WEBVTT - Inside the Blood Sport of Creditor-on-Creditor Violence 0:00:03.080 --> 0:00:16.360 Bloomberg Audio Studios, Podcasts, radio News. 0:00:21.280 --> 0:00:24.640 Hello and welcome to another episode of the All Thoughts podcast. 0:00:24.800 --> 0:00:26.200 I'm Tracy Alloway. 0:00:25.880 --> 0:00:26.960 And I'm Joe Wisenthal. 0:00:27.440 --> 0:00:30.760 Joe, what do you know about creditor on creditor violence. 0:00:30.800 --> 0:00:33.200 I don't know anything other than it's it's a very punch. 0:00:33.840 --> 0:00:36.080 It's a great that's literally it. It's come up a 0:00:36.120 --> 0:00:39.280 few times in all Right. It's come up a few 0:00:39.320 --> 0:00:42.960 times in episodes we've done about credit, and I get 0:00:42.960 --> 0:00:46.479 the impression that, you know, lenders to affirm have different 0:00:46.520 --> 0:00:49.479 status and some are higher up in the rank than others, 0:00:50.000 --> 0:00:53.560 and that they would like to probably use the technicalities 0:00:53.600 --> 0:00:57.279 of the legal code to improve their rank in some 0:00:57.400 --> 0:00:59.880 sense when money gets paid out to lenders. 0:01:00.160 --> 0:01:04.080 Yes, so it has come up in a number of well, 0:01:04.800 --> 0:01:08.880 some of the fights get pretty nasty. Okay. Well, so 0:01:08.959 --> 0:01:11.800 when I think about it, I think back to when 0:01:11.840 --> 0:01:15.240 I covered the leverage loan market at the Ft and 0:01:15.319 --> 0:01:18.520 this was sort of like twenty thirteen, twenty fourteen, and 0:01:18.640 --> 0:01:23.840 I remember writing stories about how leverage loans, more of them, 0:01:23.880 --> 0:01:30.040 were becoming covelight, so weaker covenants for lenders or investors. 0:01:30.319 --> 0:01:34.120 What that means is companies basically had more leeway to 0:01:34.280 --> 0:01:37.640 restructure their assets if they were trying to raise new 0:01:37.640 --> 0:01:41.440 capital or stave off bankruptcy or whatever at the expense 0:01:42.040 --> 0:01:46.080 of those lenders slash investors. And back in twenty fourteen, 0:01:46.480 --> 0:01:49.400 I think the proportion of the leverage loan market that 0:01:49.560 --> 0:01:53.320 was cove light was something like thirty percent, and that 0:01:53.520 --> 0:01:57.400 was like a big deal that was already higher than 0:01:57.440 --> 0:02:01.320 the leverage buyout boom in two thousand and seven. Now, 0:02:01.720 --> 0:02:04.880 the vast majority of leverage loans I think something like 0:02:04.960 --> 0:02:08.520 ninety percent could be called cove light. So the entire 0:02:08.600 --> 0:02:12.320 market is basically cove light at this point, which fits 0:02:12.360 --> 0:02:15.960 into the creditor on creditor violence theme. So I feel 0:02:15.960 --> 0:02:18.000 like we need to we need to dive into. 0:02:17.800 --> 0:02:18.640 This what it is. 0:02:18.720 --> 0:02:21.560 I just my impression is that if I'm going to 0:02:21.600 --> 0:02:26.320 be affirmed that buys leverage loans, I need a good lawyer. 0:02:26.720 --> 0:02:27.320 For the contract. 0:02:27.400 --> 0:02:30.480 Well, I kind of wonder, I guess, I wonder relatively 0:02:30.560 --> 0:02:35.240 how important like legal expertise is versus valuation expertise. 0:02:35.280 --> 0:02:36.760 This is what I am wondering as well. 0:02:36.840 --> 0:02:39.079 All right, so let's get into it. I am very 0:02:39.080 --> 0:02:42.119 pleased to say we have the perfect guest, we're going 0:02:42.120 --> 0:02:45.440 to be speaking with Sujet Endap. He is, of course, uh, 0:02:45.639 --> 0:02:49.040 the Wall Street editor over at the FT, my former colleague. 0:02:49.120 --> 0:02:52.040 We used to double byline on at least one piece. 0:02:52.120 --> 0:02:55.360 I think he is also the author of the excellent 0:02:55.680 --> 0:02:58.920 Caesar's Palace Coup book, which if you haven't read, I 0:02:58.919 --> 0:03:03.360 would highly recommend, especially on that point about distressed debt 0:03:03.600 --> 0:03:07.000 fights getting kind of nasty sigit. Thank you so much 0:03:07.120 --> 0:03:08.680 for coming on all thoughts. 