,560 --> 00:28:22,520
Speaker 5: to push to get more into the leverage loan market.

546
00:28:22,520 --> 00:28:24,159
Speaker 5: There's a reason City is not like aggressive in this

547
00:28:24,200 --> 00:28:26,320
Speaker 5: because you know, it's risky, right, So we'll see how

548
00:28:26,320 --> 00:28:28,240
Speaker 5: that works out for them. So yeah, there was the

549
00:28:28,280 --> 00:28:29,840
Speaker 5: actual idea of you know, how much leverage is their

550
00:28:29,880 --> 00:28:32,400
Speaker 5: total and then you know, then these kind of interpersonal

551
00:28:32,520 --> 00:28:34,960
Speaker 5: dynamics once the loan is extended.

552
00:28:51,080 --> 00:28:54,960
Speaker 4: As a former banker, you know, again you mentioned the

553
00:28:55,000 --> 00:28:57,080
Speaker 4: law firms come in. They have new ideas up to

554
00:28:57,120 --> 00:28:59,160
Speaker 4: your exchange offers as.

555
00:28:58,960 --> 00:29:00,320
Speaker 3: It dropped downs, cetera.

556
00:29:00,360 --> 00:29:03,280
Speaker 4: They have the whole choreography of how it's going to

557
00:29:03,320 --> 00:29:06,800
Speaker 4: play out, et cetera. These are skills that they bring

558
00:29:06,880 --> 00:29:11,400
Speaker 4: to the table that are something different from valuation and

559
00:29:11,760 --> 00:29:15,040
Speaker 4: you know, debt dynamics and so forth. Is that visible

560
00:29:15,160 --> 00:29:17,320
Speaker 4: in the pie? There's a certain amount of money that

561
00:29:17,400 --> 00:29:23,120
Speaker 4: gets spent every year on services for transactions by companies,

562
00:29:23,120 --> 00:29:27,000
Speaker 4: by borrowers or lenders, et cetera. Has there been a

563
00:29:27,040 --> 00:29:29,040
Speaker 4: shift in the tilt of the pie of like how

564
00:29:29,120 --> 00:29:31,840
Speaker 4: much goes to lawyers versus how much goes to the

565
00:29:32,240 --> 00:29:33,080
Speaker 4: deal makers.

566
00:29:33,440 --> 00:29:36,280
Speaker 5: Yeah, that's a great point too. So you've now I've

567
00:29:36,320 --> 00:29:38,000
Speaker 5: seen these stories about the law firm war as the

568
00:29:38,040 --> 00:29:41,280
Speaker 5: lawyer's getting paid twenty thirty million dollars a year and

569
00:29:41,320 --> 00:29:45,000
Speaker 5: they're shifting firms like baseball players or hedge fund guys

570
00:29:45,120 --> 00:29:48,120
Speaker 5: typically do. And that's unusual because historically you started a

571
00:29:48,160 --> 00:29:50,000
Speaker 5: law firm as an associate and you made it a partner.

572
00:29:50,040 --> 00:29:51,920
Speaker 5: You stated at that firm your whole career, and it

573
00:29:52,000 --> 00:29:54,600
Speaker 5: was prestigious and you've got a huge pension. You made

574
00:29:54,640 --> 00:29:56,160
Speaker 5: a few million dollars a year. It was less than

575
00:29:56,160 --> 00:29:57,760
Speaker 5: being a banker and less than being you know, a

576
00:29:57,760 --> 00:30:00,520
Speaker 5: hedge fun star, but it was a stable and respect

577
00:30:00,680 --> 00:30:02,560
Speaker 5: So now there is this like warfare because there are

578
00:30:02,600 --> 00:30:05,520
Speaker 5: a set of lawyers who matter in this world and

579
00:30:05,560 --> 00:30:08,200
Speaker 5: who specialize in private equity and are thought to be,

580
00:30:08,280 --> 00:30:11,239
Speaker 5: you know, the big brains around these crazy contracts. So

