Odd Lots - Inside the Blood Sport of Creditor-on-Creditor Violence

Episode Date: November 25, 2024

In the Zirp era of the mid-2010s, credit markets were booming and investors were clamoring for anything that would produce yield. So they were willing to accept fewer legal protections embedded in bond and loan documentation if it meant they could get a slice of a juicy deal. Today, the proliferation of these so-called "cov-lite" deals has been coming back to haunt the market, with investors now fighting each other over how much they can claw back from struggling companies. Some hedge funds have become incredibly creative when it comes to finding loopholes to exploit in deal docs. So what exactly is "creditor-on-creditor violence" and why has it become such a thing? How much is it adding to big investors' legal bills? And what can be done to reduce all the squabbling? We speak with Sujeet Indap, Wall Street Editor at the Financial Times and author of The Caesars Palace Coup: How a Billionaire Brawl Over the Famous Casino Exposed the Corruption of the Private Equity Industry. Read More: Hedge Funds Smell Blood as Lenders Turn on Each Other Become a Bloomberg.com subscriber using our special intro offer at bloomberg.com/podcastoffer. You’ll get episodes of this podcast ad-free and exclusive access to our daily Odd Lots newsletter. Already a subscriber? Connect your account on the Bloomberg channel page in Apple Podcasts to listen ad-free.See omnystudio.com/listener for privacy information.

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slash audio. That's vanguard.com slash audio. All investing is subject to risk vanguard marketing corporation distributor. Bloomberg Audio Studios. Podcasts Radio News. Hello and welcome to another episode of the Oddlots podcast. I'm Tracy Allaway. And I'm Joe Wisenthal. Joe, what do you know about creditor on creditor violence? I don't know anything.

Other than it's a very punchy term. It's a great, that's literally it. It's come up a few times in, all right, it's come up a few times in episodes we've done about credit. And I get the impression that, you know, lenders to affirm have different status and some are higher up in the rank than others, and that they would like to probably use the technicalities of the legal code to improve their rank in some sense when money gets paid out to lenders. Yes.

So it has come up in a number of... It's not really violence, is it? Well, some of the fights get pretty nasty. Okay, okay. Okay, well, so when I think about it, I think back to when I covered the leveraged loan market at the FT, and this was sort of like 2013, 2014, And I remember writing stories about how leverage loans, more of them were becoming covite. So weaker covenants for lenders or investors.

And what that means is companies basically had more leeway to restructure their assets if they were trying to raise new capital or stave off bankruptcy or whatever at the expense of those lenders slash investors. And back in 2014, I think the proportion of the leverage loan market that was Cove Light was something like 30%. And that was like a big deal. That was already higher than the leverage buyout boom in 2007. Now the vast majority of leverage loans, I think something like 90% could be called Cove Light. So the entire market is basically Cove Light at this point, which fits into the creditor on creditor violence. theme. So I feel like we need to, we need to dive into this. What it is. I just, my impression is that if I'm going to be a firm that buys leverage loans, uh, I need a good lawyer to look over the contract. Well, I kind of wonder, I guess I wonder relatively how important like legal expertise is versus valuation expertise. This is what I am wondering as well. All right. So let's get into it. I am very pleased to say we have the perfect guest. We're going to be speaking with Sujit Indap. He is, of course, the Wall Street editor over at the FT.

My former colleague, we used to double byline on at least one piece, I think. He is also the author of the excellent Caesar's Palace Coup book, which if you haven't read, I would highly recommend, especially on that point about distressed debt fights getting kind of nasty. Sujit, thank you so much for coming on all thoughts. Oh, Tracy Hodge. It's great to be here. Thank you. So I guess my first question is, you know, we see these headlines. about creditor on creditor violence or, you know, someone will be writing about the private credit

market and there'll be an aside about creditor on creditor violence and how it's becoming more of a thing. Can you give us some context around whether or not this is becoming a bigger trend? I feel like it is, but it's not like there's a violence index that we can look at. Yeah. So the idea of violence in corporate restructuring and private equity deals is not a new Imagine the business that's been bought by the private equity firm is just less valuable over time. The pie has shrunk. There's going to be a fight over who gets what piece and how big those pieces are. The creditor on creditor of violence phenomena, though, is a little bit more nuanced and novel.

