When you talk to Albert A. “Al” Koch about his time spent in the turnaround and restructuring space, you get the feeling you are talking to someone who has already left his mark on the field. It’s not because the vice chairman and managing director at AlixPartners’ Turnaround & Restructuring Services group boasts about his accomplishments over the last nearly two decades; in fact, he is friendly and unassuming during a phone interview. But when he revisits some of his mega-restructurings, including Kmart, Eastman Kodak and General Motors, you know you are hearing about important pieces of financial history.
It’s no wonder Koch was inducted in October into the Turnaround Management Association (TMA) Hall of Fame. The award honors those “whose outstanding individual contributions have made a lasting positive impact on an industry dedicated to stabilizing underperforming companies, rebuilding corporate value and retaining jobs.”
“Al Koch is truly a giant in his field,” wrote Lisa Donahue, global leader of Turnaround & Restructuring Services at AlixPartners, in a press release at the time of the Hall of Fame announcement. “Besides being a stellar practitioner throughout his distinguished career, Al has also always stood out for his thoughtfulness — for clients, for other engagement stakeholders and for staff. He has a genuine concern for the needs of everyone he interacts with, and has always done his best to live up to his longtime personal and professional credo: ‘to achieve the greatest good for the greatest number of people.’ Al has been a mentor to many throughout our industry, and an inspiration to all.”
General Motors: A Behemoth Restructuring
The General Motors restructuring is, by far, the most memorable restructuring for Koch. One reason is the way the automotive crisis of 2008-20091 intersected with the company’s struggles. Koch says, “It led to significant dealings with the U.S. government, which was something that I had never done before.” The Treasury, Justice and Labor departments were all involved along the way, in addition to the Environmental Protection Agency.
Koch was enlisted as chief restructuring officer to help with the automaker’s restructuring around Thanksgiving 2008, in advance of the company’s government-assisted Chapter 11 bankruptcy filing in June 2009. At the time, General Motors reported $82.2 billion in assets.2 A reconstituted GM emerged from bankruptcy in July 2009, and the wind down of “old GM” continued through early 2011. Koch was involved in the restructuring full-time between 2009 and 2011.
“The size of General Motors operating around the world — with 250,000 employees, it’s a massive organization, so in a very short amount of time to identify what assets needed to be discarded, which plants would continue, which brands would continue, which dealers would continue was a huge undertaking, and then to sit down with the government, Automotive Task Force, and get them to accept the restructuring plan was something that was incredibly intense and, at the end of the day, very rewarding,” Koch says.
Ranked by total assets, the GM Chapter 11 reorganization is considered to be one of the largest successful corporate reorganizations in U.S. history and the fourth-largest bankruptcy in U.S. history by total assets, following Lehman Brothers Holdings, Washington Mutual and WorldCom.2 Considering the scale of the General Motors restructuring — roughly 125 AlixPartners people were working on it around the world at the high point — the actual turnaround, which was about seven months, was short compared to the average company turnaround of 12 to 18 months, Koch says.
The turnaround/restructuring world has changed dramatically since Koch entered the field. One of the biggest shifts has been the growth of second lien lenders, who provide higher-yielding loans with a second secured interest in a company’s assets. “Very often when companies get into difficulty, we find ourselves dealing with not only the first lien lenders, but also with the second lien creditors, and they tend to be very aggressive in their restructuring efforts,” Koch says.
From Koch’s vantage point, second lien lenders sometimes work at cross-purposes with the turnaround team. “They tend to have more interest in getting a company out of bankruptcy quickly than in fixing the business while it’s in bankruptcy, so as a consequence there is a lot of pressure to develop a plan of reorganization and get the company out of bankruptcy without as much interest in fixing the underlying operations,” he says.
In addition, Koch used to deal more with bank workout departments in his early years, but today he finds himself working with hedge funds and other entities that buy distressed debt.
Highs and Lows of Tools / Technology
As the world has grown ever-digital, more agreements in the restructuring/turnaround field are negotiated electronically than in the past. While this has streamlined processes on one hand, it has created communication gaps in other cases.
“It used to be you’d sit down face-to-face in a meeting and work through things,” Koch recalls. “Now term sheets and other documents that are part of getting a restructuring done tend to get passed around electronically and marked up by different parties. In some cases it’s more efficient, and in other cases, the same comments keep getting made and ignored and passed between the different parties. Sometimes I wonder if it might not be better just to get people in a room and hammer out a deal.”
Koch also finds himself on many more conference calls these days. While these phone meetings are helpful in gathering dispersed colleagues, Koch says they tend to balloon because attendees forward the invitation to other parties they consider to be relevant to the conversation. “Before you know it, you have three, four, five people listening in who otherwise might not be if you were having the meeting in person.” And while numerous perspectives can be interesting, Koch has found the down side of more people to be it’s harder to get things done.
Obstacles to Today’s Turnarounds
When companies file bankruptcy today, in most cases all of their assets have a lien against them, Koch says. Whether first lien lenders or second lien lenders are involved, companies don’t usually have any assets to pledge to get debtor-in-possession financing.
“The amount of cash a company has available to affect their restructuring is more constrained. So that puts the lenders, in this case the second lien lenders, in a much more powerful position at the table because they have a lot to say about the extent to which a company will have cash available,” Koch says. “It used to be when there were only senior lenders, companies, if they ended up filing bankruptcy, would typically have some assets to pledge to get debtor-in-possession financing. Today companies rarely file where they have any assets that haven’t already been pledged. It makes it more difficult to get financing, and it typically has to come from existing lenders.”
When Koch joined AlixPartners, the firm had about 30 people. Today it has more than 1,000 employees worldwide in locations from Dubai to Shanghai. Koch says, “There’s been geometric growth during the period that I’ve been with the firm. We’ve added new lines of consulting expertise to help us operationally fix businesses.” As well, the firm works a great deal with underperforming — not just distressed — companies.
In the field as a whole, Koch is noticing a trend toward pre-negotiating with creditors restructuring solutions that may involve a bankruptcy. For these “pre-negotiated” or “pre-packaged” bankruptcies, a company can file bankruptcy and a plan of reorganization simultaneously, and in a relatively short period of time (e.g., three months) emerge from bankruptcy. Twenty years ago, this scenario was almost unheard of, as companies would typically spend 18 to 24 months in a bankruptcy proceeding before emerging, Koch says.
The benefits of pre-negotiated bankruptcies are speed and lower cost; the disadvantages are a company may re-emerge without making substantive operational improvements, Koch says. “If a company is just focused on fixing the capital structure, it really loses an opportunity to take advantage of some of the tools that a bankrupt company has [at its disposal] to make sure it optimizes its operations going forward,” he explains.
It’s obvious that Koch, who previously served as a partner at Ernst & Young before coming to AlixPartners, still finds his work fulfilling after so many years. He notes, “It’s very rewarding to work in any situation where you’re able to successfully restructure a company in a way that it is able to continue to operate going forward.”
On being inducted into the TMA Hall of Fame, Koch points out, “I’ve worked with a lot of wonderful people over the years. AlixPartners has been a terrific platform for me personally and for the restructuring world. It’s a great honor and very humbling to be recognized.”
Jill Hoffman is editor of ABF Journal.
1. General Motors Chapter 11 reorganization. Wikipedia. Available at: http://en.wikipedia.org/wiki/General_Motors_Chapter_11_reorganization (last accessed March 4, 2014).
2. Sandler L, Scinta C, Van Voris B, Green J. GM Files Bankruptcy to Spin Off More Competitive Firm (Update4). Available at: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a4brqCWwvYXY (last accessed March 4, 2014).