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Hello and welcome to another episode of the All Thoughts podcast. I'm Tracy Alloway.
And I'm Joe Wisenthal.
Joe, what do you know about creditor on creditor violence. I don't know anything other than it's it's a very punch.
It's a great that's literally it. It's come up a few times in all Right. It's come up a few times in episodes we've done about credit, and I get the impression that, you know, lenders to affirm have different status and some are higher up in the rank than others, and that they would like to probably use the technicalities of the legal code to improve their rank in some sense when money gets paid out to lenders.
Yes, so it has come up in a number of well, some of the fights get pretty nasty. Okay. Well, so when I think about it, I think back to when I covered the leverage loan market at the Ft and this was sort of like twenty thirteen, twenty fourteen, and I remember writing stories about how leverage loans, more of them, were becoming covelight, so weaker covenants for lenders or investors.
What that means is companies basically had more leeway to restructure their assets if they were trying to raise new capital or stave off bankruptcy or whatever at the expense of those lenders slash investors. And back in twenty fourteen, I think the proportion of the leverage loan market that was cove light was something like thirty percent, and that was like a big deal that was already higher than
the leverage buyout boom in two thousand and seven. Now, the vast majority of leverage loans I think something like ninety percent could be called cove light. So the entire market is basically cove light at this point, which fits into the creditor on creditor violence theme. So I feel like we need to we need to dive into.
This what it is.
I just my impression is that if I'm going to be affirmed that buys leverage loans, I need a good lawyer.
For the contract.
Well, I kind of wonder, I guess, I wonder relatively how important like legal expertise is versus valuation expertise.
This is what I am wondering as well.
All right, so let's get into it. I am very pleased to say we have the perfect guest, we're going to be speaking with Sujet Endap. He is, of course, uh, the Wall Street editor over at the FT, my former colleague. We used to double byline on at least one piece. I think he is also the author of the excellent Caesar's Palace Coup book, which if you haven't read, I would highly recommend, especially on that point about distressed debt
fights getting kind of nasty sigit. Thank you so much for coming on all thoughts.
Hi, Racy Joe, it's great to be here.
Thank you.
So, I guess my first question is, you know, we see these headlines about creditor on credit or violence, or you know, someone will be writing about the private credit market and they'll be in aside about creditor on credit or violence and how it's becoming more of a thing. Can you give us some context around whether or not this is becoming a bigger trend. I feel like it is, but it's not like there's a violence index that we can look at.
Yeah, so the idea of violence in corporate restructuring and private equity deals is not a new idea. Imagine the business that's been bought by the private equity firm is just less valuable over time, the pious shrunk, there's going to be a fight over who gets what piece and how big those pieces are. The creditor on creditor of violence phenomena, though, is a little bit more nuanced and novel, And that's the idea that imagine you, Joe, U, Tracy, and me. We are all holders of the first lean
term loan. Let's say you own five hundred million, Joe, you've got three hundred million. Let's say I'm poor, say worth the ft, and only have fifteen million. But there would be the view that since we're all in the same security governed by the same document, that our rights are the same and we are all going to be treated equally in this fight with the private equity firm
and maybe the junk bond holders below us. The creditor on credit of violence nuance now is that in fact we are not equal, and you two, as large holders, can do things to me small holder that are not equal in treatment, arguably unfair, arguably impermissible.
Just to be clear, in this theoretical setting in which all of us are quote equal in the in the firm's liabilities, did we all have the exact same language did we all enter into the same contractual language when we purchased the debt or when we lent money to the company. And furthermore, if we did all have the same language, what are the tools that we use to change our change our priorities?
Yeah, so we do. We all are governed by the firstly in credit agreement. Maybe you bought in the original LBO and maybe you're clos an i'm or you are a distressed debt hedge fund which bought in later at a different price, but we're all governed by the same document and in concept have the same rights and protections.
So then where how do I do something to you guys? If we're what are the basic tools at my disposal if I want to somehow gain an advantage for me that doesn't accrue to you.