0:03:08.680 --> 0:03:10.239 Hi, Racy Joe, it's great to be here. 0:03:10.360 --> 0:03:10.720 Thank you. 0:03:11.040 --> 0:03:13.120 So, I guess my first question is, you know, we 0:03:13.160 --> 0:03:16.840 see these headlines about creditor on credit or violence, or 0:03:17.080 --> 0:03:19.440 you know, someone will be writing about the private credit 0:03:19.480 --> 0:03:22.160 market and they'll be in aside about creditor on credit 0:03:22.240 --> 0:03:24.200 or violence and how it's becoming more of a thing. 0:03:24.680 --> 0:03:27.919 Can you give us some context around whether or not 0:03:28.080 --> 0:03:31.440 this is becoming a bigger trend. I feel like it is, 0:03:31.520 --> 0:03:34.880 but it's not like there's a violence index that we 0:03:34.920 --> 0:03:35.440 can look at. 0:03:36.320 --> 0:03:41.440 Yeah, so the idea of violence in corporate restructuring and 0:03:41.480 --> 0:03:46.160 private equity deals is not a new idea. Imagine the 0:03:46.160 --> 0:03:48.640 business that's been bought by the private equity firm is 0:03:49.160 --> 0:03:52.880 just less valuable over time, the pious shrunk, there's going 0:03:52.920 --> 0:03:56.000 to be a fight over who gets what piece and 0:03:56.040 --> 0:03:59.160 how big those pieces are. The creditor on creditor of 0:03:59.240 --> 0:04:03.040 violence phenomena, though, is a little bit more nuanced and novel, 0:04:03.080 --> 0:04:06.360 And that's the idea that imagine you, Joe, U, Tracy, 0:04:06.400 --> 0:04:08.960 and me. We are all holders of the first lean 0:04:09.120 --> 0:04:11.840 term loan. Let's say you own five hundred million, Joe, 0:04:11.840 --> 0:04:14.360 you've got three hundred million. Let's say I'm poor, say 0:04:14.400 --> 0:04:19.159 worth the ft, and only have fifteen million. But there 0:04:19.200 --> 0:04:21.120 would be the view that since we're all in the 0:04:21.120 --> 0:04:24.880 same security governed by the same document, that our rights 0:04:25.000 --> 0:04:27.200 are the same and we are all going to be 0:04:27.200 --> 0:04:30.240 treated equally in this fight with the private equity firm 0:04:30.320 --> 0:04:34.799 and maybe the junk bond holders below us. The creditor 0:04:34.839 --> 0:04:37.800 on credit of violence nuance now is that in fact 0:04:37.800 --> 0:04:40.200 we are not equal, and you two, as large holders, 0:04:40.520 --> 0:04:43.120 can do things to me small holder that are not 0:04:43.200 --> 0:04:46.920 equal in treatment, arguably unfair, arguably impermissible. 0:04:47.760 --> 0:04:51.200 Just to be clear, in this theoretical setting in which 0:04:51.240 --> 0:04:54.640 all of us are quote equal in the in the 0:04:54.640 --> 0:04:59.520 firm's liabilities, did we all have the exact same language 0:05:00.080 --> 0:05:03.240 did we all enter into the same contractual language when 0:05:03.320 --> 0:05:05.520 we purchased the debt or when we lent money to 0:05:05.600 --> 0:05:09.560 the company. And furthermore, if we did all have the 0:05:09.560 --> 0:05:13.479 same language, what are the tools that we use to 0:05:13.560 --> 0:05:15.280 change our change our priorities? 0:05:15.400 --> 0:05:18.040 Yeah, so we do. We all are governed by the 0:05:18.080 --> 0:05:20.520 firstly in credit agreement. Maybe you bought in the original 0:05:20.640 --> 0:05:25.960 LBO and maybe you're clos an i'm or you are 0:05:26.839 --> 0:05:29.080 a distressed debt hedge fund which bought in later at 0:05:29.080 --> 0:05:31.039 a different price, but we're all governed by the same 0:05:31.080 --> 0:05:34.640 document and in concept have the same rights and protections. 0:05:34.960 --> 0:05:37.800 So then where how do I do something to you guys? 0:05:38.200 --> 0:05:40.680 If we're what are the basic tools at my disposal 0:05:41.080 --> 0:05:44.080 if I want to somehow gain an advantage for me 0:05:44.240 --> 0:05:45.200 that doesn't accrue to you. 0:05:45.320 --> 0:05:48.040 Yeah, So let's talk about why that scenario was first arise. 