And that's the idea that imagine you, Joe, you Tracy, and me, we are all holders of the first lien term loan. Let's say you own 500 million, Joe, you've got 300 million. let's say I'm poor because I work with the FT and only have 15 million. But there would be the view that since we're all in the same security governed by the same document that our rights are the same. And we are all going to be treated equally in this fight with the private equity firm and maybe the junk bond holders below us. The creditor on creditor violence nuance now is that in fact we are not equal. And you two as large holders can do things to me, small holder, that are not equal in treatment, arguably unfair, arguably impermissible.

Just to be clear, in this theoretical setting in which all of us are, quote, equal in the firm's liabilities, did we all have the exact same language? Did we all enter into the same contractual language when we purchase the debt or when we lent money to the company? And furthermore, if we did all have the same language, what are the tools that we use to change our priorities? Yeah. So we do. We all are governed by the first lien credit agreement. Maybe you bought in the original LBO and maybe your CLOs and I'm or you are a distressed debt hedge fund, which bought in later at a different price.

But we're all governed by the same document. And in concept have the same rights and protections. So then how do I do something to you guys? if we're what are the basic tools at my disposal if I want to somehow gain an advantage for me that doesn't accrue to you yeah so let's talk about like why that scenario would first arise of and imagine the company is running into trouble there's a maturity coming up there's some liquidity challenge of as you said earlier these documents now since the financial crisis are covenant light or no covenant so there's a lot of flexibility for the borrower which is the company and the private equity firm that

owns the company. And rather than just declaring bankruptcy and going to bankruptcy court and fighting out there, which is messy, it's time-consuming. It has its own restrictions on what you can do. And the private equity firm will typically, if you're the equity holder, will get wiped out. Bankruptcy is, like, not an attractive option for those reasons. And so what you can try to do is raise new capital. And you're going to raise new capital often from the existing lenders. Those lenders, in exchange for giving you more money are going to ask for some things. What are they going to ask you for? First, the company itself is probably going to want to reduce the principal balance.

So they want people to take haircuts. So there's going to be some haircuts involved. And then there's going to be brought this new money brought in. That new money, however, if I'm giving you new money into this troubled company, I'm going to want some things to do that. Got it. And those things I'm going to want is the most senior priority, which is super priority. Okay, that's all sort of standard. That's not new. The nuance is the company itself has some

amount of value we can pass out as cookies in this new financing process. And in the old world, what they would do is, let's say I've got $100 million and I'm making that number up, a value to allocate in this new transaction that I'm going to raise new money in. Rather than splitting that up pro rata amongst the three of us, I'm just going to give it to two of you. And so why is that, from the company's point of view, it's $100 million, how the three of us divide it up, they don't really care about. But you two care about getting as much as you can, since you own the most, well, we all care about it. But you guys have the possibility of being, let's say, a 51% group and saying, I can take all the cookies for me and leave Sajit behind. And that is the idea of creditor and creditor of violence.

We are theoretically pari-fisou. We are in the same place with the same document. But you, because you choose to and the sponsor, wants to, doesn't really care, sponsor will just go to you. It's easier to deal to cut since there's two of you, not three of us to negotiate with. And that is the nuance of creditor on creditor of violence.

You two, theoretically, standing with me, but the same document can impose pain on me simply because you're bigger. Super priority kind of reminds me of double secret probation, right? Like I wonder, can you have like super, super priority? I guess you could like keep doing it forever pretty much or at least until all the collateral is exhausted. Well, yeah, you see these kind of like 1.5.

lean that's kind of put between first and second and then there's been, you know, double creditor on creditor violence cases. So there is like this spiral and kind of like through the looking gas. Violence squared. Yeah. So one thing I don't really get about the creditor on creditor violence is its connection with private credit. And I've seen people talk about private credit as a response to creditor on creditor violence in the sense that, you know, maybe it's easier to, you know, maybe it's easier to be a single lender to a company. You're higher up in the payment waterfall. You don't have to worry about getting into fights with a bunch of other investors. But then I also see headlines saying that creditor on creditor violence is becoming more of a thing in private credit too. So basically,

I'm confused. Yeah. So let's just take a step back and just thinking about that. I think there's two factors that are behind the generalized creditor on creditor violence concept. One is what we hit on four, which is just the technical aspect of these credit agreements, which is the legal contract that governs a leverage loan. And then, you know, what are the restrictions or covenants that are in that document that prevent this kind of creativity and like refinancing and exchange offers? And there is like a real legal dispute about whether these changes can be done with or without unanimity, whether you need 100% of the group, all three of us. to agree to a change in interest rate or principal maturity.