581
00:30:11,880 --> 00:30:13,960
Speaker 5: that is something that's happened. And also, and this is

582
00:30:13,960 --> 00:30:17,400
Speaker 5: actual the company point which is really interesting, the hedge

583
00:30:17,440 --> 00:30:21,240
Speaker 5: funds and the private equity firms and the investors in

584
00:30:21,240 --> 00:30:23,720
Speaker 5: this market that people actually put money to capital, They

585
00:30:23,720 --> 00:30:28,520
Speaker 5: are increasingly horrified how much lawyers cost. Oh yeah, how

586
00:30:28,600 --> 00:30:31,280
Speaker 5: much bankers cost. How much the whole kind of process costs.

587
00:30:31,320 --> 00:30:33,640
Speaker 5: Like in bankruptcy, if you do end up filing for bankruptcy,

588
00:30:33,680 --> 00:30:36,760
Speaker 5: there is transparency because you your fees are approved by

589
00:30:36,760 --> 00:30:38,600
Speaker 5: the court and you can see now there's lawyers who

590
00:30:38,640 --> 00:30:41,160
Speaker 5: are charging twenty five hundred dollars an hour. There's bankers

591
00:30:41,200 --> 00:30:43,440
Speaker 5: who are getting success fees for you know, a pretty

592
00:30:43,480 --> 00:30:46,240
Speaker 5: standard deal for like fifty million, Like we work, for example,

593
00:30:46,800 --> 00:30:48,880
Speaker 5: a relatively small company. At the end of the case

594
00:30:48,920 --> 00:30:50,760
Speaker 5: seven hundred and fifty million dollars there was you know,

595
00:30:51,080 --> 00:30:53,560
Speaker 5: something like one hundred million dollars in fees. Wow. And

596
00:30:54,640 --> 00:30:56,880
Speaker 5: there is real money in these kind of professional services

597
00:30:56,880 --> 00:30:59,680
Speaker 5: in a way that is relatively new, and the cost

598
00:30:59,720 --> 00:31:02,640
Speaker 5: are so much that it's affecting the returns of these funds.

599
00:31:03,000 --> 00:31:06,520
Speaker 5: And they're thinking kind of proactively, how can we limit

600
00:31:06,560 --> 00:31:08,760
Speaker 5: the damage because it's affecting you know, how much we're

601
00:31:08,760 --> 00:31:10,360
Speaker 5: going to make and the deal ourselves.

602
00:31:10,600 --> 00:31:13,760
Speaker 2: If I'm a distressed at investor in the current environment,

603
00:31:13,880 --> 00:31:17,240
Speaker 2: would it be better to be really good at valuation

604
00:31:17,360 --> 00:31:20,960
Speaker 2: in math or be really good at reading legal document?

605
00:31:21,000 --> 00:31:21,200
Speaker 5: Yeah?

606
00:31:21,200 --> 00:31:22,040
Speaker 3: I mean I was going to wonder.

607
00:31:22,080 --> 00:31:24,120
Speaker 4: It's like, if you our lawyer, you know, makes sense,

608
00:31:24,120 --> 00:31:25,640
Speaker 4: why doesn't lawyer start a hedge fund?

609
00:31:25,720 --> 00:31:27,719
Speaker 5: Anyway? Keep going, There are a lot of lawyers who

610
00:31:27,760 --> 00:31:33,320
Speaker 5: start hedge funds. I do think though, that this kind

611
00:31:33,320 --> 00:31:36,640
Speaker 5: of the legal creativity that is becoming a little bit commoditized,

612
00:31:37,280 --> 00:31:41,960
Speaker 5: and ultimately, if if you're going to make a lot

613
00:31:42,000 --> 00:31:44,840
Speaker 5: of money, it's going to be less on a technical

614
00:31:45,720 --> 00:31:49,520
Speaker 5: factor and that like the technical part I think is defensive. Ultimately,

615
00:31:49,760 --> 00:31:51,240
Speaker 5: to make money, I think you have to be an

616
00:31:51,400 --> 00:31:54,720
Speaker 5: entrepreneur and have a thesis around how is this business

617
00:31:54,840 --> 00:31:57,240
Speaker 5: going to turn around? And if I end up owning it,

618
00:31:57,280 --> 00:32:00,560
Speaker 5: you know, how do I grow the market share and

619
00:32:00,840 --> 00:32:04,120
Speaker 5: have more customers? And that really kind of commercial business aspect.

