Blackstone Goes to Kansas as Turnaround Experts Pitch Plans to U.S. States
Blackstone Group LP (BX)’s Timothy Coleman helped Ford Motor Co. (F) avoid bankruptcy and a taxpayer bailout as the automaker eliminated $9.9 billion of debt and negotiated with unions to modify collective-bargaining agreements. Now he’s trying to turn around Kansas.
Coleman, who heads restructuring at Blackstone, has met with Republican Governor Sam Brownback to discuss being hired as the state’s adviser, according to three people familiar with the discussions. Talks centered on how Kansas, where next fiscal year’s $492 million deficit is 3.5 percent of the total budget, could sell assets, streamline operations and downsize its government, said the people, who asked not to be named because the discussions are private.
Brownback, 54, took office in January seeking to revamp Medicaid, public-school financing and state regulations. The November elections brought to office 28 new governors who, like Brownback, may look to corporate-restructuring experts as they move away from piecemeal changes such as job cuts to a more sweeping approach to retooling their states.
“These governors are talking about restructuring on an unprecedented scale,” said Jonathan Henes, an attorney at Kirkland & Ellis LLP, which advised on the bankruptcies of Visteon Corp. and Solutia Inc. “States will need to pay market rates for expert restructuring advisers, but the potential for fixing the fiscal issues is huge and with restructuring advice you get what you pay for.”
A Blackstone spokesman, Peter Rose, declined to comment on talks with Brownback’s office.
The firm, hired in January 2009, advised Ford as it negotiated with the United Autoworkers to modify a 2007 collective-bargaining agreement and reduce borrowings through a debt exchange and tender offers, according to Blackstone’s website. Ford was the only major U.S. automaker to avoid Chapter 11 and a taxpayer bailout.
“Everyone recognizes that states need to balance their budgets and that they have extreme issues they’re looking at,” Coleman said in an interview with Bloomberg Television’s Carol Massar on March 7, adding that Blackstone has advised in municipal situations.
Brownback had a two-hour meeting with Blackstone in the governor’s office on Jan. 25, according to a copy of his schedule obtained by Bloomberg News through a public-records request. Blackstone has said it won’t work on issues related to state employee pensions, one of the people familiar with the discussions said.
U.S. states project combined budget deficits of $125 billion in the coming fiscal year because revenue hasn’t bounced back from the recession and spending on unemployment and Medicaid swelled. States and local pensions have an unfunded liability gap of as much as $3.6 trillion, according to an October study by economists from Northwestern University’s Kellogg School of Management and the University of Rochester.
“The days of ever-expanding government are over,” Brownback said in his State of the State address in January. “The future demands of us a commitment to deliver core services in innovative and more efficient ways.”
In addition to helping states cut costs, turnaround firms are getting involved with municipalities to restructure debt of public projects that borrowed too much and didn’t meet revenue projections.
Alabama’s Jefferson County, weighed down by more than $3 billion in sewer debt and a junk credit rating, hired West Palm Beach, Florida-based FTI Consulting Inc. (FCN), which advised creditors in the Washington Mutual Inc. bankruptcy, to prepare a turnaround plan.
Fees From Lehman
Alvarez & Marsal LLC, which runs bankrupt investment bank Lehman Brothers Holdings Inc. (LEHMQ), joined a team last month working on restructuring options for Harrisburg, Pennsylvania, the state capital that guaranteed debt payments for a failed incinerator. Officials from Philadelphia, which could run out of pension assets to pay benefits in 2015, according to the October study, met with advisers including Alvarez & Marsal, people with knowledge of the matter said on Nov. 19.
Such confidential meetings have resulted in few assignments because officials want to avoid the stigma of hiring experts associated with bankrupt corporations and restructuring firms charge relatively high fees, one of the people said.
Alvarez & Marsal received $403.5 million in fees for “interim management” of Lehman Brothers over 28 1/2 months, including $10.1 million in January, according to a court filing in February.
“Discussions between turnaround experts and state or local governments have picked up significantly over the past few months,” said Mo Meghji, principal at New York-based advisory firm Loughlin Meghji & Co. and chief restructuring officer of Capmark Financial Group Inc.
“Any successful restructuring will take a careful melding of political considerations with corporate expertise for which no clear precedents have been established,” he said.
In Kansas, Brownback has proposed eliminating or moving eight agencies, such as the state parole board and the department that runs Medicaid. The moves would save $9.2 million. Among the state’s assets is the 236-mile Kansas Turnpike, which Goldman Sachs Group Inc. (GS) said in 2006 could be sold for as much as $3.15 billion.
At the request of the legislature, Kansas’s Department of Administration compiled a 195-page list of all land and building assets owned by the state. The list, which was released in November, includes armories, ballparks, and university research facilities.
“The governor has met with lots of folks about restructuring during the transition and he has presented a number of reorganization orders on how to restructure state government in Kansas,” said Sherriene Jones-Sontag, the governor’s press secretary, without commenting specifically on any meetings with Blackstone.
State and local governments may focus on firing workers, as opposed to restructuring, as a quick way to cut costs, said Kevin Bacon, an adjunct professor at the Lyndon B. Johnson School of Public Affairs at the University of Texas in Austin and former vice president in the public-sector consulting practice at International Business Machines Corp. (IBM)
“Some of these structural solutions take time,” Bacon said. “When you need the cash right now, you may gravitate toward decisions that give you savings immediately.”
State and municipal payrolls declined by 249,000 jobs last year, according to data compiled by Bloomberg, more than the entire workforce of General Motors Co. (GM) States also are cutting reimbursements to Medicaid providers or reducing eligibility for the health-care program for the poor.
‘Terrible Cash Squeezes’
Widespread municipal-bond defaults are unlikely, said Bill Brandt, president of Development Specialists Inc. in Chicago, as state and local governments will do everything they can to maintain access to capital markets.
“Those folks who believe the market is going to transport their Chapter 11 practice into a Chapter 9 practice are crazy,” Brandt said. “Having said that, there’s going to be terrible cash squeezes and a need to negotiate and design a plan around things that many of these smaller municipalities don’t have any experience in doing.”