0:05:49.000 --> 0:05:51.400 And imagine the company is running into trouble. There's a 0:05:51.440 --> 0:05:55.320 maturity coming up, but there's some liquidity challenge. As you 0:05:55.360 --> 0:05:58.360 said earlier, these documents now since the financial crisis are 0:05:58.440 --> 0:06:00.680 covenant light or no covenant, so there's a lot of 0:06:00.720 --> 0:06:02.960 flexibility for the borrower, which is the company and the 0:06:02.960 --> 0:06:06.800 private equity firm that owns the company, and rather than 0:06:07.240 --> 0:06:10.160 just declaring bankruptcy and going to bankruptcy court and finding 0:06:10.160 --> 0:06:13.720 out there, which is messy, it's time consuming, it has 0:06:13.760 --> 0:06:15.480 its own restrictions on what you can do in the 0:06:15.520 --> 0:06:18.400 private equity firm will typically if the equity holder will 0:06:18.400 --> 0:06:21.640 get wiped out. Bankruptcy is like not an attractive option 0:06:22.040 --> 0:06:24.599 for those reasons, and so what you can try to 0:06:24.600 --> 0:06:28.760 do is raise new capital. And you're going to raise 0:06:28.760 --> 0:06:33.320 new capital, often from the existing lenders. Those lenders in 0:06:33.360 --> 0:06:36.080 exchange for giving you more money are going to ask 0:06:36.120 --> 0:06:39.880 for some things. What are they going to ask you for? First, 0:06:40.360 --> 0:06:44.080 the company itself is probably going to want to reduce 0:06:44.320 --> 0:06:46.479 the principle balance, So they want people to take haircuts. 0:06:46.520 --> 0:06:48.719 So there's gonna be some haircuts involved, and then there's 0:06:48.720 --> 0:06:52.479 gonna be brought this new money, brought in that new money. However, 0:06:52.680 --> 0:06:54.599 if I'm giving you new money into this troubled company, 0:06:54.680 --> 0:06:57.440 I'm gonna want some things to do. That gota and 0:06:57.520 --> 0:07:00.960 those things I'm gonna want is the most senior priority, 0:07:01.000 --> 0:07:04.400 which calls super priority. Okay, that's all sort of standard, 0:07:04.440 --> 0:07:08.200 that's not new. The nuance is the company itself has 0:07:08.560 --> 0:07:10.880 some amount of value it can pass out as cookies 0:07:10.920 --> 0:07:14.920 to these in this new financing process. And in the 0:07:14.960 --> 0:07:16.440 old world, what they would do is, let's say I've 0:07:16.440 --> 0:07:18.640 got one hundred million dollars and I'm making that number 0:07:18.680 --> 0:07:21.280 up of value to allocate in this new transaction that 0:07:21.280 --> 0:07:24.160 I'm going to raise new money in. Rather than splitting 0:07:24.160 --> 0:07:26.520 that up pro rata amongst the three of us, I'm 0:07:26.520 --> 0:07:28.760 just going to give it to two of you. And 0:07:28.800 --> 0:07:30.520 so why is that From the companys point of youw 0:07:30.520 --> 0:07:33.040 it's one hundredllion dollars. How the three of us divide 0:07:33.040 --> 0:07:36.360 it up? They don't really care about But you too, 0:07:36.400 --> 0:07:38.160 care about getting as much as you can since you 0:07:38.160 --> 0:07:39.520 own the mo what we all care about it? But 0:07:39.520 --> 0:07:42.680 you guys have the possibility of being let's say, a 0:07:42.720 --> 0:07:45.080 fifty one percent group and saying I can take all 0:07:45.120 --> 0:07:48.800 the cookies for me and leave Sejeet behind. And that 0:07:49.000 --> 0:07:51.280 is the idea of creditor on creditor of violence. We 0:07:51.280 --> 0:07:53.840 are theoretically PARTI pursue. We are in the same place 0:07:53.880 --> 0:07:57.440 with the same document, but you, because you choose to 0:07:57.600 --> 0:08:00.960 and the sponsor wants to doesn't really care where responsor 0:08:01.000 --> 0:08:02.480 will just go to you it's easier to deal to 0:08:02.520 --> 0:08:03.920 cuts if there's two of you, not three of us 0:08:04.040 --> 0:08:06.440 negotiate with and that is the nuance of creditor on 0:08:06.480 --> 0:08:09.480 credit violence. You two theoretically standing with me, but the 0:08:09.520 --> 0:08:13.320 same document can impose pain on me simply because you're bigger. 