Yeah, So let's talk about why that scenario was first arise. And imagine the company is running into trouble. There's a
maturity coming up, but there's some liquidity challenge. As you said earlier, these documents now since the financial crisis are covenant light or no covenant, so there's a lot of flexibility for the borrower, which is the company and the private equity firm that owns the company, and rather than just declaring bankruptcy and going to bankruptcy court and finding out there, which is messy, it's time consuming, it has its own restrictions on what you can do in the
private equity firm will typically if the equity holder will get wiped out. Bankruptcy is like not an attractive option for those reasons, and so what you can try to do is raise new capital. And you're going to raise new capital, often from the existing lenders. Those lenders in exchange for giving you more money are going to ask
for some things. What are they going to ask you for? First, the company itself is probably going to want to reduce the principle balance, So they want people to take haircuts. So there's gonna be some haircuts involved, and then there's gonna be brought this new money, brought in that new money. However, if I'm giving you new money into this troubled company, I'm gonna want some things to do. That gota and those things I'm gonna want is the most senior priority,
which calls super priority. Okay, that's all sort of standard, that's not new. The nuance is the company itself has some amount of value it can pass out as cookies to these in this new financing process. And in the old world, what they would do is, let's say I've got one hundred million dollars and I'm making that number up of value to allocate in this new transaction that I'm going to raise new money in. Rather than splitting that up pro rata amongst the three of us, I'm
just going to give it to two of you. And so why is that From the companys point of youw it's one hundredllion dollars. How the three of us divide it up? They don't really care about But you too, care about getting as much as you can since you own the mo what we all care about it? But you guys have the possibility of being let's say, a fifty one percent group and saying I can take all the cookies for me and leave Sejeet behind. And that is the idea of creditor on creditor of violence. We
are theoretically PARTI pursue. We are in the same place with the same document, but you, because you choose to and the sponsor wants to doesn't really care where responsor will just go to you it's easier to deal to cuts if there's two of you, not three of us negotiate with and that is the nuance of creditor on credit violence. You two theoretically standing with me, but the same document can impose pain on me simply because you're bigger.
Super priority kind of reminds me of double secret probation, right like that, I wonder, can you have like super super priority that would I guess you could like keep doing it forever pretty much, or at least until all the collection.
It's kind of like one point five. Yeah, I mean that's kind of put between first and second. And then there's been double creditor on creditor violence cases, so there is like this spiral, uh and kind of like through the looking guests violence squared. Yeah.
So one thing I don't really get about the creditor on creditor violence is its connection with private credit. And I've seen people talk about private credit as a response to creditor on creditor violence in the sense that, you know, maybe it's easier to be a single lender to a company. You're higher up in the payment waterfall, you don't have to worry about getting into fights with a bunch of
other investors. But then I also see headlines saying that creditor on credit or violence is becoming more of a thing in private credit too, So basically I'm confused.
Yeah, so let's just take a step back and just think about that. I think there's two factors that are behind the generalized credit or on credit or violence concept. One is what we hit on before, which is just the technical aspect of these credit agreements, which is the legal contract that governs like a leverage loan. And then you know, what are the restrictions or covenants that are in that document that prevent this kind of creativity and
like refinancing and exchange offers. And there is like a real legal dispute about whether these changes can be done with or without unanimity, whether you need one hundred percent of the group, all three of us to agree to a change an interest rate or pull maturity. It does are called the so called sacred rights, if you will, And that's like a legal question that's been liting at it, and we can talk about that more if you want.
But then there's also the social aspect. And the social aspect is the idea that me private equity forms they may have the legal ability for this mischief, but they ultimately wouldn't pursue that. And they wouldn't do that because they are a repeat player in the leverage finance markets. And if they get a reputation as a firm that gets too cute, that will cause them to borrow at higher interest rates and down the line and the next deal, the deal after that, the different partners who are not
in this deal are going to face the consequences. So there's a social aspect and also within the deal itself. If you ultimately antagonize your creditors down the road, you may need to have restructure again. And if they remember you as the person who is rough with them, they're not going to be so kind when you need their help.
And yet Argentina exists exactly.