620
00:32:04,640 --> 00:32:06,239
Speaker 5: And there are cases, you know, like Hurts I think

621
00:32:06,360 --> 00:32:07,880
Speaker 5: is a great story that was a big bidding or

622
00:32:07,960 --> 00:32:10,960
Speaker 5: during the bankruptcy and there was two competing private equity

623
00:32:10,960 --> 00:32:13,400
Speaker 5: firms with different plans for growing the business, and that

624
00:32:13,480 --> 00:32:19,680
Speaker 5: stuff I think ultimately is important. The gamesmanship again truly defensive,

625
00:32:20,480 --> 00:32:25,000
Speaker 5: and it's hard to differentiate yourself consistently. It is interesting

626
00:32:25,040 --> 00:32:29,480
Speaker 5: now in this market to see in one deal XYZ

627
00:32:29,600 --> 00:32:32,640
Speaker 5: famous hedge fund is on the outs, the other one

628
00:32:32,640 --> 00:32:35,760
Speaker 5: they're in the inn, and that's kind of coin flip.

629
00:32:36,240 --> 00:32:40,680
Speaker 5: And for that reason, you know, you just don't know

630
00:32:40,680 --> 00:32:42,120
Speaker 5: how it's coming. You think you're in the winning group,

631
00:32:42,120 --> 00:32:43,320
Speaker 5: and then you wake up and you see the press

632
00:32:43,360 --> 00:32:45,280
Speaker 5: release and you're not. That's a hard way to make

633
00:32:45,280 --> 00:32:47,920
Speaker 5: a living. It's a hard way to sleep. And I

634
00:32:47,920 --> 00:32:49,880
Speaker 5: don't know how long that will continue.

635
00:32:50,120 --> 00:32:52,920
Speaker 2: I'm going to ask a devil's advocate question. But one

636
00:32:52,960 --> 00:32:55,479
Speaker 2: of the arguments that used to come up with the

637
00:32:55,600 --> 00:32:59,080
Speaker 2: rise of cove light loans was this idea that, well,

638
00:32:59,200 --> 00:33:02,320
Speaker 2: maybe it's actually a good thing for companies because they

639
00:33:02,360 --> 00:33:05,840
Speaker 2: get more flexibility and there are more options available to

640
00:33:06,000 --> 00:33:09,479
Speaker 2: them in terms of raising capital. On the other side,

641
00:33:09,960 --> 00:33:12,840
Speaker 2: you know, maybe there is like a long term cost

642
00:33:13,040 --> 00:33:18,600
Speaker 2: associated with like legal wrangling over every single deal. What

643
00:33:18,760 --> 00:33:21,520
Speaker 2: Joe was kind of alluding to, where do you fall

644
00:33:21,880 --> 00:33:25,760
Speaker 2: on that argument. Is this ultimately good for companies or

645
00:33:25,920 --> 00:33:28,440
Speaker 2: is it a bad thing because maybe it makes people

646
00:33:28,480 --> 00:33:31,360
Speaker 2: feel a little bit different about capital markets.