0:08:13.960 --> 0:08:17.560 Super priority kind of reminds me of double secret probation, 0:08:18.000 --> 0:08:20.480 right like that, I wonder, can you have like super 0:08:20.560 --> 0:08:23.240 super priority that would I guess you could like keep 0:08:23.240 --> 0:08:25.440 doing it forever pretty much, or at least until all 0:08:25.440 --> 0:08:25.880 the collection. 0:08:26.400 --> 0:08:28.400 It's kind of like one point five. Yeah, I mean 0:08:28.640 --> 0:08:30.880 that's kind of put between first and second. And then 0:08:30.920 --> 0:08:35.079 there's been double creditor on creditor violence cases, so there 0:08:35.160 --> 0:08:38.000 is like this spiral, uh and kind of like through 0:08:38.000 --> 0:08:40.439 the looking guests violence squared. Yeah. 0:08:40.480 --> 0:08:43.160 So one thing I don't really get about the creditor 0:08:43.160 --> 0:08:47.680 on creditor violence is its connection with private credit. And 0:08:48.000 --> 0:08:51.880 I've seen people talk about private credit as a response 0:08:52.160 --> 0:08:56.040 to creditor on creditor violence in the sense that, you know, 0:08:56.600 --> 0:08:59.760 maybe it's easier to be a single lender to a company. 0:08:59.800 --> 0:09:02.800 You're higher up in the payment waterfall, you don't have 0:09:02.880 --> 0:09:05.760 to worry about getting into fights with a bunch of 0:09:05.760 --> 0:09:09.240 other investors. But then I also see headlines saying that 0:09:09.480 --> 0:09:11.880 creditor on credit or violence is becoming more of a 0:09:11.920 --> 0:09:15.600 thing in private credit too, So basically I'm confused. 0:09:16.240 --> 0:09:19.200 Yeah, so let's just take a step back and just 0:09:19.200 --> 0:09:21.559 think about that. I think there's two factors that are 0:09:21.559 --> 0:09:25.840 behind the generalized credit or on credit or violence concept. 0:09:25.920 --> 0:09:28.400 One is what we hit on before, which is just 0:09:28.440 --> 0:09:31.839 the technical aspect of these credit agreements, which is the 0:09:31.920 --> 0:09:35.199 legal contract that governs like a leverage loan. And then 0:09:35.440 --> 0:09:38.720 you know, what are the restrictions or covenants that are 0:09:38.760 --> 0:09:42.760 in that document that prevent this kind of creativity and 0:09:43.200 --> 0:09:47.160 like refinancing and exchange offers. And there is like a 0:09:47.200 --> 0:09:51.600 real legal dispute about whether these changes can be done 0:09:52.080 --> 0:09:55.000 with or without unanimity, whether you need one hundred percent 0:09:55.320 --> 0:09:57.720 of the group, all three of us to agree to 0:09:57.800 --> 0:10:00.640 a change an interest rate or pull maturity. It does 0:10:00.720 --> 0:10:02.600 are called the so called sacred rights, if you will, 0:10:03.000 --> 0:10:04.640 And that's like a legal question that's been liting at it, 0:10:04.679 --> 0:10:06.120 and we can talk about that more if you want. 0:10:06.800 --> 0:10:09.880 But then there's also the social aspect. And the social 0:10:09.960 --> 0:10:14.480 aspect is the idea that me private equity forms they 0:10:14.480 --> 0:10:18.839 may have the legal ability for this mischief, but they 0:10:18.960 --> 0:10:23.120 ultimately wouldn't pursue that. And they wouldn't do that because 0:10:23.440 --> 0:10:26.640 they are a repeat player in the leverage finance markets. 0:10:26.679 --> 0:10:28.840 And if they get a reputation as a firm that 0:10:28.840 --> 0:10:32.000 gets too cute, that will cause them to borrow at 0:10:32.040 --> 0:10:34.360 higher interest rates and down the line and the next deal, 0:10:34.400 --> 0:10:36.000 the deal after that, the different partners who are not 0:10:36.040 --> 0:10:38.160 in this deal are going to face the consequences. So 0:10:38.200 --> 0:10:40.360 there's a social aspect and also within the deal itself. 0:10:40.400 --> 0:10:45.000 If you ultimately antagonize your creditors down the road, you 0:10:45.040 --> 0:10:47.600 may need to have restructure again. And if they remember 0:10:47.640 --> 0:10:50.040 you as the person who is rough with them, they're 0:10:50.080 --> 0:10:52.120 not going to be so kind when you need their help. 0:10:52.320 --> 0:10:55.720 And yet Argentina exists exactly. 