So that brings us to the private credit point. And you were obviously a lover's finance reporter and a lover's loan mayven. And you know how that market works, which is it's really big. It involves banks who underwrite these deals and then they sell them on in the syndication process,
and that's a whole kind of machine. And you know, in in a big leveraged loan credit, there's going to be dozens of clos and regular way mutual funds and then hedge funds, and it's like a wide, widely dispersed kind of group, and that dynamic affects how the document is negotiated and just you know, all the kind of
interactions down the line. And a private credit deal where you truly have like a club or maybe even a single lender, whether there's you know, four or five or three or two, maybe one firm that's providing a loan to a private equity backed company, that group is just much smaller. The negotiations around that document are much more intimate.
And again for those social reasons, there was the idea that in a private credit deal, the private equity firm sponsor who owns the company is not going to declare war or go to deaf Con five or deaf Cone one with whichever the highest one is, to pursue their own ends. It's going to be much more of a collaborative, collaborative and.
Kind friendly come by a relationship.
And so this again now we go to the examples of the credit or on credit violence that has arisen down the private credit market and The examples are relatively sparse so far because private credit is relatively new and too, I do think this kind of social dynamic actually is true. There's this case called plural Site, which Bloomberg has covered.
The ft is covered, where in fact, there was one of these aggressive kind of reef financing transactions that happened using kind of a loose document, and the private credit syndicate, which was four or five firms, was reportedly indignant that this had happened. In fact, this credit or on credit of violance situation was extremely mild. It was like one
very small refinancing to make an interest payment. And then ultimately what happened was the sponsor handed the keys to the private credit firms to take ownership in a very bloodless way. And in fact, I wouldn't even like that, and I wouldn't even put this even close to the real like headline grabbing violence cases.
So let's say I am I don't know a small there's sub sort of club dealer, there's subsort of deal and I am a small holder, and I am aware of the existence of creditor on creditor violence as a risk. I perceive me as being the one who might get screwed, so to speak, at some point in the future, what am I doing, along with my law firm, to write that document into such a way so as to reduce my odds of finding myself in that position.
If you're a small player in the leverage finance market now and or a CLO, which is basically a passive instrument, as you guys know, things that just accumulate loans and turned in securities, and you're not like a shark hedge fund. This leverage loan market has changed quite a bit. And so if we just take a step back, leverage loans are the most senior part of a capital structure, even
in a levered company. And so what that means is, even if things go south, the recovery rates and leverage loans historically have been very high, like eighty ninety one hundred percent, and so the people who hold these relatively risk averse institutions. And so two things have happened. Of like one is this credit on credit of violence common concept. But also, as you alluded to earlier, this market is
huge now. Leverage loansally speaking, it's exploded in the last ten years, and there are a lot of loan only companies. There is nothing below the leverage loan other than the equity. There's no high yield bond, and so the recovery rates have become lower because there's less loss absorption below you. And this idea that conservative buyer over leverage loan have bought the safest security and you have the first lean,
the first claim on the assets. That idea has been eroded, and that's actually very profound, and that this market has become much riskier than it used to be for the technical reasons and the social reasons. So getting your question on what you should do about it, one, you have to ask yourself, do you want to be in this business? Okay?
And there's a lot of people who, now you know, unless they're like one of a handful of really big players that can impact of a distress situation and actually be in the negotiating room, they're thinking long and hard about being in this business. And two, you do hope that the documents themselves are being tightened over time, and
there are ebbs and flows in the market. You know, there's supply and demand, and you know there's there's waves of when the documents are tight and when they're loose, and now you hear these terms about there's a j CREU blockers, Yeah, there is, and there are these like blockers, these blockers, like the J crew blocker, the sort of blocker, and that just means that in the in the document, the lawyers will negotiate tighter terms and restrictions that prevent
j crue transaction the sort of transaction. And we can talk about this more in detail if you want. There is again this push and pull about you know, the documents and how title loose there are and how people push back. So you know, but the thing is, though, like everyone tends to be a price taker in these markets, and you kind of take the document that is the market at the time, and if you are a firm that tries to push back in the negotiations, they can just pass you over.
Right, There's plenty of others someone else.