647
00:33:32,200 --> 00:33:34,040
Speaker 5: Yeah, so if we go back to like the Surta case,

648
00:33:34,360 --> 00:33:36,680
Speaker 5: which I think is a good example, again, you've got

649
00:33:36,680 --> 00:33:42,360
Speaker 5: two competing groups, two aggressive transactions, and someone's going to win,

650
00:33:42,440 --> 00:33:44,480
Speaker 5: someone's going to lose, and someone's feelings are going to

651
00:33:44,520 --> 00:33:46,120
Speaker 5: be hurt, and there's going to be a litigation. But

652
00:33:46,160 --> 00:33:50,040
Speaker 5: from the company's perspective, you have an auction and you're

653
00:33:50,040 --> 00:33:51,720
Speaker 5: trying to get the lowest cost of capital for the

654
00:33:51,760 --> 00:33:55,280
Speaker 5: one hundred million dollars that you need, and who wins

655
00:33:55,320 --> 00:33:58,720
Speaker 5: or who loses to you doesn't matter. And this whole

656
00:33:58,760 --> 00:34:02,680
Speaker 5: kind of distributional point, who wins who loses, Like, why

657
00:34:02,680 --> 00:34:06,080
Speaker 5: do anyvists care if famous hedge fund access on the

658
00:34:06,080 --> 00:34:08,160
Speaker 5: outs in this deal and in that deal and the

659
00:34:08,440 --> 00:34:10,279
Speaker 5: winning sidn of that deal. That doesn't really matter. But

660
00:34:10,400 --> 00:34:13,920
Speaker 5: if a company can raise capital at the best terms

661
00:34:14,040 --> 00:34:20,200
Speaker 5: and avoid bankruptcy, that seems like a social positive. The

662
00:34:20,200 --> 00:34:22,600
Speaker 5: the points to temper that are, I think are two things. One,

663
00:34:23,560 --> 00:34:27,680
Speaker 5: does the overall cost of capital go up, because.

664
00:34:27,520 --> 00:34:30,960
Speaker 4: Well, if the investors are getting less returns because they

665
00:34:30,960 --> 00:34:33,440
Speaker 4: have to factor in their legal fees, that sounds like

666
00:34:33,480 --> 00:34:34,640
Speaker 4: higher less returns.

667
00:34:34,640 --> 00:34:36,640
Speaker 5: And you're just there's some chance you're just gonna get

668
00:34:36,800 --> 00:34:38,520
Speaker 5: you hold a senior loan and you're gonna be at

669
00:34:38,560 --> 00:34:40,799
Speaker 5: the bottom of the bottom of the totem pole and

670
00:34:40,840 --> 00:34:43,080
Speaker 5: that that and you're just a boring clo. That's gonna

671
00:34:43,120 --> 00:34:45,840
Speaker 5: be like it seems bad. And then two, if the

672
00:34:45,880 --> 00:34:48,239
Speaker 5: company this is this is something that we're seeing a

673
00:34:48,239 --> 00:34:51,759
Speaker 5: lot of. If the company ultimately does file for bankruptcy

674
00:34:52,320 --> 00:34:54,600
Speaker 5: and ends up in bankruptcy court, you end up with

675
00:34:54,640 --> 00:34:58,800
Speaker 5: this like Frankenstein capital structure, where you have super senior

676
00:34:59,360 --> 00:35:03,400
Speaker 5: firstly one point five lean third out of and the

677
00:35:03,400 --> 00:35:06,759
Speaker 5: banksty court and the banks process has to figure out

678
00:35:06,880 --> 00:35:09,480
Speaker 5: what the actual order is. There's probably litigation.

679
00:35:09,360 --> 00:35:11,600
Speaker 2: That happened with Caesar's, right, it.

680
00:35:11,560 --> 00:35:13,360
Speaker 5: Did, I mean Caesars. There is a little bit of

681
00:35:13,400 --> 00:35:15,319
Speaker 5: creditor on credit of violence, which against the idea of

682
00:35:15,440 --> 00:35:19,840
Speaker 5: inter or intra conflict of Caesar's is more the classic

683
00:35:19,880 --> 00:35:22,280
Speaker 5: case where you have a fight between the equity holders,

684
00:35:22,320 --> 00:35:24,440
Speaker 5: the junk bondholders, and the senior loans. Yes, and there

685
00:35:24,440 --> 00:35:25,719
Speaker 5: are people who are holding holds, but.

