The Philadelphia Credit and Restructuring Summit celebrated its 10th anniversary with a new name and a new location — the Union League of Philadelphia. Both changes injected fresh energy into this gathering of lenders, restructuring professionals and bankruptcy court judges. Attendance more than doubled that of last year’s event in Villanova, PA.
Keeping with tradition, Judge Michael Kaplan opened the summit by hosting Judicial Jeopardy, starring U.S. Bankruptcy Court Judges Eric Frank, Vincent Papalia and Jerrold Poslusny. Before opening the event, Judge Kaplan commented that he has noticed bankruptcy judges tended to be very knowledgeable about legal issues but weaker on the popular culture front.
Still Judge Kaplan, who, unlike professional Jeopardy host Alex Trebek, actually prepares the questions in addition to moderating the game, challenged participants to recognize the lyrics from obscure television show theme songs, supply trivia about the different states and discern between movies based or set in Philadelphia. Judge Frank proved up to the challenge, sweeping both rounds and taking home the trophy presented by event sponsors ABF Journal, New York Institute of Credit, Commercial Finance Association Philadelphia Chapter and Turnaround Management Association Philadelphia.
After that light-hearted start, panelists moved on to serious matters. Michael Bonner, a partner at Stradley Ronon, Stevens & Young, moderated the lenders’ panel, Current Trends and the Potential Trump Effect Across the Capital Structure. Glenn Bernabeo, co-head of Financial Restructuring at Griffin Financial Group; Paul Schuldiner, senior vice president of Rosenthal Trade Capital; Mark Seigel, president of Veritas Financial Partners and Jeffrey Wacker, senior managing director and head of U.S. ABL Originations at TD Bank discussed the challenges lenders face in a rapidly changing marketplace.
Challenges for Lenders
The distress on the retail industry, largely because of the growth in e-commerce, is continuing. Schuldiner noted that every wholesaler coming to Rosenthal for factoring has an e-commerce division or is trying to get one in place. Factors, he pointed out, must go deeper into the inventory collateral and acquire better data to analyze this component of a transaction.
He pointed out that blockchain — a fintech procedure utilizing decentralized ledgers in place of a paper trail to track a transaction — will become more critical to tracking inventory along the supply chain.
Bernabeo said he is seeing a robust M&A environment, particularly in the oil and gas, healthcare and retail industries.
Seigel, representing a nonbank ABL lender, said his company is trying to innovate to make its products more successful in a highly competitive arena. “Our conversion rate is as low as it’s ever been. We’re constantly surprised that we’re doing term sheets and still having the banks come in inside of us,” he said.
The company is lending to oil and energy companies and metals, not producers, but supporting players. He noted that they are not large enough to hedge and “the banks won’t lend to them,” so they fall into Veritas’ purview.
Wacker of TD noted, “We’ve seen a lot of liquidity in the market, very competitive pricing. And we haven’t seen a difference between the tiers. So whether you’re doing a $20 million loan or a $2 million loan, there’s not a lot of price difference. Also a lot of the larger transactions have migrated down to the lower transaction space.”
Panel members all agreed that any changes in the actual bank regulations i.e., Dodd Frank, will take time as moderator when scheduled moderator Jennifer Palmer of Gerber Finance was called away.
Women Execs Break Glass Ceiling
The panel members were Donna M. De Carolis, PhD, Dean of Drexel University’s Close School of Entrepreneurship; Cheryl McKissack Daniel, president and CEO of McKissack & McKissack; Lori Reiner, partner in charge at EisnerAmper Philadelphia and Patti Santelle, managing partner of White & Williams.
Although the panelists were not lenders or, except for Reiner, turnaround professionals, they all rose in industries that are as male-dominated as commercial lending. De Carolis was teaching at Drexel’s business school when she realized there were many entrepreneurs on campus enrolled in business who had needs the school was not meeting. She overcame the skepticism of her colleagues and her small budget to found the nation’s first college of entrepreneurship.