Will take the bad document when you won't. And that is just that's the difficult dynamic right now.
So there's this great bit in your book where the lawyers are arguing over the meaning of and in a contracts end or like whether and means a bunch of conditions have to be met or maybe only some.
Of them, you know, I've always thought in language, this is a weird term because it's exactly right, it's off anyway, Yes, I didn't, I've always thought this is a weird term.
Sorry, keep going so personal aside, But my husband is a former corporate lawyer, and it takes him ages to send a text message, Like he will spend twenty minutes writing a text message that's like two sentences, and he blames it on his legal background and the fact that you really have to consider the meaning of every single word. The thing I don't get about covenants and indentures and things like that is I would have thought a lot
of it nowadays is like standard boiler plate. But I mean the fact that these issues arise and that there can be arguments over them suggests that maybe it isn't. So. I guess my question is like, how much of this is standardized versus customized for particular companies.
Yeah, I mean, I think if we just take a step back and think about like the industrial organization of these markets, and to your point, I think there was a sense that these documents are standardized and there's some kind of like template which you downloaded, and they're all kind of the same more or less. What's happened is there has been now this arms race amongst the law firms and the investment banks to read these documents really carefully and then in their laboratories in the basement come
up with crazy transaction structure. So the big credit or on credit of violence techniques. There's something called the drop down. There's something called the up to exchange. There's something more exotic called the double dip. It's called pari plus. And these are like designed by these law firms and these investments and when you do one of these transactions, you are not just checking a boxing. I want to do up to your exchange, and something like it just happens.
There's like five crazy things you have to do which are kind of unnatural and combine together create an up to her exchange or a drop down, and the result is all the same, which is you, senior lender, suddenly in the left behind group, collateral that you owned now is somewhere else and is not reachable to you. And
I've described our different techniques to do those things. And so people realize not only are the documents sort of looser, but the creativity that lawyers and bankers try to exploit has been accelerated and ratcheted up, and there's this idea that we're going to ask for forgiveness, not permission. We'll do the transaction. If someone wants to sue, we'll see
them in court. That'll go on forever. And what you're ultimately trying to do in all these cases is create negotiating leverage for the actual settlement where everyone will come into a room and sort it out. But in fact who has the leverage is determined by you know, who's in the group and who's not. The actual transaction may or may not be important, but what it does is does set the parameters for the ultimate negotiation.
So we've been talking a lot about behavior on the borrower and the lender side, but there is a sort of third party here, which is the court itself and the judges. And speaking of great books on credit, there's a great book on the Argentina restructure that came out relatively recently called Default, The landmark court battle over Argentina's
one hundred billion dollar debt restructuring. And one of the takeaways that I got from reading that book is so much depends on the judge that is put in charge of a particular case, and there are moments in that book where like the judge is just really tired and fed up with everyone, and so he kind of like does things kind of hastily, I guess. But what's been the response from the courts to more aggressive creditor on creditor in fighting.
So that's a great question, and not just the actual writing of the document the lawyers are doing is part of what the service they're offering. They're offering an entire kind of choreography on how this chess match is going to like each chest move is going to in florid, We're going to the document to the actual creditor on credit of violence transaction, and then ultimately the litigation and how we game out each of these moves.
So like we'll be in this jurisdiction, we can expect maybe to get like this particular judge and the company or the other lender will respond this way.
Yeah, And so these documents are all now almost all of them are written under New York state law, but that doesn't mean they always end up in New York state court. Sometimes they end up in New York State court. Sometimes they end up in federal court where the federal court is interpreting New York state law. And then sometimes they end up in bankruptcy court, which is a federal court as well and has its own, like very kind of unique powers, and they end up interpreting the document.
And there's a whole again art and science deciding, you know how you think it's going to involve. The state court and the federal courts are relatively slow, bankruptcy courts are relatively fast. So like one case, it's really interesting and I followed closely. Is this sort of Simmons from a couple of years ago, which was which is one of the emblematic creditor on creditor. Oh yeah, and so this is a mattress company. Obviously we all heard of
it got into trouble during the pandemic. They in an effort to raise more capital, essentially went to their existing lenders and said, we need more money. Who can give us a deal? And this is a fun case because they end up being two competing groups and they each propose their own deal. One is an uptier exchange. One is a drop down essentially accomplishing the same things, which is new capital in the company, the exchange of debt for a discount, and the company essentially had an auction
for new capital. They picked one so one group one. One group lost.
