Editor: Would you describe the formation of Day Pitney's Distressed Assets Practice Group?
Siegel: We created the Distressed Assets Practice Group for the purpose of having a multi-disciplinary team to deal with issues that arise in connection with acquisitions, dispositions, restructurings, and workouts of distressed companies, including their securities and assets. The Group is available to work with clients who are either looking to acquire distressed assets because of market opportunities or are selling distressed assets as part of their restructuring strategy.
Editor: How long has the firm been involved in such activities?
Siegel: Day Pitney was created by the merger of two firms, Day, Berry & Howard and Pitney Hardin, in January of 2007. Each of the combined firms had been doing this work for a long time. For example, in the 1990s, Day Berry & Howard was involved in the $2 billion involuntary bankruptcy, acquisition, restructuring and recapitalization of Public Service of New Hampshire, a publicly owned electric utility, which had large interests in several nuclear plants. As a result of the merger, we have harnessed the energies and sophistication of both firms into a cohesive team.
Editor: What practice groups are involved in this multi-disciplinary approach?
Siegel: We have lawyers from the Bankruptcy and Creditor's Rights, Mergers & Acquisitions, Intellectual Property, Financial Services Regulation, Governmental Investigation, Finance, Private Equity, Institutional Finance, Securities Law, Securities Litigation, Real Estate and Tax Groups, so there are many practice areas represented. In order to best serve our clients, we wanted to include experienced lawyers in those disciplines who would be efficient and strategic in handling the issues involved in distressed asset transactions. In addition, our lawyers can also provide clients with access to skilled financial advisors with whom we have good relationships since in most of these deals financial considerations are paramount.Tancredi: It is important to note that we have constructed teams that work collaboratively to maximize our responsiveness to client needs and our ability to strategically position the client's interests.
Editor: What are the market dynamics that have signaled the reasons for the formation of this group?
Tancredi: We were fortunate enough to have sensed the imminence of some of the failures of major financial institutions and the consequential credit and liquidity crisis. Unfortunately, their investments in subprime and other securitizations have spread volatility throughout our financial industry. We realized almost a year ago that there was going to be a significant economic reckoning that would start to take place in 2008.
Editor: What were some of the factors that led you to that conclusion?
Tancredi: Subprime, CDOs and CLOs, were widely held by hedge funds, pension funds and major financial institutions. For those securities to work, the underlying deals have to make economic sense. Since many of them did not, it was clear to us that the resulting economic stress on these businesses would create a demand for the talents we have assembled.
Editor: What developments do you see taking place in the future?
Tancredi: We still have conventional, stable banks and insurance companies in the United States that rely on business fundamentals to underwrite loans because they hold their loans and manage them and they are available to help borrowers if problems should arise. These institutions will have whole new vistas of opportunity opening up for them. Owners of companies, having seen the results of the current crisis, are going to want to deal with more conventional and stable lenders.
The other thing that's going to happen is that a new group of hedge funds is going to create distressed asset units, and there will be another generation of opportunistic buying and selling. Some buyers and sellers are going to be foreign entities, and some are going to be mainstream businesses that have favored business fundamentals.
Siegel: The buyers will be those entities who have capital and who see an opportunity to take advantage of volatility in the markets. Some foreign investors, including the sovereign wealth firms, are well-capitalized entities that have been able to make investments in the United States over the last several months because of the declining value of the dollar, which has made U.S. investments very attractive for them. While the dollar's recovery will temper this trend, foreign firms will undoubtedly continue looking to the United States to invest their capital.
Editor: What are the typical dynamics of a distressed acquisition?
Tancredi: Crisis and chaos.
On the acquirer's side, perceiving an opportunity and acting with speed and decisiveness based on experienced judgment will define "winners." If you want to capitalize on an opportunity in a distressed environment, you need to do it with your eyes open - with acumen as how to proceed and vision as to how to implement your plans. You are not typically going to be in a position to do deep due diligence or have a long time to deliberate. These acquisitions usually have multiple parties with varying and changing interests and the successful acquirer must know how to forge strategic alliances with different constituencies during the process and must understand the need to alter those alliances in response to the dynamics of the transaction.
The legal and business disciplines required on the seller side are the core ones that Rob has delineated, including specialized M&A skills and bankruptcy experience - not from the point of view that "bankruptcy is inevitable," but rather, after examining alternative remedies, to develop a strategy that will allow a debtor the longest period of time to survive and maximize its value in a competitive sale. In that context, advisory services on corporate governance are significantly implicated because fiduciary duties may shift from shareholders to creditors, leading to stresses between the board and management. And then you need every other discipline to which Rob referred, particularly when you are talking about selling operating units or divisions. Those types of transactions involve transfers of tangible assets, contracts, intellectual property and human resources, which means you need experience in real estate, intellectual property, employment, pension and tax law. It is a combination of all of these disciplines that need to be brought together in a short period of time to make sound strategic and business decisions.
Siegel: From the buyer's perspective the same legal disciplines are implicated, but they are focused on the flip side of the issues. You are usually working within a very compressed time period, so you have a limited amount of time for due diligence, and will likely receive very little in the way of meaningful representations and warranties. This means that the legal team on the buyer's side has to have experienced business advisors who understand the process and work with management in assessing not only the legal risks, but also the business risks. The challenge is to structure a deal that can be implemented successfully in a stressful and time-compressed environment with imperfect information.
Tancredi: Typically in a distressed scenario, you are not going to get significant representations and warranties. There is not going to be an entity left behind that is going to stand behind the deal. And because you have limited due diligence, one of the things you need to know is how to structure a transaction to hedge risk or to use the bankruptcy court or other vehicles (like a receivership, foreclosure, assignment for the benefit of creditors and UCC remedies) to purge the operating entity of some of the residual off-balance sheet risks and liabilities that a buyer does not want to assume involuntarily.
Editor: What business sectors are you positioned to service?
Tancredi: There are several. One sector where the firm has preeminence is its specialized Energy Group that has included the ability to restructure power contracts and generation facilities including nuclear power plants. The commercial real estate market is one where we have operated in every sub-sector - office buildings, hotels, resorts, shopping centers and malls. Construction - we have represented buyers of partially completed commercial projects or lenders to distressed projects. Healthcare - we have represented the interests of hospitals, nursing homes and other healthcare institutions as well as lenders to them. Manufacturing - it has run the gamut from steel to brass to machine tooling and plating. More recently, we have had engagements involving - the airline industry and the second and third tier automotive industry. Retailing - we have represented lenders to major retail operations and we have represented, restructured and sold major regional retailers. Technology and Intellectual Property businesses - we have represented the mid-tech, high-tech, telecommunications and water filtration sectors.
Editor: How do you distinguish your group from competitors?
Siegel: First, we are multidisciplinary, so we have lawyers from the various disciplines that I already mentioned. Second, we have depth of support. The combination of our two firms has greatly enhanced our capability to handle multiple complex transactions and larger transactions. We also have lawyers who are very experienced in running deals and in developing a responsive strategy within the compressed time frame needed in distressed asset transactions. We have competence in dealing with distressed companies in a variety of industries.
We have a geographic platform that covers the Amtrak corridor, and we have the ability to do transactions anywhere in the U.S. One of our big advantages is that we have resources in several low cost markets, including Hartford, which means that we have very capable lawyers with billing rates that are substantially less than you would find for lawyers with comparable experience in other markets, like New York.
Finally, the collaborative, service-oriented culture of our team assures that we provide value-added services to our clients and that the client's business objectives are always our highest priority.