There's Plenty For All At The Bankruptcy BanquetBy
Rhett Butler an oracle for the '90s? Probably not. But Gone With the Wind's rakish Civil War profiteer, who made a fortune even as the South was losing, offered some oddly prophetic advice. "Most people don't realize," he tells Scarlett O'Hara, "there's just as much money to be made when a society's falling down as when it's rising up."
Quicker than you can say Chapter 11, Rhett Butler's creed has become a rallying cry for a growing segment of Wall Street. Restructuring, once a finance-industry backwater, has become a veritable gold mine. Charging fees of $500 an hour or more, legions of lawyers, investment bankers, and accountants are taking in millions to undo the damage of the '80s. "It has become our own cottage industry," says Wilbur L. Ross Jr., a restructuring pioneer whose Rothschild Inc. workout group was launched in 1985. "It may not be as lucrative as mergers and acquisitions, but there is still plenty of money to be made."
Indeed. The 26 firms involved in the Eastern Air Lines Inc. bankruptcy in 1989 charged close to $86 million in fees. Former Wickes Cos. Chairman Sanford C. Sigoloff stands to make at least $12 million for his work on liquidating retailer L. J. Hooker Corp., while Ross's firm earned $2.5 million for
representing just the creditors in the bankruptcy of Donald Trump's Trump Taj Mahal. And the biggest reward may still be ahead: The dozens of firms working to dismantle onetime Wall Street powerhouse Drexel Burnham Lambert Inc. received $77 million in fees through May--and are still charging $5 million a month.
HIRING A HALL. The sheer complexity of bankruptcy proceedings and the desire of creditors to protect their interests account for the surging industry. "It seems that every investor, every creditor, no matter how big or small, comes to the table with his own lawyer or financial adviser," says Christopher Beard, publisher ef Washington-based newsletter Turnarounds & Workouts. Consider Tucson Electric Power Co. When the Arizona utility announced an interest-payment moratorium earlier this year, it rented a hotel ballroom to fit the nearly 200 creditors and their seconds who showed up. With myriad debt, sale leasebacks, and other financing mechanisms to deal with, 10 law firms, a dozen investment advisers, and two accounting firms are now billing time.
With so many companies on the ropes, restructuring crews can play crucial roles. Los Angeles-based Jeffrey Chanin, a lawyer and former Drexel investment banker, draws $200,000 a month for guiding Carter Hawley Hale Stores Inc. through Chapter 11. This summer, he helped earn his keep by coming up with a novel plan to persuade bondholders to sell $431 million in bonds to Chicago financier Sam Zell. Consolidating creditor claims and bonds, estimates Chanin, will save six months in bankruptcy court and $18 million. For his efforts, he will claim a bonus of up to $1 million when the retailer emerges from bankruptcy.
DEJA VU. Similarly, Rothschild's Ross helped earn his $150,000 monthly retainer by negotiating an attractive deal for Orion Picture Corp.'s bondholders. In August, he helped pressure majority shareholder John W. Kluge to add $50 million in capital before the bondholders would agree to swap their paper for stock and zero coupons.
Ironically, in many cases, newcomers to the workout industry are the same folks who raised money or struck deals for companies that now are going sour. New York's Skadden, Arps, Slate, Meagher & Flom, a top mergers-and-acquisitions law firm in the '80s, created a 75-lawyer restructuring unit last year by reassigning some tax and other corporate attorneys from their M&A duties.
Then there's the Drexel connection. Nearly two dozen members of Drexel's high-yield unit have landed elsewhere on Wall Street and now are doing restructuring at Kidder Peabody, Smith Barney, Alex. Brown & Sons, and Jefferies & Co. Leon Black, a former Drexel executive, now runs Lion Advisors, which is counseling France's Altus Finance on its proposed $3 billion purchase of ailing Executive Life Insurance Co.'s junk-bond portfolio. "Sometimes, it's just a matter of turning the same company and looking at it from another angle," says Kenneth D. Moelis, a managing director at Donaldson, Lufkin & Jenrette Securities Corp. who arrived with seven former Drexel colleagues in early 1990.
Workout advisers are among the first to acknowledge that it's far more difficult these days to strike a deal between management and creditors. Not only is everyone more litigious, but creditors are no longer so fearful of Chapter 11. "We have arrived at the age of the militant investor," says Sigoloff. This spring, Los Angeles lawyer Stephen Chrystie, representing a group of vendors, forced MGM Pathe Communications Co. into involuntary bankruptcy. The move prompted a management overhaul that also freed $16 million for his clients. Chrystie's take was roughly 10%.
Whether the workout profession will continue to attract as many new players is questionable. Wary that advisers will gouge hapless companies, bankruptcy courts increasingly are forcing firms to scale back or rebate fees. A Dallas bankruptcy judge rejected more than $400,000 in fees that Bear, Stearns & Co. had billed Southmark Corp., while a Miami judge overseeing the General Development Corp. bankruptcy rolled back the fees of 11 firms by $1.5 million.
What's more, with clients often cash poor, getting paid can be a problem, as Los Angeles-based Stutman, Treister & Glatt knows. Considered one of the leading bankruptcy boutiques, the law firm still is waiting for a judge to allow half the $7.5 million it charged for more than 15,000 hours of work during the two-year-long bankruptcy proceeding for Public Service Co. of New Hampshire.
'COUNTER CYCLICAL.' Likewise, Donaldson, Lufkin & Jenrette took $4 million in stock instead of cash for Saatchi & Saatchi Advertising International's restructuring earlier this year and $2 million in notes for Orion's debt-swap offering. "Often, you can't charge as much as you might if the company was going well," admits Donald S. Bernstein, the lead bankruptcy partner for New York law firm Davis Polk & Wardwell. But, he adds, "it is still a good countercyclical business."
Even when the cycle changes and companies rebound, some cleanup firms will continue to profit. Anticipating that certain companies will emerge from bankruptcy in better shape than ever, some workout specialists want an even bigger piece of the action. Sigoloff, whose firm is working on four restructuring deals now, says he's eager to trade his firm's "sweat equity" for pieces of the companies he counsels. The idea is simple: What goes around comes around. Rhett Butler would understand.
THE COST OF A CLEAN SLATE Company Fees* Millions of dollars LTV $120 FEDERATED DEPARTMENT STORES 90 EASTERN AIR LINES 86 DREXEL BURNHAM LAMBERT 77 L.J. HOOKER 45 *Estimated fees for legal, accounting, and investment banking paid by companies since declaring bankruptcy DATA: BW