Wait was it the up tier the so the up.
Tor exchange group one. And there's a whole a side about this where the drop down group, which is Apollo an Angela Gordon, very aggressive smart firms that are in this market all the time. You know, think the actual up tier structure is something that actually is actually legally offensive in a way a drop down is not. And that's a rabbit hole we can go down. That's sort of at that point is actually very interesting.
Theoretically essentially add like a new layer of debt to the capital step.
Yeah, they both do the same thing. You end up in the same place. There's this whole question of whether the up to exchange is something that's actually contemplated in the original document, the drop down kind of is or not in that we can go down that rabbit hole if you want. But the point is, eventually STA had to file for bankruptcy. The Apollo angel Gordon group had sued in New York state court, and I can't recall that ended up in federal court or not for jurisdiction reasons.
But anyway, there was some lawsuit kind of going through the court. There are multiple lawsuits about the transactions. One the company went into bankruptcy. The company and the winning group sought to have the bankruptcy court to declare the transaction permissible, and the court bankrupt court, which was very fast, the Houston Court at the time, very very fast, blessed the transaction, the deal, the bankruptc deal got done, and the people in the winning group ultimately the kind of
took control of the company. The people left behind, you know, got hoosed for dimes on the dollar. So yes, So to answer your question, yes, the whole kind of legal game theory, the judicial is actually very important, and these questions are kind kind of often left outstanding and hanging because what happens is people ultimately settle out before they get vial ruling.
Well, I'm to add on to Tracy's question, has there been an evolution over time? So okay, lawyers are racing to come up with new ideas and new interpretations of words and oh, but in the dream world, you do transactions without ever really having to like red down to the document itself. Right, everyone is operating good faith. We know what all these things mean? Hopefully you don't have to spend the time a lot of time look at
where commas are or what and or actually means. Has there been an evolution among judges in courts in terms of the degree to which they say, look, we know what all we know what these words mean, while you guys trying to redefine words versus I guess like a more literal like what do these words mean in the English language as described in the original document.
Yeah, that brings up an interesting point if you read the actual complaints that, like the losing group will write in their lawsuits, go through all their contrastual points that you can't actually do this up to her exchange and the five crazy things to get it done, and the very last count that they'll add to their to their complaint is something called the covenant of good faith. And Yeah, and that is the idea that let's just put the wards aside. What do these actulety parties mean when they
struck this transaction? Like, what was the actual intent? Was the spirit of the document?
Right?
Because in the end, we don't want to have to live in a world right. I assume many investors lawyers might, but investors probably don't want to live in a world where every comma and word is being challenged as it's definition. And I'm curious if there's been some erosion of norms about the degree to which we sort of accept good people investors accept.
Yeah, we all knew what this meant, good faith.
Yeah, And I think there is some level of exhaustion. And you know, there have been some subsequent rulings where court frowns upon the credit or on creditor violence transaction.
There's just now this idea of also cooperation groups, which is this idea where the creditors, instead of like doing this fifty one to forty nine kind of fight, they all sign a contract to say we're going to be one single block and we will negotiate as group with the company and there can be no drawing credit violence because often what will happen in these deals is the sponsor will find the fifty one percent group and they're
in cahoots to do this thing. Right now, they're saying, you, financial sponsor, don't do that, because we're all one group and you can't pick and you can't.
Say separately from the separately from the bond doc or the low.
Yeah, we'll say, well, is that we are not going to sign into a deal for the next six months or a year or to the maturity. And if the company wants to negotiate, they negotiate with all of us as a block. So that's one thing. And there is now an effort to actually do what are called still called pro rata transactions where there is a refinancing, but the entire group Tracy, Joe, Sujit all get a chance to participate.