686
00:35:25,680 --> 00:35:28,040
Speaker 2: I just mean in terms of having a capital structure

687
00:35:28,080 --> 00:35:31,400
Speaker 2: that was so complicated that like the bankruptcy court was

688
00:35:31,400 --> 00:35:34,719
Speaker 2: struggling to understand it and deal with it, Like, yeah.

689
00:35:34,520 --> 00:35:39,480
Speaker 5: Exactly that. Yeah, you of like the company before bankruptcy

690
00:35:39,520 --> 00:35:41,640
Speaker 5: is trying to lower its cost of capital by selling

691
00:35:41,680 --> 00:35:44,920
Speaker 5: all these like bespoke securities for this particular type of investor,

692
00:35:45,120 --> 00:35:46,759
Speaker 5: and it seems like a good idea at the time,

693
00:35:46,800 --> 00:35:49,319
Speaker 5: and it maybe is, But then when you're actually trying

694
00:35:49,320 --> 00:35:53,080
Speaker 5: to divide up a shrunken pie, that is a mess

695
00:35:53,160 --> 00:35:56,520
Speaker 5: and that process ends up being like very costly. And

696
00:35:56,600 --> 00:35:58,759
Speaker 5: we've seen cases where there is a credit on credit

697
00:35:59,640 --> 00:36:02,440
Speaker 5: violent refancing and then six months later the entire companies

698
00:36:02,440 --> 00:36:06,480
Speaker 5: in bankruptcy. In the bankruptcy is much more complicated t

699
00:36:06,600 --> 00:36:09,560
Speaker 5: plus six months rather than if they had just decided

700
00:36:09,600 --> 00:36:10,560
Speaker 5: to do it on day zero.

701
00:36:11,360 --> 00:36:13,359
Speaker 4: This is always this crazy thing when I think about

702
00:36:13,360 --> 00:36:15,799
Speaker 4: like distressed stuff is like, man, there's just a risk

703
00:36:15,840 --> 00:36:17,719
Speaker 4: in it at all. Like everyone is trying to like eke

704
00:36:17,760 --> 00:36:20,480
Speaker 4: out their extra pennies or extra dollars, but you could

705
00:36:20,520 --> 00:36:21,920
Speaker 4: really just like collapse the whole thing.

706
00:36:22,560 --> 00:36:24,759
Speaker 5: Yeah, you're picking up pennies in front of the steam roller,

707
00:36:25,360 --> 00:36:27,200
Speaker 5: and that is bad.

708
00:36:27,440 --> 00:36:30,400
Speaker 2: So, speaking of Caesar's, there's one more question I wanted

709
00:36:30,400 --> 00:36:34,000
Speaker 2: to ask you, which is what's the deal with Apollo? Like,

710
00:36:34,080 --> 00:36:36,520
Speaker 2: can you just explain Apollo to me? Because they seem

711
00:36:36,560 --> 00:36:40,200
Speaker 2: to be everywhere nowadays. I see like a headline after

712
00:36:40,320 --> 00:36:43,880
Speaker 2: headline about what Apollo is doing, what they're thinking about doing.

713
00:36:44,280 --> 00:36:45,000
Speaker 2: What's your take?

714
00:36:46,160 --> 00:36:50,560
Speaker 5: Yeah, I mean I think they're the most interesting example

715
00:36:50,840 --> 00:36:55,840
Speaker 5: of like the broader theme in either alternatives assets, alternative assets,

716
00:36:55,920 --> 00:36:58,200
Speaker 5: or just private capital generally, and that there are a

717
00:36:58,200 --> 00:37:00,920
Speaker 5: set of firms that started as started out as in

718
00:37:00,960 --> 00:37:03,319
Speaker 5: the eighties or nineties, as like leveraged buyout firms they

719
00:37:03,400 --> 00:37:07,600
Speaker 5: bought whole businesses or carbouts of big businesses. As an

720
00:37:07,640 --> 00:37:10,560
Speaker 5: equity player, they borrowed a bunch of money. They owned

721
00:37:10,560 --> 00:37:13,279
Speaker 5: the they owned the company, they managed it, and they

722
00:37:13,280 --> 00:37:15,560
Speaker 5: sold it five years later ideally at a big profit.

