Navigating rising waters
Distressed companies and their creditors sought out PJT Partners for innovative solutions to increasingly complex balance-sheet troubles in 2023. Many sought to head off trouble with liability management transactions while others resolved crises in court. PJT Partners proved adept at managing every facet of the restructuring arena and remains IFR’s Restructuring Adviser of the Year.
On paper, liability management sounds like a simple process for heavily indebted companies to confront their problems squarely with their bondholders. But exponents of the art say it would be wrong to assume there is a readymade solution to every situation.
“It's not an easy market,” said Steve Zelin, global head of restructuring and special situations group at PJT Partners. Processes need to be refined on many occasions and PJT is frequently the first port of call from those on both sides of a potential deal.
Zelin said the expansion of the firm’s liability management product, which now accounts for more than half the restructuring group’s revenue, drove restructuring revenue to a peak in 2023.
“It may be easy to model but it’s hard to do in practice,” said Josh Abramson, partner in PJT's restructuring and special situations group.
Carrying out such processes, before a debtor files for bankruptcy, has been a growing trend. The costs of filing for Chapter 11 or similar bankruptcy protection mechanisms outside the US have mounted in recent years, meaning avoiding such events is now preferable for cash-strapped clients.
Zelin said providing such an alternative has helped the overall business grow in recent years.
“Our growth in revenue has been a direct result of the expansion of our product offering,” he said. “The pure distress business has not exploded. The number of bankruptcies has grown but is not much larger than last year.”
Revenues across PJT’s business, which also includes M&A advisory and fund placement, rose 11% in the first nine months of 2023 to US$825m. Many other advisory boutiques in contrast struggled with the M&A downturn.
When delivering the record figures chief executive Paul Taubman highlighted “the strong momentum and leadership position” of the firm’s “world-class” restructuring business with fees up “substantially” year on year.
Zelin said: “We have been busy advising companies potentially two to three years ahead of when they might hit the wall. That is the sweet spot of our business: after regular capital markets fail but before liquidity issues give you a problem.”
PJT's prowess at carrying out a liability management seamlessly at this point means many financial sponsor clients are sending more business its way too. “Repeat business from private equity firms is driven by our consistency in this area,” Zelin said.
Being one of the top choices of such investors, either on debtor or “fulcrum” creditor mandates, has allowed PJT to avoid more junior roles, such as advising unsecured creditor committees. That leads to more success on mandates – and higher fees.
Among the landmark assignments in 2023, PJT advised a highly organised and diverse group of bondholders in Carvana. The online car retailer completed a US$5.5bn distressed debt exchange that gave the company US$900m of liquidity and pushed out maturities. Creditors, advised by PJT, were able to swap unsecured debt for secured notes and a more predictable path for any future workouts, in addition to a richer coupon.
At Shutterfly, PJT was able to broker a consensual debt exchange without pitting lenders against one another. Shutterfly operates the largest school photography business in the US in addition to its personalised products and home decor business revolving around personal photography. In the final exchange the company was able to reduce debt by US$200m, extend US$2.5bn in maturities to 2026 and beyond, and boost liquidity by US$600m.
Doing an all-lender deal, instead of focusing on a group holding 25% of the capital structure was the right answer for Shutterfly, Abramson said.
Cosmetics company Revlon collapsed into bankruptcy in June 2022. It turned out that during the pandemic, when many women worked from home, they didn’t see much need to spend heavily on makeup. PJT advised the company on its 2021 debt exchange and was selected to advise on the bankruptcy as well. Revlon emerged from bankruptcy in May 2023 with a fully consensual deal involving nine tranches of funded debt despite twists and turns – one of which threatened to ensnare Citigroup following a clerical error.
Over the pond
PJT also has an extensive platform outside the US. Over the past year in Europe it advised German real estate group Adler on its high profile restructuring as well as creditors of Spanish steelmaker Celsa and the two biggest French cases, care homes operator Orpea and supermarket chain Casino.
Tom Campbell, partner and head of EMEA for Restructuring and Special Situations Group, said PJT’s “deal velocity” was higher than during the pandemic in 2020, when many debtors sought emergency advice on their liabilities. “The seeds of this work were sown in 2022 when borrowers with 2023 maturities came to us,” he said.
One of those approaching PJT at this time was Adler Group, which had €6.7bn of debt overall with a substantial amount coming due in 2023. The German company, which had been targeted by short-seller Viceroy Research, initially tried to use a domestic consent solicitation to solve its problems.
That exercise, targeting six notes with €3.1bn outstanding, failed after it was blocked by a bondholder group in one series, but through canny use of the new English restructuring plan by a UK subsidiary, it staved off an insolvency filing, giving it two more years to fight its financial battles.
“This was the biggest deal in the European market and the first contested restructuring plan,” said Campbell. As part of the deal another bondholder group agreed to put in €937m of new money. “It gave the company a very valuable runway,” he said.
The transaction also set a legal precedent that could help other issuers facing tricky restructurings, and confirmed the UK’s place as the venue of choice across Europe to carry out the most complex, cross-border transactions.
The restructuring plan allows creditor classes to be grouped together and then crammed down if a judge approves. In this case the six different bonds were kept separate but the plan was still sanctioned by the court in April 2023, just days before the first series of notes came due.
Holdout bondholders have successfully appealed the decision but that is largely academic as PJT has secured the new money for Adler.
Old China hands
In Hong Kong the firm has also built a wave of mandates for offshore creditors of property developers in China. Most of these processes have so far been delayed as the Chinese authorities ensure that customers of these companies who have paid upfront for apartments see them delivered.
Only after that will other creditors be dealt with. However, Sunac, which is based in Northern China, did manage to agree a restructuring plan with its offshore creditors, holding over US$10bn of claims, advised by PJT.
“Sunac was the first of our eight deals to close,” said Martin Gudgeon, chairman of EMEA and Asia RSSG. “It was a complicated amend and extend.” Maturities on Sunac’s offshore notes have been extended by up to seven years and some swapped for convertible bonds.
This was seen as attractive in part because trading in the company’s equity was more liquid than in some of the offshore debt instruments. Investors who wish to exit can therefore do so more easily by converting their debt into equity at the earliest opportunity.
Another notable deal in Asia was the second round of restructuring for materials producer Lycra. The first had seen the original owner lose control of the business. This time PJT helped the company negotiate upcoming debt maturities against some hostile creditor reception.
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