What happened to the leverage lending guidance because you alluded to how big this market is earlier, and it's huge and it's been booming since like the twenty tens, and I remember at one point regulators seemed concerned, and so they issued these guidelines of how to do leverage loans and you know, like what kind of leverage you should have, and I remember a bunch of bankers freaking out about them at the time, but it doesn't seem to have had much of an impact. Uh.
Yeah, So that was the idea that a bank couldn't extend a leverage loan where the DEBTIBA dollar issue was more than six times, and that was because you know, it's a bank and they can't do RESI shouldn't do these risky these risky deals. So a couple things happened. One, there's just a whole non bank market too. You know, there's some banks like Jeffrees that are not subject to
these guidance lines. Three, there's this private credit which is a whole different world which is obviously not regulated by banks. And four I think banks found ways to push the limits or change the definition bit dah. But even six times. I mean, if you go up to six, that's like a lot of leverage. And you know, even if you're
doing it six and banks themselves. I think there's a story in somewhere about City Bank or City Group, which hasn't been a big player in leverage loans, it has been kind of usurped in the market share now suddenly has a new guy from Jacone Morgan. There's a story yesterday in the journal I think about how he's going to push to get more into the leverage loan market. There's a reason City is not like aggressive in this because you know, it's risky, right, So we'll see how
that works out for them. So yeah, there was the actual idea of you know, how much leverage is their total and then you know, then these kind of interpersonal dynamics once the loan is extended.
As a former banker, you know, again you mentioned the law firms come in. They have new ideas up to your exchange offers as.
It dropped downs, cetera.
They have the whole choreography of how it's going to play out, et cetera. These are skills that they bring to the table that are something different from valuation and you know, debt dynamics and so forth. Is that visible in the pie? There's a certain amount of money that gets spent every year on services for transactions by companies, by borrowers or lenders, et cetera. Has there been a shift in the tilt of the pie of like how much goes to lawyers versus how much goes to the deal makers.
Yeah, that's a great point too. So you've now I've seen these stories about the law firm war as the lawyer's getting paid twenty thirty million dollars a year and they're shifting firms like baseball players or hedge fund guys typically do. And that's unusual because historically you started a law firm as an associate and you made it a partner. You stated at that firm your whole career, and it was prestigious and you've got a huge pension. You made
a few million dollars a year. It was less than being a banker and less than being you know, a hedge fun star, but it was a stable and respect So now there is this like warfare because there are a set of lawyers who matter in this world and who specialize in private equity and are thought to be, you know, the big brains around these crazy contracts. So
that is something that's happened. And also, and this is actual the company point which is really interesting, the hedge funds and the private equity firms and the investors in this market that people actually put money to capital, They are increasingly horrified how much lawyers cost. Oh yeah, how much bankers cost. How much the whole kind of process costs.
Like in bankruptcy, if you do end up filing for bankruptcy, there is transparency because you your fees are approved by the court and you can see now there's lawyers who are charging twenty five hundred dollars an hour. There's bankers who are getting success fees for you know, a pretty standard deal for like fifty million, Like we work, for example, a relatively small company. At the end of the case seven hundred and fifty million dollars there was you know,
something like one hundred million dollars in fees. Wow. And there is real money in these kind of professional services in a way that is relatively new, and the cost are so much that it's affecting the returns of these funds. And they're thinking kind of proactively, how can we limit the damage because it's affecting you know, how much we're going to make and the deal ourselves.
If I'm a distressed at investor in the current environment, would it be better to be really good at valuation in math or be really good at reading legal document?
Yeah?
I mean I was going to wonder.
It's like, if you our lawyer, you know, makes sense, why doesn't lawyer start a hedge fund?