723
00:37:16,640 --> 00:37:19,000
Speaker 5: That's a great business. You can make a lot of money.

724
00:37:19,040 --> 00:37:21,920
Speaker 5: Pretty risky, but you know it created a lot of

725
00:37:21,960 --> 00:37:24,600
Speaker 5: billion dollar fortunes. But there is a limit on how

726
00:37:24,600 --> 00:37:26,640
Speaker 5: many companies you can buy. And these firms have realized

727
00:37:26,640 --> 00:37:32,200
Speaker 5: that they have such expertise in negotiating valuation, understanding businesses

728
00:37:32,200 --> 00:37:35,480
Speaker 5: and business models and just being creative generally that the

729
00:37:35,520 --> 00:37:40,120
Speaker 5: credit markets are just much bigger. And you couple that

730
00:37:40,160 --> 00:37:43,120
Speaker 5: with the idea that the banking sector has undergone like

731
00:37:43,200 --> 00:37:47,279
Speaker 5: massive systemic changes post financial crisis, and those businesses are

732
00:37:47,360 --> 00:37:51,200
Speaker 5: much more constrained and complicated and not equipped, you know,

733
00:37:51,200 --> 00:37:53,239
Speaker 5: maybe for like the modern capital market. So they have,

734
00:37:53,840 --> 00:37:56,520
Speaker 5: for lack of a better phrase, use regulatory arbitrage to

735
00:37:56,680 --> 00:37:59,880
Speaker 5: encroach into every aspect of lending. And that is a

736
00:37:59,880 --> 00:38:03,400
Speaker 5: lot them to become trillion dollar managers. And that is

737
00:38:03,440 --> 00:38:06,480
Speaker 5: like a sea change. Whether it's good or bad, too

738
00:38:06,520 --> 00:38:09,960
Speaker 5: soon to say, but you know, Apollo is the clearest

739
00:38:10,000 --> 00:38:13,120
Speaker 5: example you know from whose heritage is in credit, coming

740
00:38:13,120 --> 00:38:15,960
Speaker 5: out of Drexel. But in fact, you know, credit markets

741
00:38:16,000 --> 00:38:18,680
Speaker 5: are much deeper, much wider, and there's just much more

742
00:38:18,719 --> 00:38:21,440
Speaker 5: opportunity to build a massive firm and that's.

743
00:38:21,280 --> 00:38:23,600
Speaker 2: What they're doing, all right, Suji, thank you so much

744
00:38:23,640 --> 00:38:26,520
Speaker 2: for coming on all thoughts. Truly the perfect guest, and

745
00:38:26,800 --> 00:38:30,080
Speaker 2: I cannot recommend your book enough, So everyone who's listening

746
00:38:30,120 --> 00:38:45,000
Speaker 2: definitely go check that out if you haven't done. Right Joe,

747
00:38:45,040 --> 00:38:46,880
Speaker 2: I thought that was so good, and I feel like

748
00:38:47,000 --> 00:38:49,839
Speaker 2: I have a lot more clarity about what's going on now.