Those are called the so-called sacred rights, if you will. And that's like a legal question that's been litigated, and we can talk about that more if you want. But then there's also the social aspect. And the social aspect is the idea that me, private equity firm X, they may have the legal ability for this mischief, but they ultimately wouldn't pursue that. And they wouldn't do that because they are a repeat player

in the leverage finance markets, and if they get a reputation as a firm that gets too cute, that will cause them to borrow at higher interest rates down the line. And the next deal, the deal after that, the different partners who are not in this deal are going to face the consequences. So there's a social aspect. And also within the deal itself, if you ultimately antagonize your creditors down the road,

you may need to have restructure again. And if they remember you as the person who is rough with them, they're not going to be so kind when you need their help. And yet Argentina exists. Exactly. Exactly. So that brings us to the private credit point. And you were obviously a leveraged finance reporter and a leverage loan maven. And you know how that market works, which is it's really big. It involves banks who underwrite these deals and then they sell them on in the syndication process. And that's a whole kind of machine. And, you know, in a big leveraged loan credit, there's going to be dozens of CLOs and regular way mutual funds and then hedge funds. And it's like a wide, widely dispersed kind of. group. And that dynamic affects how the document is negotiated and just, you know, all the kind of interactions down the line. And a private credit deal where you truly have like a club or maybe even a

single lender, whether there's, you know, four or five or three or two, maybe one firm that's providing a loan to a private equity backed company. That group is just much smaller. The negotiations around that document are much more intimate. And again, for those social reasons, there was the idea that in a private credit deal, the private equity firm sponsor, who owns the company, is not going to declare war or go to DefCon 5 or DefCon 1, whichever the highest one is, to pursue their own ends. It's going to be much more of a collaborative and kind of friendly, kumbaya relationship. And so this, again, now we go to the examples of the credit or uncredit violence that has arisen now in the private credit market. And the examples are

relatively sparse so far because private credit is relatively new. And two, I do think that's kind of social dynamic actually is true. There's this case called plural site, which Bloomberg's covered, the FTT is covered, where in fact there was one of these aggressive kind of refinancing transactions that happened using kind of a loose document. And the private credit syndicate, which was four or five firms, was reportedly indignant that this had happened. In fact, this credit or credit or credit violence situation was extremely mild. It was like one very small refinancing that to pay and make an interest payment. And then ultimately what happened was the sponsor handed the keys to the private credit firms to take ownership in a very bloodless way. And in fact, I wouldn't even link that. I wouldn't even put this even close to the real like headline grabbing violence cases. Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy.

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And I am aware of the existence of creditor on creditor violence as a risk. I perceive me as being the one who might get screwed, so to speak, at some point in the future. What am I doing, along with my law firm, to write that document in such a way, so as to reduce my odds of finding myself in that position. If you're a small player in the leverage finance market now and or a CLO, which is basically a passive instrument, as you guys know,

these things that just accumulate loans and turn in securities, and you're not like a shark hedge fund. This leverage loan market has changed quite a bit. And so if we just take a step back, leverage loans are the most senior part of a capital structure, even a levered company. And so what that means is even if things go, South, the recovery rates and leverage loans historically have been very high, like 80, 90, 100%.

And so the people who hold these are relatively risk-averse institutions. And so two things have happened of like, one is this creditor on credit violence concept, but also, as you alluded to earlier, this market is huge now, leverage loans. Yeah. It's exploded in the last 10 years. And there are a lot of loan-only companies. There is nothing below the leverage loan other than the equity. There's no high-yield bond. And so the recovery rates have become lower because there's less loss absorption below you.

And this idea that conservative buyer over-leverage loan have bought the safest security, and you have the first lien, the first claim on the assets, that idea has been eroded. And that's actually very profound. And that this market has become much riskier than it used to be for the technical reasons and the social reason. So getting your question on what you should do about it. One, you have to ask yourself, do you want to be in this business? There's a lot of people who now, you know, unless they're like one of the handful of really big players that can impact a distress situation and actually be in the negotiating room, they're thinking long and hard about being in this business. And two, you do hope that the documents themselves are being tightened over time.

And there are ebbs and flows in the market. You know, there's supply and demand and, you know, there's waves of when the documents are tight and when they're loose. And now you hear these terms about there's a J crew blocker. Is that a pushback now? Yeah, there is. And there are these like blockers, like the J crew blocker, the Serta blocker. And what is it mean? And that just means that in the document, the lawyers will negotiate tighter terms and restrictions that prevent the J-Crew transaction, the Serta transaction.