Anyway? Keep going, There are a lot of lawyers who start hedge funds. I do think though, that this kind of the legal creativity that is becoming a little bit commoditized, and ultimately, if if you're going to make a lot of money, it's going to be less on a technical factor and that like the technical part I think is defensive. Ultimately, to make money, I think you have to be an entrepreneur and have a thesis around how is this business
going to turn around? And if I end up owning it, you know, how do I grow the market share and have more customers? And that really kind of commercial business aspect. And there are cases, you know, like Hurts I think is a great story that was a big bidding or during the bankruptcy and there was two competing private equity firms with different plans for growing the business, and that stuff I think ultimately is important. The gamesmanship again truly defensive,
and it's hard to differentiate yourself consistently. It is interesting now in this market to see in one deal XYZ famous hedge fund is on the outs, the other one they're in the inn, and that's kind of coin flip. And for that reason, you know, you just don't know how it's coming. You think you're in the winning group, and then you wake up and you see the press release and you're not. That's a hard way to make a living. It's a hard way to sleep. And I don't know how long that will continue.
I'm going to ask a devil's advocate question. But one of the arguments that used to come up with the rise of cove light loans was this idea that, well, maybe it's actually a good thing for companies because they get more flexibility and there are more options available to them in terms of raising capital. On the other side, you know, maybe there is like a long term cost associated with like legal wrangling over every single deal. What Joe was kind of alluding to, where do you fall
on that argument. Is this ultimately good for companies or is it a bad thing because maybe it makes people feel a little bit different about capital markets.
Yeah, so if we go back to like the Surta case, which I think is a good example, again, you've got two competing groups, two aggressive transactions, and someone's going to win, someone's going to lose, and someone's feelings are going to be hurt, and there's going to be a litigation. But from the company's perspective, you have an auction and you're trying to get the lowest cost of capital for the one hundred million dollars that you need, and who wins
or who loses to you doesn't matter. And this whole kind of distributional point, who wins who loses, Like, why do anyvists care if famous hedge fund access on the outs in this deal and in that deal and the winning sidn of that deal. That doesn't really matter. But if a company can raise capital at the best terms and avoid bankruptcy, that seems like a social positive. The the points to temper that are, I think are two things. One, does the overall cost of capital go up, because.
Well, if the investors are getting less returns because they have to factor in their legal fees, that sounds like higher less returns.
And you're just there's some chance you're just gonna get you hold a senior loan and you're gonna be at the bottom of the bottom of the totem pole and that that and you're just a boring clo. That's gonna be like it seems bad. And then two, if the company this is this is something that we're seeing a
lot of. If the company ultimately does file for bankruptcy and ends up in bankruptcy court, you end up with this like Frankenstein capital structure, where you have super senior firstly one point five lean third out of and the banksty court and the banks process has to figure out what the actual order is. There's probably litigation.
That happened with Caesar's, right, it.
Did, I mean Caesars. There is a little bit of creditor on credit of violence, which against the idea of inter or intra conflict of Caesar's is more the classic case where you have a fight between the equity holders, the junk bondholders, and the senior loans. Yes, and there are people who are holding holds, but.
I just mean in terms of having a capital structure that was so complicated that like the bankruptcy court was struggling to understand it and deal with it, Like, yeah.
Exactly that. Yeah, you of like the company before bankruptcy is trying to lower its cost of capital by selling all these like bespoke securities for this particular type of investor, and it seems like a good idea at the time, and it maybe is, But then when you're actually trying to divide up a shrunken pie, that is a mess and that process ends up being like very costly. And we've seen cases where there is a credit on credit violent refancing and then six months later the entire companies
in bankruptcy. In the bankruptcy is much more complicated t plus six months rather than if they had just decided to do it on day zero.
This is always this crazy thing when I think about like distressed stuff is like, man, there's just a risk in it at all. Like everyone is trying to like eke out their extra pennies or extra dollars, but you could really just like collapse the whole thing.
Yeah, you're picking up pennies in front of the steam roller, and that is bad.
So, speaking of Caesar's, there's one more question I wanted to ask you, which is what's the deal with Apollo? Like, can you just explain Apollo to me? Because they seem to be everywhere nowadays. I see like a headline after headline about what Apollo is doing, what they're thinking about doing. What's your take?
