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| J. Scott Victor |
J. Scott Victor is a managing director and founding partner at SSG Capital Advisors,where he originates and supervises distressed investment banking transactions. Victor has a B.A. in European history from the University of Pennsylvania. After graduating with a J.D. from the University of Miami School of Law in 1983, he started his career as a bankruptcy lawyer in Philadelphia in 1983 and moved to Berwind Financial Group's Special Situations Group in 2000. In 2001 he formed SSG. Can you describe what SSG does and your role at the firm?
SSG is a boutique investment banking firm representing middle-market companies facing challenges. We are primarily engaged by our clients to obtain new financing at all levels of the capital structure to help them restructure their balance sheets. We are often engaged to sell our clients either in parts or as a whole. Many of these companies also file for Chapter 11 protection in order to consummate the transaction that is strategically best suited for them, being a private placement, a sale or a restructuring.
What are some of the current situations you're involved with?
Last week a company called The Glass Group, the largest manufacturer of specialty glass in the country with about $130 million of revenue, filed for Chapter 11 in Delaware. We were able to find replacement financing to take out the existing lender and provide the company with liquidity to allow them to either reorganize or sell their business through a Chapter 11 proceeding.
What is unusual in this transaction is that a new lender is coming in, Capital Source, to take out the existing lender on a $40 million debt facility. At this level of a debt facility, the usual course of events is for the existing lender to provide the DIP financing. Here, we could not get the needed liquidity from the existing lender so we brought in a new lender that could provide the necessary liquidity.
Another current matter than I'm working on is the Chapter 11 reorganization of Congoleum Corp., the flooring manufacturer. This case is interesting because it is a restructuring involving the creation of an asbestos trust to pay the claims of those suffering from asbestos-related diseases through the creation of an insurance trust to be set up under a Chapter 11 plan of reorganization.
One of my favorite transactions that I have ever worked on took place last year when we sold AstroPower, a large publicly held solar cell manufacturer. The U.S. business was sold last March through a Chapter 11 sale to GE Energy, which I predict will become a leader in the solar cell manufacturing industry. We also sold the Spanish subsidiary Atersa based in Valencia, Spain last July to another Spanish company Elecnor. The best part of the deal was traveling frequently to Valencia and Madrid. Our counsel there has become a good friend and my wife and I went to visit him in Madrid in December.
Recently, SSG transferred the senior debt of Jorgenson Forge Corp. to a strategic lender. How did SSG get involved and how do you find strategic lenders?
Jorgenson, a manufacturer of precision machined forging, is based out in Seattle. We were introduced to the company through the ceo, who we knew from another transaction. He knew the services we provide for companies facing challenges and he called us to help Jorgenson recapitalize and restructure its balance sheet. We went out to refinance the company's senior debt and found an otherwise strategic buyer, who we knew through a company we sold to them the prior year in a distressed situation.
SSG knew it would be a logical strategic buyer, but everyone wanted to keep the transaction out of a Chapter 11 proceeding. The transaction was done where the otherwise strategic buyer came in and bought the debt from the lender in order to recapitalize the balance sheet. That's why we use the term strategic lender, because the lender is not really a lender in the traditional sense, they'd otherwise be a strategic buyer but now they are the lender. And it was an innovative way to refinance and recapitalize the company without selling it and without having to put it through a Chapter 11 proceeding.
Why has so much capital come to the middle-market and is there now an excess of capital?
Many of the specialty asset lenders and hedge funds that are doing these types of financing transactions on turnaround situations have promised and are indeed performing, at least today, 40% plus returns to their investors. With that success, their investors are very anxious to continue investing to achieve returns. In the world of distressed transactions where you have strategic buyers, private equity firms and hedge funds vying for acquisitions, there will be fewer opportunities to make the kind of returns that many investors are receiving today.
Are those returns sustainable?
I don't believe that universally those returns are sustainable. Some transactions where the lenders and hedge funds are looking for those types of returns will inevitably fail because the businesses themselves will fail. That will drive down the returns. As more and more money is available there will be less and less returns due to increased competition for deals that have the potential for those high returns.
Should hedge funds be in the business of acting like banks and what are the pitfalls if any?
Hedge funds act as many different things these days. They are not regulated like banks, but they act as lenders. They act as secondary lenders to shore up a void left in a transaction between equity and senior debt. They also fill the void of equity when needed. Moreover, today many hedge funds are directly looking to be buyers, competing against private equity firms and strategic buyers. I think it's great! It's a fantastic liquidity alternative available to companies facing challenges for almost whatever reason. Companies with challenges have more liquidity options today than they've had have for quite sometime.
You have been quoted as saying that even "in the best of times there are always companies in distress, whether from excess leverage, industry cycles or just plain bad management " What opportunities do you see in the middle market in this current cycle?
These challenged companies are in all sectors and there always will be. If history repeats itself, which it usually does, we are in a cycle right now where there are a lot of funds available for out-of-court restructurings. These are the same type of funds that were available from 1997-99, not the same players but the amount of financing available. When that cycle ended and the next cycle began money became tight. The capital markets tightened up and the banks and asset-based lenders took much less risk. There was no specialty financing hedge fund money to the middle to lower-middle market in 2000-2001 and you had a spike in bankruptcy filings, with everyone in the restructuring and bankruptcy business very busy. Now it's gone back to the other cycle where there are a lot of out-of-court restructurings again. One could predict that there will be another cycle where credit will tighten and more companies will face challenges and be forced to file for bankruptcy and have to be sold.
How A Lawyer Becomes A Banker
In 2000, Victor was a partner and senior member of the bankruptcy and reorganization department at Saul Ewing, a regional law firm based in Philadelphia. He decided to move to the investment banking group at Berwind, the investment banking arm of the Berwing Corp. "I was close with Mark Chesen from Berwing and we referred cases back and forth to one another throughout the 90s and he convinced me to change hats from bankruptcy lawyer to distressed investment banker."
He put away his time sheets and started traveling, doing very similar transactions to what he did as a bankruptcy lawyer. "I think that being a practicing bankruptcy lawyer for a number of years is a great background to have to become a distressed investment banker," he said.
After being at Berwind for one year, Berwing closed down its leveraged buyout fund and said it wanted to exit the investment banking business in the next 12 to 18 months. In the spring of 2001, Victor and his partners, Chesen, Allyson DeMatteo and Matt Karlson, decided to form SSG by acquiring the Special Situations Group investment banking practice from Berwind. It was spun out as SSG in December 2001.
More Work ...
When he's is not doing deals, Victor is a Fellow of the American College of Bankruptcy, president of the Philadelphia Chapter of the Turnaround Management Association and is active in the American Bankruptcy Institute and the Association of Insolvency & Restructuring Advisors.
... And Play
Victor's favorite activity is spending time with his wife Laurie and his three kids Kyle, 15, Fiona, 6, and Skye, 3, because his schedule requires a lot of travel. "I'm not sure which gives me more grey hair, my work schedule or my own children." He also enjoys golfing, tennis and skiing.