And we can talk about this more in detail if you want. There is, again, this push and pull about, you know, the documents and how tighter loose there are and how people push back. So, you know, but the thing is, though, like everyone. tends to be a price taker in these markets. And you kind of take the document that is the market at the time. And if you are a firm that tries to push back in the negotiations, they can just pass you over. Right. There's plenty of others. Yeah, someone else will take the bad document when you won't. And that is just, that's a difficult dynamic right now. So there's this great bit in your book where the lawyers are arguing over the meaning of end in a contract. That's right. And or, yes.

And or, like, whether and means a bunch of conditions have to be met or maybe only some of them. You know, I've always thought in language this is a weird term because it's exactly, right. It's often, anyway, yes, I didn't. I've always thought this is a weird term. Sorry, keep going. So, personal aside, but my husband is a former corporate lawyer, and it takes him ages to send a text message. Like, he will spend 20 minutes writing a text message that's like two sentences, and he blames it on his legal background. and the fact that you really have to consider the meaning of every single word.

The thing I don't get about covenants and indentures and things like that is I would have thought a lot of it nowadays is like standard boilerplate. But I mean, the fact that these like issues arise and that there can be arguments over them suggests that maybe it isn't. So I guess my question is like how much of this is standardized versus customized for particular companies? Yeah, I mean, I think if we just take a step back and think about just like the industrial organization of these markets. And to your point, I think there was a sense that these documents are standardized and there's some kind of like template which you download and they're all kind of the same, more or less. What's happened is there has been now this arms race amongst the law firms and the investment bank. to read these documents really carefully. And then in their laboratories in the basement,

come up with crazy transaction structure. So the big creditor-un-and-creditor-violence techniques, there's something called the drop-down, there's something called the up-tier exchange. There's something more exotic called the double-dip. Oh, yeah. It's something called Pari Plus. And these are, like, designed by these law firms

and these investments. And when you do one of these transactions, you are not just checking a box thing. I want to do up-tier exchange, and something like it just happens. There's like five crazy things you have to do, which are kind of unnatural and combine together, create an up to your exchange or a drop down. And the result is all the same, which is you, senior lender, suddenly in the left behind group, collateral that you owned now is somewhere else and is not reachable to you. And what I've described are different techniques to do those things.

And so people realize not only are the documents sort of looser, but the creativity that lawyers and bankers, try to exploit has been accelerated and ratcheted up. And there's this idea that we are going to ask for forgiveness, not permission. We'll do the transaction. If someone wants to sue, we'll see them in court, that'll go on forever. And what you're ultimately trying to do in all these cases is create negotiating leverage for the actual settlement, where everyone will come into a room and, you know, sort it out. But in fact, who has the leverage is determined by, you know, who's in the group and who's not. So the actual transaction may or may not be important, but what it does is does set the parameters for the ultimate negotiation. So we've been talking a lot about behavior on the borrower

and the lender side, but there is a sort of third party here, which is the court itself and the judges. And speaking of great books on credit, there's a great book on the Argentina restructuring that came out relatively recently called Default, the landmark court battle over Argentina's 100 billion dollar debt restructuring. And one of the takeaways that I got from reading that book is so much depends on the judge that is put in charge of a particular case. And there are moments in that book where, like, the judge is just really tired and fed up with everyone. And so he kind of like does things kind of hastily, I guess. But what's been the response from the courts to more aggressive creditor on creditor in fighting?

So that's a great question. And not just the actual writing of the document the lawyers are doing as part of what the service they're offering. They're offering an entire kind of choreography on how this chess match is going to, like each chest move is going to inflow. We're going to document to the actual creditor on creditor violence transaction and then ultimately the litigation. And how can we game out each of these moves? So like we'll be in this jurisdiction. We can expect maybe to get like this particular judge and the kind of. company or the other lender will respond this way.