749
00:38:50,120 --> 00:38:53,879
Speaker 2: I did think that the social aspect that Suji brought

750
00:38:53,960 --> 00:38:58,239
Speaker 2: up is really interesting because, like I, okay, obviously cove

751
00:38:58,320 --> 00:39:01,080
Speaker 2: lights became more of a thing, and then you had

752
00:39:01,280 --> 00:39:04,320
Speaker 2: higher interest rates in recent years, and so more companies

753
00:39:04,360 --> 00:39:07,080
Speaker 2: were under pressure and maybe they got more creative and

754
00:39:07,080 --> 00:39:10,799
Speaker 2: how they're raising capital. But I do think like the

755
00:39:10,880 --> 00:39:14,680
Speaker 2: difference or the change in social behavior on the part

756
00:39:14,680 --> 00:39:17,600
Speaker 2: of investors is also a big part of the story,

757
00:39:17,640 --> 00:39:19,400
Speaker 2: and so I guess the question is whether or not

758
00:39:20,000 --> 00:39:23,160
Speaker 2: it could change again. To Sijit's point about maybe having

759
00:39:23,160 --> 00:39:26,440
Speaker 2: investors team up and have their own contracts about how

760
00:39:26,440 --> 00:39:28,879
Speaker 2: they're all going to work together and things like that, no.

761
00:39:29,120 --> 00:39:32,240
Speaker 4: I thought it was there are some really interesting social

762
00:39:32,440 --> 00:39:35,960
Speaker 4: questions arising out of that. And you know, I'm not

763
00:39:36,000 --> 00:39:38,840
Speaker 4: a lawyer, but it does not. So I'm biased because

764
00:39:40,320 --> 00:39:43,040
Speaker 4: I'm not the beneficiary of this trend. But it does

765
00:39:43,080 --> 00:39:47,640
Speaker 4: not seem great to have a ton of, you know,

766
00:39:47,760 --> 00:39:52,200
Speaker 4: human hours devoted towards the definition of and or or

767
00:39:52,280 --> 00:39:54,799
Speaker 4: things that were We all thought we knew the definition

768
00:39:54,880 --> 00:39:57,600
Speaker 4: of et cetera. But actually, technically, if you look at

769
00:39:57,640 --> 00:40:00,920
Speaker 4: and or, then the second one has to be in there,

770
00:40:00,960 --> 00:40:03,440
Speaker 4: because that's how I've always read it too. But maybe

771
00:40:03,440 --> 00:40:05,279
Speaker 4: we thought it meant something else, or maybe we just

772
00:40:05,320 --> 00:40:06,760
Speaker 4: thought it meant and whatever.

773
00:40:07,320 --> 00:40:09,360
Speaker 2: Hire Joe for your litigation.

774
00:40:09,480 --> 00:40:10,319
Speaker 3: I'm glad you brought this up.

775
00:40:10,360 --> 00:40:12,719
Speaker 4: This has always bothered me so and it's interesting to

776
00:40:12,800 --> 00:40:17,560
Speaker 4: think like it's actually eating into the returns these legal costs,

777
00:40:17,600 --> 00:40:21,240
Speaker 4: that it actually even setting aside an incident of credit

778
00:40:21,320 --> 00:40:23,760
Speaker 4: on credit or violence, or even setting aside an incident

779
00:40:23,960 --> 00:40:27,560
Speaker 4: of bankruptcy, that it would eat into returns just because

780
00:40:27,560 --> 00:40:30,360
Speaker 4: of how much you're paying the law firms to go

781
00:40:30,520 --> 00:40:32,920
Speaker 4: over every one of these legal documents.

782
00:40:33,160 --> 00:40:35,640
Speaker 2: It is crazy also just to think about like the

783
00:40:35,680 --> 00:40:39,560
Speaker 2: amount of brain power that's being spent on debating this.

784
00:40:39,719 --> 00:40:43,480
Speaker 2: And again that's something that comes through in Sidjet's book,

785
00:40:43,760 --> 00:40:47,000
Speaker 2: like how much people are thinking about this, and it

786
00:40:47,080 --> 00:40:49,840
Speaker 2: certainly comes through in the Argentina book. Just how like

787
00:40:50,560 --> 00:40:54,239
Speaker 2: mentally taxing and time consuming sorting the stuff out is.

