Few major insurers are in worse shape than The Equitable Life Assurance Society of the U. S. Pummeled by junk-bond defaults and soured real estate deals, the 132-year-old company is hard at work restructuring itself. Meanwhile, Equitable's quite healthy subsidiary, Donaldson, Lufkin & Jenrette Securities Corp., is making a very good living helping ailing clients restructure. Indeed, the small, low-profile investment banking firm has become perhaps the leader in Wall Street's red-hot restructuring business. "We are clearly No. 1," says John S. Chalsty, the company's South African-born chief executive officer.
DLJ faces a host of potent rivals, some of whom also claim preeminence in restructuring. But few dispute that DLJ has become the firm to beat. "DLJ has done a super job of jumping into the business," says Sharon M. Meadows, head of the reorganization group at First Boston Corp. "They suddenly appeared on the screen from nowhere in 1990." The firm's best-known assignments include Southland, MorningStar Foods, and British advertising agency Saatchi & Saatchi PLC (table). DLJ says that during 1990, its staff of 40 had 55 assignments.
COMPLEX CASE. Meadows and others attribute DLJ's success to its hiring in 1990 of a dozen employees from Drexel Burnham Lambert Inc., many of whose clients have fallen on hard times. The most prominent ex-Drexelite is Kenneth D. Moelis, a former managing director at the firm. When Moelis and seven colleagues signed on, they brought three or four active assignments with them. That attracted other troubled Drexel clients, including Southland Corp., DLJ's largest restructuring to date.
The Southland case was the biggest "prepackaged" or expedited bankruptcy ever. It involved negotiations with thousands of holders of nine securities issues. When a Japanese company expressed interest in bidding for Southland, DLJ lined up financing for a competitive offer "to foster an auction mentality," says Moelis. That probably forced up the Japanese bid. The Japanese wound up paying $430 million for 70% of the ailing company.DLJ's most complex case was Saatchi & Saatchi PLC. The firm was struggling under a heavy debt load incurred during a 1980s acquisition binge. The spree was financed largely by convertible debt. Under the bonds' terms, Saatchi could have been obligated to redeem them in 1993 for $400 million. But that was far more money than Saatchi was likely to have.
LEFT ALONE. DLJ and S. G. Warburg Group PLC, Saatchi's British adviser, managed to persuade the company's banks, bondholders, and shareholders to approve an offer where the bondholders exchanged their securities for common shares. Because Saatchi was under pressure to get the deal done, DLJ offered to make a $40 million bridge loan to Saatchi to facilitate the exchange. In an unusual twist, the advisers then got certain bondholders to underwrite a rights offering to existing shareholders that raised $100 million in new equity.
"It was extraordinarily complicated," says Simon J. Mellor, a Saatchi director. "The fact that DLJ, with our U. K. advisers, could produce something acceptable to all of the shareholders in itself speaks volumes." He credits DLJ's knowledge of the U. S. high-yield market. Half of the holders of the company's convertible bonds were American.
Many clients have been attracted by DLJ's track record in junk-bond deals. Unlike other firms, it has had few embarrassments, notably Morse Shoe Inc., a $230 million deal that ended in bankruptcy last year. DLJ is now representing the bondholders in a restructuring effort.
Although it doesn't exactly have deep pockets these days, Equitable finances much of DLJ's bridge-loan fund. Otherwise, it seems content to leave its subsidiary alone. Luckily for DLJ, few people even associate the two. "Their investment is passive," says Hamilton E. James, head of merchant banking for the firm and a prime mover in beefing up the restructuring operation. "Beyond that one-time investment, Equitable treats our merchant banking operation no differently from any other firm's."
DLJ still has a special relationship with Equitable's CEO, Richard H. Jenrette. Jenrette is the "J" in DLJ and its chairman. If he ever needs help fixing up Equitable, he knows whom to call.
A SAMPLER OF DLJ WORKOUTS
JPS TEXTILE MARCH, 1991 Represented the company in one of the fastest prepackaged bankruptcies ever, with the plan approved in 42 days. When some equity investors backed out at the last minute, DLJ invested $2.5 million
MORNINGSTAR FOODS MARCH, 1991 Advised the company in its difficult restructuring. Found new equity investors and restructured subordinated debt. Helped Morningstar repurchase 70% of the debt at 50~ on the dollar
SAATCHI & SAATCHI APRIL, 1991 Hired by the advertising giant to engineer one of the biggest British restructurings. Crafted a highly complex deal that was acceptable to a wide mix of parties, including many cross-border holders
SOUTHLAND MARCH, 1991 Advised the convenience-store chain on the largest prepack to date, which popularized the notion of using prepacks with large companies. Negotiated with holders of nine separate issues of securities