The Sweet Smell Of Chapter 11

Saybrook Capital specializes in 'big, ugly' bankruptcies. Today, that means airlines

Nestled 3,000 miles from Wall Street in the beachside town of Santa Monica, Calif., Saybrook Capital is an unlikely player in the rough-and-tumble world of bankruptcies. But since it started in 1990, the 60-person boutique investment bank has carved out a key role in some of the country's largest bankruptcies, advising creditors of Pacific Gas & Electric and shareholders of Kmart (SHLD ) and Adelphia Communications (ADELQ ). Often it competes against much bigger firms such as Lazard and Rothschild. "We tend to get the deals that are big, ugly, and complicated," says Jonathan Rosenthal, who runs the firm's bankruptcy practice.

Now the firm is knee-deep in the airline industry, where three of the four largest carriers are in Chapter 11. Saybrook has been advising the official committee of creditors of United Airlines parent UAL Corp. (UALAQ ), which filed for bankruptcy in 2002. Saybrook is short-listed to do the same with both of the two carriers that filed on Sept. 14 -- Delta Air Lines (DAL ) and Northwest Airlines (NWAC ). Creditors will choose advisers in the next few weeks. Saybrook may have the inside track over three rivals for the Delta job because it has been representing creditors informally for 15 months.

So Saybrook figures to have a seat at the table as the U.S. airline industry is reshaped. "Advisers have a lot of say over who wins and who loses" in bankruptcy court, says Rosenthal. "Bankruptcy is a powerful tool and can be used for all kinds of things, including mergers." He expects carriers will emerge from bankruptcy with drastically reduced costs to enable them to compete with low-cost carriers such as Southwest Airlines. And he foresees mergers over the next couple of years: "You're going to take seats out of the system, and that will improve yields."

Rosenthal has proved adept at molding reorganization plans. In the 2001-04 PG&E bankruptcy, the utility wanted to sell its assets to wholly owned subsidiaries -- a plan that Saybrook considered doomed. In an unusual move, Rosenthal, who has a law degree from Southwestern University, persuaded the judge to terminate PG&E's right to set its own plan and submitted an alternative that kept the company intact. "Jon was extraordinary at crafting something that worked for the creditors and could bring the utility and regulators into consensus," says Jerry R. Bloom, a lawyer at White & Case LLP who co-chaired the unsecured creditors' committee. PG&E eventually accepted the alternative. Creditors got one of the largest U.S. bankruptcy settlements ever -- $15 billion, or $1.06 on the dollar (the market value of their bonds rose as interest rates fell).

Taking on the problems of the airlines comes naturally to the 50-year-old Rosenthal. In the 1980s he founded and ran NetAir International Corp., then the largest U.S. charter jet company. It was one reason he won the UAL assignment.

The UAL case has turned into a behemoth. Saybrook has spent 21,000 hours on it -- advising on the renegotiation of 660 aircraft leases and collective-bargaining agreements with seven unions, and on the largest pension-plan terminations ever. Just when UAL thought it had costs under control, fuel prices soared, forcing more cuts. "UAL has taken longer and has absorbed more resources than we had anticipated," Rosenthal says. UAL expects to emerge from bankruptcy in February. Creditors may not be so happy with the outcome: UAL projects unsecured creditors will recover between 4% to 7% of their $28 billion in claims. But Rosenthal says he's pleased: UAL's bonds are trading at 14 cents on the dollar, vs. 6.5 cents when Saybrook took the case.


Delta could be the next order of business. Last year, Rosenthal expected its troubles to get worse and accepted an invitation to begin organizing unsecured creditors, which includes banks, aircraft companies, and unions. It was a risky move. Saybrook worked for free, betting that Delta would seek bankruptcy-court protection and that creditors would tap Saybrook as their paid adviser. The assignment could be lucrative. Saybrook typically gets a flat monthly fee and a share of what's recovered. It has collected $6.9 million from UAL so far.

Extracting money from bankrupt concerns isn't a cheery way to make a living. "It's like being the coroner," says Rosenthal, who lives in Los Angeles with his wife and two children. "I've had friends drive up when I'm standing outside Starbucks, roll down the window, and say, 'Is there something wrong here?"' It doesn't help either that bankruptcy advisers often have sharp elbows. However, Rosenthal is known as a bit of a diplomat. "J.R. has a personal touch that helps him achieve things that someone at a small firm would otherwise have difficulty doing," says James S. Feltman, senior managing director at Mesirow Financial Consulting, a competitor and occasional ally of Saybrook's.

Surprisingly, many of Rosenthal's most valuable assignments have come from former opponents. While advising Lehman Brothers Inc. (LEH ) in the 1990s, he locked horns with Andrew Clare, who represented Lehman's creditor, First Interstate Bank. "We fought like cats and dogs, really screaming and yelling," Rosenthal recalls. The day after the case closed, Clare called to ask Rosenthal to advise First Interstate on another matter. "I was stunned," Rosenthal says. Despite the fighting, Clare had admired Rosenthal's deportment. "He was very smart, but he didn't shove his intellect down your throat," Clare says. It pays to be diplomatic when you're the coroner.

By Justin Hibbard in San Mateo, Calif.

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