Distressed Focus

Michael Mandel: Founder and managing partner of Mandel, Katz, Manna & Brosnan Michael Mandel is the founder and managing partner of Mandel, Katz, Manna & Brosnan(MKMB) and was also the inventor and co-founder of ClearPar. He started his career at Paul Weiss, Rifkind, Wharton & Garrisonin the early 90s and was one of the early pioneers in secondary distressed trading in the U.S., Europe and Asia. He founded MKMB in 1993 but is now retiring from active practice and has sold ClearPar to Fidelity National Financial. Mandel plans to spend his free time focusing on his family and charitable work, which includes his board membership at the Rockland Family Shelter, where 13 lawyers at MKMB do pro bono divorces for battered women. Mandel discusses the changes in the market, global opportunities and creating a level playing field.  

What have been the biggest changes and the constants in the past 13 years in the distressed loan market?

There has been an explosion in the number of participants in the loan market and at various times over the years, supply has exceeded demand or vice versa. At this point in time, demand greatly exceeds supply. That puts us in an interesting position because it forces our clients to look at more obscure and more interesting situations from a legal perspective.

We've always tried to position ourselves in the market to take advantage of whatever the conditions are, which is why we opened up in Singapore right before the beginning of the Asian crisis and in London when we saw there would be a shift to the European market. Initially my work in the distressed loan area started in London, beginning with Maxwell Communications and Isosceles and Gateway--a large supermarket that went bust, Wembley Stadium, Brent Walker Pubs, Queens Moat Houses and then the first blow up of Eurotunnel followed. We ended up structuring most of the original loan participations in Eurotunnel because there was a freeze on selling the debt.

At MKMB, we are always getting into the deepest, darkest recesses of a capital structure to find value, but it's always more interesting when demand exceeds supply. People start looking into other parts of the world where we have more expertise than our competitors, such as Asia or Europe. We are doing transactions now in the Czech Republic and are just finishing a large deal in Italy that will be one of the first NPL securitizations there.

The biggest change over the past 13 years, for lawyers and businesspeople in the U.S., has to be the standardization of documentation via The Loan Syndications and Trading Association (LSTA) and all the lawyers who work with it. This has increased liquidity, which brought a lot more people into the market over the last two years. But this I believe is largely people chasing returns and I don't think the returns have been there this year compared to 2003. I think '04 was tight and '05 will be tight, but we think in '06 the supply and higher returns will be back.

Efficiency has also changed the market. When I first started practicing in this area, I specialized in the dealer side of things. In the early days of this business, buyers didn't care if the dealers made between 5-10 points on a difficult trade. It's rare these days. Three years later, it was down to 2.5 points, then 2, then 1.5. Now the spreads are very thin and I think that is also why the dealers are branching out to areas where there is less efficiency because they play a bigger role there, or at least they play a different role where they add a different value. When I started I used to help write Maxwell research reports and dealers were providing research reports to the marketplace. Dealers were doing much more public research, because the regulatory environment was different, there were very few players and very few positions to focus on. Today it's a very different world.  

What were the most extraordinary situations that you have been involved in and what moments defined the market?

The most interesting thing we have done at MKMB is capturing the 'NPL auction' market, which is a really specialized market and I think we are the only law firm in the world that does it. We go into non-performing loan auctions all over the world and work with broker-dealers, banks and investors and help run whole teams of analysts and accountants and local lawyers--there could be 20-40 people on a team--and do a massive analysis of what could be thousands of loans on portfolios that are hundreds of millions (often over $1 billion) face amount and price them right through the auction. We've done that in Korea, Indonesia, Thailand, Taiwan, China and most recently represented the government of the Philippines and its state-sponsored banks' in their first NPL auctions. We've also been very active in Germany as are most of my current clients. A lot of people have set up shop in Germany now, such as Cerberus Capital Management and Oaktree Capital Management. Auction work is important to us because it represents the culmination of what we have done over the years.

