Editor: Please tell us about your background and current practice.
Dropkin: I have enjoyed an incredibly diverse and challenging legal experience. I started my career as a litigator representing large institutional clients primarily in energy and banking. My first case involved a highly contested arbitration before the International Chamber of Commerce on behalf of a major energy company. That arbitration concerned interpretation of an overriding royalty provision, and it served as an ideal introduction to the energy industry.
I have also litigated a complicated bankruptcy of a domestic energy refiner and general contract disputes, as well as cases involving antitrust, franchise termination, loan default, collateral foreclosure and repurchase agreements. Indeed, it was the knowledge I gained in litigating repurchase agreements that served as a springboard to the regulatory and product development side of the financial services industry. I was asked by a major bank to develop its securities lending program in the aftermath of repeal of the Glass-Steagall Act. They felt that having litigated when things go wrong, I would be in the best position to get things right at the outset. From there, I branched into derivatives and structured finance.
In 1994, I joined Proskauer to head its finance practice and have since been involved in a very broad array of financial transactions, both debt and equity (domestic and international), including the first Shari’a-compliant securitization. My current representation of Suburban Propane Partners, L.P. has brought me full circle, as I am able to bring to bear judgment and problem‑solving skills honed from my litigation, finance, regulatory and transactional experience. I also regularly advise clients in banking, insurance, pension and private equity funds, and venture capital.
Editor: We understand that you led the Proskauer team in connection with the acquisition of Inergy, L.P.’s retail propane operation by Suburban Propane Partners. Please describe this transaction.
Dropkin: The recently closed acquisition by Suburban Propane Partners of the retail propane assets of Inergy was a very complex series of transactions. Both Suburban and Inergy are publicly traded master limited partnerships, so significant tax structuring was required to enable the transaction and financing to occur in a tax efficient manner.
There were many aspects to Suburban’s financing. The aggregate consideration for the acquisition was approximately $1.8 billion and was funded through a variety of debt and equity structures. Suburban conducted a private exchange offer for up to $1 billion of outstanding Inergy notes and issued $1 billion of new Suburban notes plus cash for tendered notes.
As part of the consideration, Suburban also issued equity to Inergy, virtually all of which was earmarked as a future special distribution to existing Inergy unit holders that would enable them to continue to participate in the propane industry. Suburban also amended its credit agreement with a syndicate of banks to increase its line to pay transactional expenses and augment working capital. The acquisition closed on August 1. Shortly thereafter, Suburban issued additional equity through a syndicate of underwriters, the proceeds of which were used to repay loan borrowings incurred in the acquisition.
Controlling these multifaceted financings with their interdependency upon one another was challenging, but we addressed all of the securities, antitrust, tax, employment and related issues as they occurred, and the transaction successfully closed.
Editor: You headed a team that included lawyers from a variety of practice groups. How important was this to the success of the transaction?
Dropkin: The fact that we had specialists from a number of practice groups was critical to our success. For example, the unique tax structure of a master limited partnership required specialized tax expertise. Fortunately, Proskauer represents a number of master limited partnerships. There were also critical issues involving labor‑management and employee benefits, expertise in which Proskauer is well known.
We developed specific teams for each aspect of the transaction. Our M&A team addressed the acquisition; our antitrust team focused on Hart‑Scott‑Rodino Act issues; our securities and capital market teams oversaw the public and private offerings; and our finance team advised with respect to the syndicated loans. The beauty of using the team approach is that it permitted us to efficiently handle a complex transaction that involved many activities that were going on simultaneously. It is because of the depth of talent in a firm like Proskauer that we are able to serve our clients’ needs well.
Editor: Do you expect to see more consolidation in the propane industry?
Dropkin: Yes. The propane business is highly competitive, and propane retailers in the U.S. compete in a large number of localized markets. The size of the geographic markets can vary with factors such as population density and local topography, but are generally at the scale of a city or town. Propane retailers fall into two broad categories: larger multi‑state marketers and smaller local independent marketers. Due in part to low entry barriers, the propane market is highly fragmented, and is dominated by small “mom‑and‑pop” operators, which account for more than half of the annual gallons sold. The top ten retailers account for only 40 percent of the estimated 9.2 billion gallons of propane sold in the U.S. annually, and the five largest account for approximately one-third of the business. No single company commands more than 15 percent of the total propane sold in the U.S. Because the propane industry continues to be highly fragmented with numerous “mom‑and‑pop” suppliers, consolidation of the industry, which offers the potential for further economies of scale, is likely to continue.