0:10:56.040 --> 0:10:58.840 So that brings us to the private credit point. And 0:10:58.880 --> 0:11:02.240 you were obviously a lover's finance reporter and a lover's 0:11:02.320 --> 0:11:05.640 loan mayven. And you know how that market works, which 0:11:05.679 --> 0:11:08.840 is it's really big. It involves banks who underwrite these 0:11:08.880 --> 0:11:11.840 deals and then they sell them on in the syndication process, 0:11:12.320 --> 0:11:14.560 and that's a whole kind of machine. And you know, 0:11:14.679 --> 0:11:17.960 in in a big leveraged loan credit, there's going to 0:11:18.000 --> 0:11:21.840 be dozens of clos and regular way mutual funds and 0:11:21.840 --> 0:11:24.880 then hedge funds, and it's like a wide, widely dispersed 0:11:25.160 --> 0:11:28.160 kind of group, and that dynamic affects how the document 0:11:28.200 --> 0:11:30.040 is negotiated and just you know, all the kind of 0:11:30.040 --> 0:11:33.080 interactions down the line. And a private credit deal where 0:11:33.120 --> 0:11:34.840 you truly have like a club or maybe even a 0:11:34.840 --> 0:11:37.720 single lender, whether there's you know, four or five or 0:11:37.720 --> 0:11:41.160 three or two, maybe one firm that's providing a loan 0:11:41.280 --> 0:11:44.720 to a private equity backed company, that group is just 0:11:44.960 --> 0:11:49.280 much smaller. The negotiations around that document are much more intimate. 0:11:49.720 --> 0:11:53.040 And again for those social reasons, there was the idea 0:11:53.720 --> 0:11:56.920 that in a private credit deal, the private equity firm 0:11:56.920 --> 0:12:00.600 sponsor who owns the company is not going to declare 0:12:00.640 --> 0:12:02.600 war or go to deaf Con five or deaf Cone 0:12:02.600 --> 0:12:04.440 one with whichever the highest one is, to pursue their 0:12:04.480 --> 0:12:07.560 own ends. It's going to be much more of a collaborative, 0:12:07.600 --> 0:12:09.000 collaborative and. 0:12:10.040 --> 0:12:13.719 Kind friendly come by a relationship. 0:12:13.920 --> 0:12:15.640 And so this again now we go to the examples 0:12:15.920 --> 0:12:18.120 of the credit or on credit violence that has arisen 0:12:18.120 --> 0:12:22.960 down the private credit market and The examples are relatively 0:12:23.240 --> 0:12:25.679 sparse so far because private credit is relatively new and too, 0:12:25.720 --> 0:12:28.720 I do think this kind of social dynamic actually is true. 0:12:28.720 --> 0:12:31.160 There's this case called plural Site, which Bloomberg has covered. 0:12:31.200 --> 0:12:33.560 The ft is covered, where in fact, there was one 0:12:33.559 --> 0:12:36.520 of these aggressive kind of reef financing transactions that happened 0:12:36.600 --> 0:12:40.160 using kind of a loose document, and the private credit syndicate, 0:12:40.200 --> 0:12:43.880 which was four or five firms, was reportedly indignant that 0:12:43.920 --> 0:12:45.720 this had happened. In fact, this credit or on credit 0:12:45.720 --> 0:12:48.839 of violance situation was extremely mild. It was like one 0:12:49.360 --> 0:12:52.360 very small refinancing to make an interest payment. And then 0:12:52.440 --> 0:12:55.920 ultimately what happened was the sponsor handed the keys to 0:12:55.920 --> 0:12:57.920 the private credit firms to take ownership in a very 0:12:57.960 --> 0:13:00.199 bloodless way. And in fact, I wouldn't even like that, 0:13:00.520 --> 0:13:02.440 and I wouldn't even put this even close to the 0:13:02.480 --> 0:13:05.240 real like headline grabbing violence cases. 0:13:21.360 --> 0:13:24.280 So let's say I am I don't know a small 0:13:24.559 --> 0:13:26.559 there's sub sort of club dealer, there's subsort of deal 0:13:26.600 --> 0:13:28.840 and I am a small holder, and I am aware 0:13:28.960 --> 0:13:32.920 of the existence of creditor on creditor violence as a risk. 0:13:33.400 --> 0:13:36.600 I perceive me as being the one who might get screwed, 0:13:36.800 --> 0:13:39.760 so to speak, at some point in the future, what 0:13:39.880 --> 0:13:45.280 am I doing, along with my law firm, to write 0:13:45.320 --> 0:13:48.360 that document into such a way so as to reduce 0:13:48.480 --> 0:13:50.360 my odds of finding myself in that position. 