Distressed Investing

In some cases, a distressed investment strategy is best handled in an out-of-court transaction — which may consist of a debt or operational restructuring, refinancing, workout, recapitalization, acquisition, or divestiture. While bankruptcy may be the best avenue for restructuring a company that has significant labor, pension, or environmental concerns (or that requires significant contractual concessions or terminations), an out-of-court solution can often be a more effective, less expensive, lower risk, and less public alternative.

We can assist in determining whether an out-of-court restructuring is viable by thoroughly analyzing the capital structure and existing creditor, intercreditor, and inter-lender relationships. If it is deemed viable, we can provide comprehensive advice on every aspect of the restructuring process, including structuring the transaction, managing corporate governance and securities law issues, negotiating amendments, developing consent solicitations and exchange offers (including strategies to address potential hold-outs), and weighing the tax implications of the restructuring.

Bankruptcy M&A


We have represented many sophisticated private equity, hedge fund and other institutional investors in their distressed merger and acquisition activities, including Section 363 sales (whether as a “stalking horse bidder” or as an auction participant) and acquisitions by way of sponsored or stand-alone reorganization plans. When liquidity is scarce, we guide investors in crafting and implementing alternative investment and financing tactics, including “loan-to-own” strategies like using senior debt claims to credit bid on distressed assets or existing debt securities to confirm a plan of reorganization and emerge with equity.

Restructuring Debt in Bankruptcy

Schulte lawyers have extensive experience in handling all areas of bankruptcy restructuring. For understandable reasons, there is a substantial emphasis on speed and efficiency in most bankruptcy cases. There is often an absence of liquidity to fund lengthy and expensive cases, and lenders frequently demand that debtors identify and implement near-term exit strategies. As a result, investors who are not adequately prepared to address the issues may well find themselves on the wrong side of a valuation fight or a plan designed to “cram down” their claims or interests. Early participation in negotiations with the debtor is essential. In order to minimize the duration of a case, reduce costs and expenses and satisfy the demands of senior lenders, the use of a “pre-packaged” or “pre-negotiated” bankruptcy may be desirable, as well as the use of plan support and lock-up agreements — particularly where the debtor is prepared to turn over control to the holder of the fulcrum security.

Debtor-in-Possession and Exit Financings

Schulte is a nationally recognized leader in complex, multifaceted financings, including lending to bankrupt borrowers. The depth of our experience in navigating the risks and opportunities associated with distressed debtors allows us to take the lead in structuring, negotiating and managing financing transactions in bankruptcy cases, including debtor-in-possession financings and exit facilities implemented through Chapter 11 plans of reorganization. We have a panoramic practice that enables us to provide advice on transactions across the debtor’s capital structure, including senior and junior secured debt, term and revolving loans, bridge facilities, and subordinated or mezzanine debt. We advise on all types of debt financing to distressed debtors, whether they are roll-ups of existing debt or new loans. We have assisted numerous clients in successfully consummating these transactions on accelerated timetables.

We provide practical solutions to the complicated corporate governance issues that arise from diverse post-transaction shareholder bases, and we also provide creative tax structures to minimize a target’s cancellation of indebtedness income and to preserve net operating losses. Our interdisciplinary approach enables us to offer a team of experienced professionals with across-the-board expertise in dealing with the unique structuring, strategic, diligence, finance and documentation issues that arise in distressed M&A transactions.

We have significant experience representing investors, including private equity real estate funds and REITs, and developers in the acquisition and development of distressed real estate, whether single-asset or multi-property, developed or undeveloped, or commercial or residential, and with the related capital markets transactions, from subordinated financings and intercreditor arrangements to equity financings.

Our clients have included domestic and international buyers and sellers, and our experience includes joint venture, LLC and partnership transactions. We also have a successful track record representing clients in troubled financing deals and bankruptcy situations. We have represented secured and unsecured creditors, loan servicers, special servicers, acquirers and other interested parties in workouts, debt and equity restructurings and recapitalizations, mortgage foreclosures, deeds in lieu of foreclosure, defaulted-loan litigation, receiverships, Chapter 11 cases, cramdowns, and distressed debt and property dispositions.

Capital Structure Analysis

A distressed investment opportunity typically begins with a comprehensive, interdisciplinary review of the target’s capital structure, which may have a complex array of outstanding debt and equity securities, and which may include structured finance securities such as CMBS in the real estate sector or ABS in the aircraft sector. We analyze the relative rights of the various interest holders and help identify the fulcrum security. Most analyses include a review of debt covenants and anti-layering restrictions, intercreditor and inter-lender provisions, governance provisions and provisions with respect to transferability and voting rights. Our lawyers have experience with a broad array of industries and sectors, ranging from base manufacturing companies to technology and financial services firms. Our interdisciplinary teams are also equipped to address cross-border tax, collateral and insolvency issues.

Trading

Effective and timely implementation of an investment strategy must include taking ownership of the underlying loans or securities and being able to exercise the attendant rights and remedies, including the right to vote and to give direction to the agent or trustee. It also requires understanding the risks, such as potential fraudulent conveyance claims and upstream chain of title issues. We have the broad range of experience and expertise necessary to assist clients in negotiating and documenting distressed or par trades (including the ability to rely on “big boy” letters).