Editor: To what extent was this transaction made possible by the willingness of investors to invest and banks to lend?
Dropkin: There was no shortage of investors in the deal. As I noted, the financing techniques utilized by Suburban were dependent on a wide array of investors. Institutional holders of Inergy notes were asked to, and did, tender their notes in exchange for new Suburban notes. Suburban’s lenders were asked to, and did, amend and restate its credit agreement to provide additional borrowing capacity, working capital and covenant flexibility; and new lenders were added to the original syndicate. Retail and institutional investors also acquired newly issued Suburban common units, which strengthened Suburban’s balance sheet and added many equity holders. The transaction was greeted in the Street favorably, and all the financing objectives of Suburban were attained.
Editor: Was the Suburban Propane transaction an indication that there will be increased activity in other parts of the economy?
Dropkin: That’s hard to say. In the energy arena, propane is a mature industry where economies of scale rung from consolidation can help to drive profits. Companies involved in potential natural gas fracking offer significant potential for increased activity and economic growth, but exploitation of this natural resource involves important environmental concerns and political considerations.
While the Suburban Propane transaction demonstrated broad investor interest, I cannot say it is a harbinger for increased activity in other parts of the economy. There is meaningful investor capital on the sidelines, but deals are still scrutinized cautiously.
Editor: Do you feel that Dodd-Frank has played a role in improving the climate for investing and lending by addressing systemic risks?
Dropkin: Certainly the goal of Dodd-Frank in addressing the systemic risk of “too big to fail” is laudatory, but it’s much too soon to know if the statute, which is still the subject of rule‑making and legal challenge, will be a plus to the investing community. I do not believe that Dodd‑Frank affected the decisions of the debt or equity investors or the lenders who participated in the Suburban financing of the Inergy acquisition.
Editor: Are you concerned about financial institutions that are said to be “too big to fail”?
Dropkin: Yes, but institutional size can be regulated through the antitrust laws. Size is not always evil. In the financial services industry, larger size can facilitate the mega‑global financings that are needed in infrastructure, energy and technology. The key issue is how best to achieve effective regulation. Banking regulators already have on the books the ability to determine safe and sound banking practices. More regulation, therefore, is not necessarily better regulation.
Editor: The agencies tasked with issuing Dodd‑Frank regulations have fallen far behind in that task. Has that created uncertainties that have slowed investment and lending, particularly with respect to new financial products?
Dropkin: It’s true that the parameters of Dodd‑Frank are still being worked out and that the absence of clarity brought about by delays in promulgating and implementing final regulations have created uncertainty. It’s also true that in the last few years the introduction of new financial products has been slowed. However, to be fair, the present uncertainty in the financial services landscape is probably more a function of geopolitical forces and the effects of economic interdependence among international economies that are in recession than regulatory factors.
Editor: Some argue that the solution to avoiding a future meltdown lies in better risk management by the private sector, not increased regulation. What are your thoughts?
Dropkin: Clearly more effective risk management by the private sector is necessary. The question is how to get there. Many banks have elaborate value‑at‑risk models as do hedge funds. Further enhancements to modeling should be encouraged, but, as we’ve seen in the past, models cannot completely and accurately predict the fallout from particular events. Therefore, the major issue for policy makers will be to implement policies that do not stifle financial product development while seeking to prevent improvident risk taking.
Although much maligned, derivative products as an incidental hedging tool for interest rates, currency values or commodity prices make a great deal of sense. If these tools are allowed to morph into speculative trading or are overly relied on for generating bank earnings, risk is created not only for the institution involved, but for interdependent financial institutions and counterparties around the world.
I believe that enhanced capital requirements for risk‑adjusted activity is a useful start, as are limitations on the use of leverage and compensation clawbacks in appropriate circumstances.