0:13:50.920 --> 0:13:54.880 If you're a small player in the leverage finance market 0:13:54.920 --> 0:13:58.520 now and or a CLO, which is basically a passive instrument, 0:13:58.520 --> 0:14:01.440 as you guys know, things that just accumulate loans and 0:14:01.559 --> 0:14:05.200 turned in securities, and you're not like a shark hedge fund. 0:14:05.440 --> 0:14:07.400 This leverage loan market has changed quite a bit. And 0:14:07.440 --> 0:14:09.640 so if we just take a step back, leverage loans 0:14:09.679 --> 0:14:12.559 are the most senior part of a capital structure, even 0:14:12.600 --> 0:14:15.600 in a levered company. And so what that means is, 0:14:15.840 --> 0:14:19.080 even if things go south, the recovery rates and leverage 0:14:19.120 --> 0:14:22.640 loans historically have been very high, like eighty ninety one 0:14:22.720 --> 0:14:25.359 hundred percent, and so the people who hold these relatively 0:14:25.480 --> 0:14:29.560 risk averse institutions. And so two things have happened. Of 0:14:29.680 --> 0:14:32.200 like one is this credit on credit of violence common concept. 0:14:32.280 --> 0:14:36.000 But also, as you alluded to earlier, this market is 0:14:36.080 --> 0:14:38.800 huge now. Leverage loansally speaking, it's exploded in the last 0:14:38.840 --> 0:14:42.160 ten years, and there are a lot of loan only companies. 0:14:42.160 --> 0:14:45.760 There is nothing below the leverage loan other than the equity. 0:14:45.800 --> 0:14:49.680 There's no high yield bond, and so the recovery rates 0:14:49.720 --> 0:14:52.920 have become lower because there's less loss absorption below you. 0:14:53.600 --> 0:14:59.280 And this idea that conservative buyer over leverage loan have 0:14:59.280 --> 0:15:01.920 bought the safest security and you have the first lean, 0:15:01.960 --> 0:15:04.680 the first claim on the assets. That idea has been eroded, 0:15:04.680 --> 0:15:07.120 and that's actually very profound, and that this market has 0:15:07.160 --> 0:15:09.760 become much riskier than it used to be for the 0:15:09.800 --> 0:15:12.800 technical reasons and the social reasons. So getting your question 0:15:12.880 --> 0:15:15.040 on what you should do about it, one, you have 0:15:15.040 --> 0:15:18.440 to ask yourself, do you want to be in this business? Okay? 0:15:18.600 --> 0:15:20.720 And there's a lot of people who, now you know, 0:15:20.880 --> 0:15:22.760 unless they're like one of a handful of really big 0:15:22.800 --> 0:15:26.840 players that can impact of a distress situation and actually 0:15:26.880 --> 0:15:29.520 be in the negotiating room, they're thinking long and hard 0:15:29.560 --> 0:15:33.480 about being in this business. And two, you do hope 0:15:33.480 --> 0:15:37.240 that the documents themselves are being tightened over time, and 0:15:37.280 --> 0:15:38.720 there are ebbs and flows in the market. You know, 0:15:38.760 --> 0:15:41.320 there's supply and demand, and you know there's there's waves 0:15:41.320 --> 0:15:43.000 of when the documents are tight and when they're loose, 0:15:43.040 --> 0:15:45.000 and now you hear these terms about there's a j 0:15:45.120 --> 0:15:47.640 CREU blockers, Yeah, there is, and there are these like blockers, 0:15:47.880 --> 0:15:50.960 these blockers, like the J crew blocker, the sort of blocker, 0:15:51.000 --> 0:15:54.880 and that just means that in the in the document, 0:15:54.880 --> 0:15:59.560 the lawyers will negotiate tighter terms and restrictions that prevent 0:16:00.120 --> 0:16:02.760 j crue transaction the sort of transaction. And we can 0:16:02.800 --> 0:16:04.840 talk about this more in detail if you want. There 0:16:04.920 --> 0:16:06.600 is again this push and pull about you know, the 0:16:06.600 --> 0:16:08.720 documents and how