Financial restructuring for a distressed firm and its significant counterparties is the process of "recontracting." This involves significantly altering, replacing, or terminating key financial contracts for the purpose of rehabilitation. Most of these contracts, as of the date of such restructuring, typically relate to debt obligations with claim values that are known to the firm and to each of the counterparties who are involved in the restructuring process. This note examines the non-debt claims a distressed firm may face, specifically looking at (1) employee-related liabilities, such as those related to defined benefit pension obligations and retirement benefits; (2) tort-related claims, such as those related to litigation or environmental remediation; and (3) claims related to executory contracts, such as leases. The latter category is the most common, but it is also the easiest to resolve. In contrast, restructuring employee-related and tort-related claims is much more complex because the value of such claims may not be known at the time of the proposed restructuring. It is restructuring in these two areas, employee-related and tort-related claims, that are the subject of this note. The note contains three case examples for the purposes of class discussion.
This case explores the use of advanced out-of-court restructuring techniques from the perspective of a company facing looming debt maturities and an overleveraged capital structure. The decade that followed the global financial crisis was characterized by rising corporate leverage with increasingly forgiving debt covenant packages. These looser covenants enabled borrowers to pursue a range of novel transactions to avoid bankruptcy. The 2016 exchange offer conducted by J.Crew paved the way for the use of a particularly aggressive form of restructuring, where valuable assets that had provided collateral and/or value support for loans and bonds are separated from the company and used as a bargaining chip to obtain more favorable terms in a restructuring negotiation. The protagonist in the case is a restructuring advisor, contemplating the proposal of a similar type of transaction for Neiman Marcus Group. These transactions have significant financial, strategic, commercial, legal and ethical implications, which the case explores in depth.
This case (A), and its related cases (B-E), establish a setting to discuss an M&A transaction and some of the key legal contracts that are associated with it. In 2010, private equity backed food manufacturer Pierre Foods is contemplating the acquisition of a key competitor, Advance Foods. The acquisition would be debt financed, and would involve the "rollover" of an equity stake by the selling shareholders. There are five key documents to be negotiated: The Stock Purchase Agreement (Cases B-1, B-2), the Stockholders' and Registration Rights Agreements (Cases C-1, C-2), the Credit Agreement (Cases D-1, D-2), and the Employment Agreement (Cases E-1, E-2). These agreements have been drafted, but each contain a handful of open business points which the parties need to resolve. The cases look at these open points from the perspective of each of the key parties involved, including Pierre's majority shareholder, Oaktree Capital Management, the selling shareholders, the target's management team, and the lenders to the acquisition facility. Overall, these cases can be used to understand the unique elements of a complex corporate transaction, how the key documents allocate risk and value, and how parties may make trade-offs to achieve outcomes that best match their priorities.
This case is a setting to discuss "loan to own" investment strategy that is often pursued by distressed investors. The aftermath of the 2007 financial crisis left many companies with poor liquidity and limited ability to obtain credit. One of these companies was Pierre Foods, a producer and distributor of processed and precooked protein products that had experienced several years of promising sales growth and held a leading market position. Despite this, 2007 saw Pierre foods adversely affected by a spike in production costs and unsustainably high leverage. This made Pierre Foods an attractive opportunity for Oaktree Capital Management, allowing them to employ its strategy of investing in distressed debt securities with the goal of leading a restructuring during which their debt investment would be converted into a controlling equity stake. The challenge of executing "loan to own" strategy is being able to identify ahead of the restructuring the debt layer that stands to becoming equity (the so called "fulcrum security"). Overall, this case can be used to understand unique elements of a representative distressed investment. It can also be used as a platform for discussing sources of value and risks associated with distressed investing.