Spiraling fee costs and a diverse roster of creditors are contributing to an already complicated restructuring of the beast that is Enron Corp. Under the Enron big top, restructuring pros can find all the things that make workouts in today's market complicated and slow. One of the challenges in today's restructurings is the emergence of new lenders with different agendas, all fighting for their share of what's left.
To be sure, the biggest challenge with Enron is the company itself. "[It's] the most complex legal and financial organization I have ever seen," Stephen Cooper, chairman of Kroll Zolfo Cooper and interim CEO and chief restructuring officer for Enron Corp, said in his opening remarks. He added that whoever designed Enron "did it at 4 am in a nightmare dream. Enron was designed to be obscure, obtuse and tax efficient."
Fees
That legal and financial complexity is driving fees, Cooper said. Professional fees in the restructuring are running at $25 million a month, though more than 50% of this is from lawyers and advisors for creditors, he noted. On the Enron side of the equation, advisors are being required to keep to 90-day budgets. That is helping control costs, but attempts to reign in creditors with similar budgets have been met with a "remarkable lack of success."
Foot Dragging
Cooper said one solution to the problem of modern restructurings would be for a process to be developed where the value can be determined far sooner. That way, constituencies out of the money can acknowledge what the value is and avoid games and acrimony. "The process was not designed to be a foot-dragging process to maximize recovery," he said. "If you believe in efficient capital markets, the rates you charged were the risks you were prepared to take."
Diverse Lending Groups
Cooper noted that the new investor community involved in bankruptcies is one factor leading to more contentious restructuring than in the past. Asset-based lenders, prime-rate funds, commercial banks, foreign banks and distressed investors are among participants, Cooper said. "Part of the complexity today is finding a common agenda on the creditor side." Norma Corio, a managing director in the restructuring group at J.P. Morgan, in a separate session, highlighted the increasing differences between the pre-petition syndicate and post-petition group. Collateralized debt obligations, so prevalent in the primary syndication of loans, often cannot hold defaulted debt for more 12 months, she explained. Also, many of the new players are buying at 40 and are willing to sell at 55, compared to par lenders who don't want to settle at 55, she said.
Changing DIP Dynamic
The expansion of the lending roster is also being felt in debtor-in-possession facilities. The massive consolidation among banks combined with a more liquid secondary loan market is bringing hedge funds and distressed investors to the DIP party, said Corio. There are still traditional asset-based lenders like GE Capital and banks such as Bank of America, J.P. Morgan and Citibank. But more recently there are higher-risk investors playing in DIPs.