There have really been no defining moments for the distressed loan market. The market is amorphous, and it just moves very slowly in different directions. One defining moment may have been the commencement of the LSTA, which really took off when Tom Hudson was running it. He was terrific at running the LSTA and jumpstarting it and really brought standardization to the U.S. market.  

How else has MKMB contributed to the development of the distressed loan market?

We have tried to define the market since the beginning and to do so in a way that is not overlawyering, but highlights there really is no distinction in this marketplace between the legal side and the business side. So much of the value of loans is tied up with the legal analysis that the distinction really gets blurred, and that is something that gets lost when you are moving towards standardization. The most unfortunate thing going on in the market today are lawyers in the U.S. who just read the form and want to get it signed and sent off, who really are not adding any value at all. But the reason loans are distressed are overwhelmingly legal rather than financial and the best traders out there are those who understand that the best, and who master the legal side as well as the financial.  

What are the next steps for the industry and in what regions?

How to think more globally. There is a huge disconnect between the way loans are treated from a legal perspective and a settlement perspective on a global basis. The need to integrate that is huge and the steps that have been taken so far are miniscule. It's not a difficult job to do but there is no one effectively doing it now. What is happening is that the money is going worldwide, but no one is making the worldwide effort to standardize the process. For instance you have the LSTA in the U.S., The Loan Market Association in Europe, the Asia Pacific Loan Market Association, and the Japan Loan Association, which is at least ten years too late. A lot of those organizations are self-perpetuating organizations, when what really has to happen is dealer and buyside-led initiatives to straighten out the processes and to really work on having uniform settlement procedures and documentation procedures.

Once they have done that, then they can start attacking the big disconnect in the bankruptcy laws. Right now, that is where a lot of the bets are. For instance, looking at where multi-national companies are going to file and how that is going to affect recoveries. That should not be where you are looking for value. All of those laws should be uniform.

Investors also have to look carefully at bond and note issues and get past the fact that they think they are much more liquid than loans. There have been huge enforcement problems with bonds--especially foreign bonds. The best example is probably in Indonesia, where borrowers just go out and routinely sue to cancel their bonds claiming that they were illegal to begin with and just screw all the lenders. Then many of those same lenders who are getting sued by borrowers are right back lending in the country again.

People have to look at the global realities and reconcile that with their investment practices. There are fundamental flaws in the enforcement mechanisms of bond documents and because of that loans, which are thought to be more difficult to enforce than bonds are actually drafted much better. There has to be a real push to straighten out the loan and bond markets on a global basis, so everyone's on a level playing field and analysis can move away from legal obscurities and into the fitness of the borrower and the chances of actually getting repaid.

The Many Careers of Michael J. Mandel

Born 1958 Tarrytown, N.Y., Mandel earned his B.A. from Hobart College in 1980 and attended the University of Michigan School of Urban Planning. He earned a J.D. from St. John's University in 1988.

Mandel has been, among other things:

* a merchant mariner (during a hiatus in college)

* a sailing instructor

* a special assistant to the director of museums, libraries, and archaeological services in St. Croix

* a chef and restaurant owner of both Rabbi Guido's--a Jewish deli and Italian Café, and Michael's Cheesecakes

The restaurants were in Ann Arbor, Michigan--he left grad school at the University of Michigan to pursue his restaurant career at the time--then later in Manhattan and Rockland County.

From 1988 to 1993, Mandel practiced in the litigation and corporate departments of Paul, Weiss, Rifkind, Wharton & Garrison in New York. He left Paul Weiss in 1993 and started his own firm.

Mandel said he came up with the idea for ClearPar five or six years ago as a hedge against electronic settlement possibly taking business from the firm, something that never happened since the firm focuses mainly on distressed loans.

Hobbies include cooking and boating. Much of his free time however, is taken up at Rockland Family Shelter and with his eight and nine-year-old boys.