Yeah, I mean I think they're the most interesting example of like the broader theme in either alternatives assets, alternative assets, or just private capital generally, and that there are a set of firms that started as started out as in the eighties or nineties, as like leveraged buyout firms they bought whole businesses or carbouts of big businesses. As an
equity player, they borrowed a bunch of money. They owned the they owned the company, they managed it, and they sold it five years later ideally at a big profit. That's a great business. You can make a lot of money. Pretty risky, but you know it created a lot of billion dollar fortunes. But there is a limit on how
many companies you can buy. And these firms have realized that they have such expertise in negotiating valuation, understanding businesses and business models and just being creative generally that the credit markets are just much bigger. And you couple that with the idea that the banking sector has undergone like massive systemic changes post financial crisis, and those businesses are much more constrained and complicated and not equipped, you know,
maybe for like the modern capital market. So they have, for lack of a better phrase, use regulatory arbitrage to encroach into every aspect of lending. And that is a lot them to become trillion dollar managers. And that is like a sea change. Whether it's good or bad, too soon to say, but you know, Apollo is the clearest example you know from whose heritage is in credit, coming
out of Drexel. But in fact, you know, credit markets are much deeper, much wider, and there's just much more opportunity to build a massive firm and that's.
What they're doing, all right, Suji, thank you so much for coming on all thoughts. Truly the perfect guest, and I cannot recommend your book enough, So everyone who's listening definitely go check that out if you haven't done. Right Joe, I thought that was so good, and I feel like I have a lot more clarity about what's going on now.
I did think that the social aspect that Suji brought up is really interesting because, like I, okay, obviously cove lights became more of a thing, and then you had higher interest rates in recent years, and so more companies were under pressure and maybe they got more creative and how they're raising capital. But I do think like the difference or the change in social behavior on the part of investors is also a big part of the story, and so I guess the question is whether or not
it could change again. To Sijit's point about maybe having investors team up and have their own contracts about how they're all going to work together and things like that, no.
I thought it was there are some really interesting social questions arising out of that. And you know, I'm not a lawyer, but it does not. So I'm biased because I'm not the beneficiary of this trend. But it does not seem great to have a ton of, you know, human hours devoted towards the definition of and or or things that were We all thought we knew the definition of et cetera. But actually, technically, if you look at and or, then the second one has to be in there,
because that's how I've always read it too. But maybe we thought it meant something else, or maybe we just thought it meant and whatever.
Hire Joe for your litigation.
I'm glad you brought this up.
This has always bothered me so and it's interesting to think like it's actually eating into the returns these legal costs, that it actually even setting aside an incident of credit on credit or violence, or even setting aside an incident of bankruptcy, that it would eat into returns just because of how much you're paying the law firms to go over every one of these legal documents.
It is crazy also just to think about like the amount of brain power that's being spent on debating this. And again that's something that comes through in Sidjet's book, like how much people are thinking about this, and it certainly comes through in the Argentina book. Just how like mentally taxing and time consuming sorting the stuff out is.
I thought it was also a really interesting point about the sort of I don't know if it's like dis economies of scale from capital efficiency. Right, So you have all of these different instruments. You have equity, you have junk bonds, you have all the you know, super plus whatever, and individually, each one of these transactions is designed to be the most capital efficient to align the company's borrowing
needs with the investors' needs. But then you end up with this sort of you know, Frankenstein's monster of a capital stack. And in the event that that has to be unwound, that is it's like a tail risk, right, Yeah, merges that in the event that has to be unwound, it'll be a much costlier process than had it simply been equity and bonds or something like that.
Yeah, I mean there can be like a parent company, an operating company, like convertible bonds, the loans, preferred stock, like it can go on and on and on, and someone has to go through all of that. Uh, Okay. Well, on that note, shall we leave it there?
Let's leave it there.
This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.
And I'm joll Wisenthal. You can follow me at the Stalwart. Follow our guest Sujit in Depth. He's at s in Depth and check out his book. He is the co author of The Caesars Palace Coup, came out in twenty twenty one. Follow our producers Carmen Rodriguez at Kerman Erman dash Ol Bennett at Dashbot and Calebrooks at Kale Brooks.
Thank you to our producer Moses Ondam. More Oddlots content, go to Bloomberg dot com slash od loots, where you have transcripts, a blog, and a new daily newsletter and you can chat about all of these topics twenty four to seven in our discord Discord dot gg slash od loots.
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