title loose there are and how people 0:16:08.760 --> 0:16:11.440 push back. So you know, but the thing is, though, 0:16:12.160 --> 0:16:17.840 like everyone tends to be a price taker in these markets, 0:16:17.880 --> 0:16:20.360 and you kind of take the document that is the 0:16:20.400 --> 0:16:22.680 market at the time, and if you are a firm 0:16:22.680 --> 0:16:25.560 that tries to push back in the negotiations, they can 0:16:25.600 --> 0:16:26.240 just pass you over. 0:16:26.360 --> 0:16:28.080 Right, There's plenty of others someone else. 0:16:27.960 --> 0:16:30.240 Will take the bad document when you won't. And that 0:16:30.360 --> 0:16:33.120 is just that's the difficult dynamic right now. 0:16:33.280 --> 0:16:36.960 So there's this great bit in your book where the 0:16:37.040 --> 0:16:40.560 lawyers are arguing over the meaning of and in a 0:16:40.640 --> 0:16:46.440 contracts end or like whether and means a bunch of 0:16:46.480 --> 0:16:49.240 conditions have to be met or maybe only some. 0:16:49.160 --> 0:16:51.200 Of them, you know, I've always thought in language, this 0:16:51.280 --> 0:16:55.680 is a weird term because it's exactly right, it's off anyway, Yes, 0:16:55.840 --> 0:16:58.280 I didn't, I've always thought this is a weird term. 0:16:58.320 --> 0:17:02.080 Sorry, keep going so personal aside, But my husband is 0:17:02.120 --> 0:17:05.359 a former corporate lawyer, and it takes him ages to 0:17:05.480 --> 0:17:08.320 send a text message, Like he will spend twenty minutes 0:17:08.400 --> 0:17:11.000 writing a text message that's like two sentences, and he 0:17:11.080 --> 0:17:13.800 blames it on his legal background and the fact that 0:17:14.240 --> 0:17:17.399 you really have to consider the meaning of every single word. 0:17:17.760 --> 0:17:21.959 The thing I don't get about covenants and indentures and 0:17:22.000 --> 0:17:24.320 things like that is I would have thought a lot 0:17:24.359 --> 0:17:29.600 of it nowadays is like standard boiler plate. But I 0:17:29.640 --> 0:17:32.720 mean the fact that these issues arise and that there 0:17:32.720 --> 0:17:35.760 can be arguments over them suggests that maybe it isn't. So. 0:17:35.920 --> 0:17:37.760 I guess my question is like, how much of this 0:17:37.800 --> 0:17:41.480 is standardized versus customized for particular companies. 0:17:42.440 --> 0:17:44.359 Yeah, I mean, I think if we just take a 0:17:44.359 --> 0:17:47.040 step back and think about like the industrial organization of 0:17:47.680 --> 0:17:53.000 these markets, and to your point, I think there was 0:17:53.040 --> 0:17:56.880 a sense that these documents are standardized and there's some 0:17:57.000 --> 0:17:59.880 kind of like template which you downloaded, and they're all 0:18:00.119 --> 0:18:04.159 kind of the same more or less. What's happened is 0:18:05.400 --> 0:18:09.760 there has been now this arms race amongst the law 0:18:09.800 --> 0:18:13.680 firms and the investment banks to read these documents really 0:18:13.680 --> 0:18:17.120 carefully and then in their laboratories in the basement come 0:18:17.240 --> 0:18:20.919 up with crazy transaction structure. So the big credit or 0:18:20.920 --> 0:18:23.480 on credit of violence techniques. There's something called the drop down. 0:18:23.960 --> 0:18:26.880 There's something called the up to exchange. There's something more 0:18:26.880 --> 0:18:31.720 exotic called the double dip. It's called pari plus. And 0:18:31.760 --> 0:18:34.639 these are like designed by these law firms and these 0:18:34.680 --> 0:18:36.480 investments and when you do one of these transactions, you 0:18:36.480 --> 0:18:38.119 are not just checking a boxing. I want to do 0:18:38.200 --> 0:18:40.880 up to your exchange, and something like it just happens. 