McKissack Daniel is the fifth generation of her family to run the design and construction company founded by her great-grandfather, a former slave who learned the trade from his master. McKissack Daniel’s grandfather, the first African American licensed as an architect, along with his brother, incorporated the company in 1905. Her mother took over the company to keep it in the family after her father suffered a stroke. McKissack Daniel spoke about making changes to expand the company’s services that caused a financial crisis, resulting in the need for a turnaround, executed by EisnerAmper.
Reiner spoke of her mentors and how they had helped her find her path in a profession dominated by men. She and Santelle both discussed how young woman need mentors and advocates in their companies to guide them towards success. They pointed out that work-life balance was an impossible concept and noted that men were never asked how they balanced their professional and personal lives.
Structured Dismissal or Not?
Views from the Bench was moderated once more by Mark Indelicato, partner at Hahn & Hessen, the summit’s master sponsor. The bankruptcy court panelists were Judge Jean FitzSimon of the Eastern District of Pennsylvania, Judge Rosemary Gambardella of the District of New Jersey, Judge Kevin Gross of the District of Delaware and Judge Kaplan of the District of New Jersey. The bankruptcy attorneys on the panel included Sean Beach, partner at Young Conaway Stargatt & Taylor; Mark Minuti, partner at Saul Ewing and Andrew Silfen, partner at Arent Fox.
One of the topics focused on by the panelists included the March 23 Supreme Court decision regarding structured dismissals in Czyzewski v. Jevic Holding.
Jevic was a New Jersey trucking company that filed Chapter 11 following a failed leveraged buyout. Its secured lender, CIT Group, held a lien on virtually all of its assets, which were worth far less than the amount owed on the loan. The unemployed drivers filed WARN Act claims for unpaid wages against Jevic and Sun Capital, its private equity sponsor. Sun also held a portion of the secured debt. An official committee of unsecured creditors was appointed, which commenced fraudulent conveyance and equitable subordination litigation against CIT and Sun.
Three years later, all of the assets had been sold off and the proceeds distributed to the secured lenders. In addition, the WARN Act claimants had received a judgment in the bankruptcy court in excess of $12 million, a substantial portion of which was entitled to priority status under the Bankruptcy Code. Nothing remained of the Jevic bankruptcy estate except $1.7 million in cash (which was subject to the secured lenders’ lien) and the litigation claims against CIT and Sun. The case was effectively at an impasse. A plan could not be confirmed, because there were insufficient funds to pay administrative and priority claims of the Chapter 11 case in full. The only other means available under the Bankruptcy Code to resolve a Chapter 11 case are either a conversion to liquidation under Chapter 7 or a dismissal of the case. Neither approach would provide for professional fees to be paid quickly, and no recovery would have been received by any creditors other than CIT or Sun.
The parties (except WARN claimants) found a creative way to end the stalemate. The case was dismissed, but a “structured dismissal” incorporated a settlement among Jevic, CIT, Sun and the creditors’ committee. Under the Jevic structured dismissal, CIT and Sun agreed, in exchange for a release of the litigation, to allow the $1.7 million in cash remaining in the estate and subject to Sun’s lien plus another $2 million they contributed to the plan to be used to pay administrative expenses and to provide a small distribution for general unsecured creditors.
The WARN Act claimants, however, were not part of the settlement. Since they refused to release their WARN Act litigation against Sun, they received nothing, even though their claims for unpaid wages against the Jevic bankruptcy estate were entitled to priority treatment ahead of general unsecured claims. The bankruptcy court nevertheless approved the settlement and the structured dismissal, finding there was “no realistic prospect” of a recovery to any parties other than CIT and Sun in any event. The U.S. Court of Appeals for the 3rd Circuit affirmed. The Supreme Court reversed the decision finding that a structured dismissal could not be used to alter the priority scheme set forth in the Bankruptcy Code for distribution to creditors.
The group debated the merits of the decision. While Sifen contended that structured dismissals are a valuable tool that can be used in Chapter 11, Judge Gambardella acknowledged that it is a valid tool only if used early in the process, but it cannot be used to dismiss whole classes of creditors without their consent. All parties acknowledged that the Supreme Court tried to draft a very narrow holding, but the ultimate impact of Jevic on structured dismissals in general and gifting plan remains in flux subject to further direction from the courts in light of Jevic.