788
00:40:54,560 --> 00:40:57,520
Speaker 4: I thought it was also a really interesting point about

789
00:40:57,560 --> 00:41:00,239
Speaker 4: the sort of I don't know if it's like dis

790
00:41:00,360 --> 00:41:03,960
Speaker 4: economies of scale from capital efficiency. Right, So you have

791
00:41:04,160 --> 00:41:07,040
Speaker 4: all of these different instruments. You have equity, you have

792
00:41:07,280 --> 00:41:10,280
Speaker 4: junk bonds, you have all the you know, super plus whatever,

793
00:41:10,640 --> 00:41:14,200
Speaker 4: and individually, each one of these transactions is designed to

794
00:41:14,239 --> 00:41:17,520
Speaker 4: be the most capital efficient to align the company's borrowing

795
00:41:17,600 --> 00:41:20,839
Speaker 4: needs with the investors' needs. But then you end up

796
00:41:20,880 --> 00:41:23,560
Speaker 4: with this sort of you know, Frankenstein's monster of a

797
00:41:23,560 --> 00:41:26,360
Speaker 4: capital stack. And in the event that that has to

798
00:41:26,360 --> 00:41:29,480
Speaker 4: be unwound, that is it's like a tail risk, right, Yeah,

799
00:41:29,560 --> 00:41:31,920
Speaker 4: merges that in the event that has to be unwound,

800
00:41:31,960 --> 00:41:35,640
Speaker 4: it'll be a much costlier process than had it simply

801
00:41:35,680 --> 00:41:38,200
Speaker 4: been equity and bonds or something like that.

802
00:41:38,360 --> 00:41:40,640
Speaker 2: Yeah, I mean there can be like a parent company,

803
00:41:40,760 --> 00:41:45,680
Speaker 2: an operating company, like convertible bonds, the loans, preferred stock,

804
00:41:45,920 --> 00:41:47,759
Speaker 2: like it can go on and on and on, and

805
00:41:47,840 --> 00:41:51,640
Speaker 2: someone has to go through all of that. Uh, Okay. Well,

806
00:41:51,680 --> 00:41:52,960
Speaker 2: on that note, shall we leave it there?

807
00:41:53,000 --> 00:41:53,680
Speaker 3: Let's leave it there.

808
00:41:54,120 --> 00:41:56,800
Speaker 2: This has been another episode of the All Thoughts podcast.

809
00:41:56,880 --> 00:41:59,880
Speaker 2: I'm Tracy Alloway. You can follow me at Tracy Alloway.

810
00:42:00,080 --> 00:42:02,920
Speaker 4: And I'm joll Wisenthal. You can follow me at the Stalwart.

811
00:42:03,160 --> 00:42:06,239
Speaker 4: Follow our guest Sujit in Depth. He's at s in

812
00:42:06,360 --> 00:42:08,399
Speaker 4: Depth and check out his book. He is the co

813
00:42:08,480 --> 00:42:11,320
Speaker 4: author of The Caesars Palace Coup, came out in twenty

814
00:42:11,360 --> 00:42:15,040
Speaker 4: twenty one. Follow our producers Carmen Rodriguez at Kerman Erman

815
00:42:15,160 --> 00:42:18,480
Speaker 4: dash Ol Bennett at Dashbot and Calebrooks at Kale Brooks.

816
00:42:18,719 --> 00:42:22,000
Speaker 4: Thank you to our producer Moses Ondam. More Oddlots content,

817
00:42:22,040 --> 00:42:24,160
Speaker 4: go to Bloomberg dot com slash od loots, where you

818
00:42:24,160 --> 00:42:27,480
Speaker 4: have transcripts, a blog, and a new daily newsletter and

819
00:42:27,520 --> 00:42:29,600
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820
00:42:29,640 --> 00:42:33,719
Speaker 4: to seven in our discord Discord dot gg slash od loots.

821
00:42:33,960 --> 00:42:36,400
Speaker 2: And if you enjoy odd Lots, if you like it

822
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824
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