0:18:41.040 --> 0:18:43.320 There's like five crazy things you have to do which 0:18:43.359 --> 0:18:46.520 are kind of unnatural and combine together create an up 0:18:46.520 --> 0:18:50.760 to her exchange or a drop down, and the result 0:18:50.840 --> 0:18:54.520 is all the same, which is you, senior lender, suddenly 0:18:55.080 --> 0:18:58.000 in the left behind group, collateral that you owned now 0:18:58.040 --> 0:18:59.800 is somewhere else and is not reachable to you. And 0:19:00.040 --> 0:19:02.760 I've described our different techniques to do those things. And 0:19:02.840 --> 0:19:08.199 so people realize not only are the documents sort of looser, 0:19:08.280 --> 0:19:11.640 but the creativity that lawyers and bankers try to exploit 0:19:12.040 --> 0:19:16.560 has been accelerated and ratcheted up, and there's this idea 0:19:16.600 --> 0:19:21.000 that we're going to ask for forgiveness, not permission. We'll 0:19:21.000 --> 0:19:23.360 do the transaction. If someone wants to sue, we'll see 0:19:23.359 --> 0:19:25.440 them in court. That'll go on forever. And what you're 0:19:25.480 --> 0:19:28.080 ultimately trying to do in all these cases is create 0:19:28.160 --> 0:19:31.679 negotiating leverage for the actual settlement where everyone will come 0:19:31.680 --> 0:19:34.280 into a room and sort it out. But in fact 0:19:34.520 --> 0:19:37.040 who has the leverage is determined by you know, who's 0:19:37.040 --> 0:19:39.320 in the group and who's not. The actual transaction may 0:19:39.359 --> 0:19:42.040 or may not be important, but what it does is 0:19:42.160 --> 0:19:44.800 does set the parameters for the ultimate negotiation. 0:19:45.280 --> 0:19:48.040 So we've been talking a lot about behavior on the 0:19:48.440 --> 0:19:50.880 borrower and the lender side, but there is a sort 0:19:50.880 --> 0:19:54.480 of third party here, which is the court itself and 0:19:54.520 --> 0:19:57.760 the judges. And speaking of great books on credit, there's 0:19:57.800 --> 0:20:00.760 a great book on the Argentina restructure that came out 0:20:01.040 --> 0:20:05.480 relatively recently called Default, The landmark court battle over Argentina's 0:20:05.520 --> 0:20:09.359 one hundred billion dollar debt restructuring. And one of the 0:20:09.400 --> 0:20:12.800 takeaways that I got from reading that book is so 0:20:13.080 --> 0:20:16.560 much depends on the judge that is put in charge 0:20:16.600 --> 0:20:19.199 of a particular case, and there are moments in that 0:20:19.280 --> 0:20:22.280 book where like the judge is just really tired and 0:20:22.320 --> 0:20:24.719 fed up with everyone, and so he kind of like 0:20:25.480 --> 0:20:28.960 does things kind of hastily, I guess. But what's been 0:20:29.000 --> 0:20:33.440 the response from the courts to more aggressive creditor on 0:20:33.520 --> 0:20:34.720 creditor in fighting. 0:20:35.080 --> 0:20:39.320 So that's a great question, and not just the actual 0:20:39.800 --> 0:20:42.960 writing of the document the lawyers are doing is part 0:20:43.000 --> 0:20:46.760 of what the service they're offering. They're offering an entire 0:20:46.840 --> 0:20:51.120 kind of choreography on how this chess match is going 0:20:51.160 --> 0:20:53.120 to like each chest move is going to in florid, 0:20:53.119 --> 0:20:56.240 We're going to the document to the actual creditor on 0:20:56.280 --> 0:20:59.720 credit of violence transaction, and then ultimately the litigation and 0:20:59.760 --> 0:21:01.399 how we game out each of these moves. 0:21:01.480 --> 0:21:03.920 So like we'll be in this jurisdiction, we can expect 0:21:03.920 --> 0:21:06.760 maybe to get like this particular judge and the company 0:21:06.880 --> 0:21:08.960 or the other lender will respond this way. 0:21:09.080 --> 0:21:13.919 Yeah, And so these documents are all now almost all 0:21:13.960 --> 0:21:16.919 of them are written under New York state law, but 0:21:16.960 --> 0:21:18.239 that doesn't mean they always end up in New York 0:21:18.240 --> 0:21:20.400 state court. Sometimes they end up in New York State court. 0:21:20.760 --> 0:21:22.960 Sometimes they end up in federal court where the federal 0:21:23.040 --> 0:21:26.200 court is interpreting New York state law. And then sometimes 0:21:26.200 --> 0:21:29.359 they end up in bankruptcy court, which is a federal 0:21:29.400 --> 0:21:33.320