Yeah. And so these documents are all now, almost all of them are written under New York state law. But that doesn't mean they always end up in New York state court. Sometimes they end up in New York state court. Sometimes they end up in federal court where the federal court is interpreting New York state law. And then sometimes they end up in bankruptcy court, which is a federal court as well and has its own very kind of unique powers. And they end up interpret the document and there's a whole, again, art and science deciding, you know, how you think it's going to involve. The state court and the federal courts are relatively slow. Bankruptcy courts are relatively fast. So like one case that's really interesting and I followed closely is the

case Sirta Simmons from a couple of years ago, which was, which is one of the emblematic creditor on creditors. Oh, yeah. And so this is a mattress company. Obviously, we all heard of it, got into trouble during the pandemic. They, in an effort to raise more capital, essentially went to their existing lenders and said, we need more money, who can give us a deal? And this is a fun case because they end up being two competing groups. And they each propose their own deal. One is an up-tier exchange. One is a drop-down, essentially accomplishing the same things, which is new capital in the company, an exchange debt for a discount. And the company essentially had an auction for new capital. They picked one. So one group one, one group lost. Wait, was it the up-tier or

So the up-tier exchange group one. And there's a whole aside about this where the drop-down group, which is Apollo and Angela Gordon, very aggressive smart firms that are in this market all the time, you know, think the actual up-tier structure is something that actually is actually legally offensive in a way a drop-down is not. And that's a rabbit hole we can go down. That point is actually very interesting. But they both essentially add like a new layer of debt to the capital staff. Yeah, they both do the same thing. You end up in the same place. the whole question of whether the up to your exchange is something that's actually contemplated in the original document the drop-down kind of is or not.

And we can go down that rabbit hole if you want. But the point is eventually SIRDA had to file for bankruptcy. The Apollo Angel Gordon Group had sued in New York State Court. I can't recall if that ended up in federal court or not for jurisdiction reasons. But anyway, there was some lawsuit kind of going through the courts or multiple lawsuits about the transactions. Once the company went into bankruptcy, the company and the winning group sought to have the bankruptcy court declared the transaction permissible, and the court, bankruptcy court, which was very fast. The Houston court at the time were very, very fast, blessed the transaction,

the deal, the bankruptcy deal got done. And the people in the winning group ultimately kind of took control of the company. The people left behind, you know, got hosed for dimes on the dollar. So yes, so to answer your question, yes, the whole kind of legal game theory, the judicial is actually very important. And these questions are kind of often left outstanding and hanging because what happens is people ultimately settle out before they get final rulings. Well, to add on to Tracy's question, has there been an evolution over time? So, okay, lawyers are racing to come up with new ideas and new interpretations of words. But in the dream world, you do transactions without ever really having to like rid down to the document itself, right? Everyone is operating good

faith. We know what all these things mean. Hopefully you don't have to spend a lot of time. looking at where commas are or what and or actually means. Has there been an evolution among judges in courts in terms of the degree to which they say, look, we know what these words mean why are you guys trying to redefine words versus, I guess, like a more literal, like, what do these words mean in the English language as described in the original document? Yeah, that actually brings up an interesting point. If you read the actual complaints that, like, the losing group will write in their lawsuit,

so they'll go through all their contractual points that you can't actually do this up-tier exchange and the five crazy things to get it done. And the very last count that they'll add to their complaint is something called the covenant of good faith and fair to-year. And that is the idea that let's just put the words aside. What do these actually parties mean when they struck this transaction? Like what was the actual intent? It was the spirit of the document. Right. Because in the end, we don't want to have to live in a world, right? I assume many investors, lawyers might, but investors probably don't want to live in a world where every comma and word is being challenged as its definition.

And I'm curious if there's been some erosion of norms about the degree to which we sort of accept good investors, except, yeah, we all knew what this meant, good faith. Yeah, and I think there is some level of exhaustion and, you know, there have been some subsequent rulings where a court frowns upon the creditor on creditor violence transaction. There's this now this idea of also cooperation groups, which is this idea where the creditors,

instead of like doing this 51-49 kind of fight, they all sign a contract to say, we're going to be one single block and we'll negotiate as a group with the company. And there can be no criminal on credit violence because often what will happen in these deals is the sponsor will find the 51% group. And they're in cahoots to do this thing, right?

Now they're saying, you financial sponsor, don't do that because we're all one group. And you can't pick any... So separately from the bond dock or the low... Yeah, we'll say, well, we are not going to sign into a deal for the next six months or a year or to the maturity. And if the company wants to negotiate, they negotiate with all of us as a block.

So that's one thing. And there is now an effort to actually do what are called so-called pro-rata transactions where there is a refinancing. But the entire group, Tracy, Joe, Sejit, all get a chance to participate. What happened to the leverage lending guidance? Because you alluded to how big this market is earlier. and it's huge and it's been booming since like the 2010s. And I remember at one point regulators seemed concerned.

And so they issued these guidelines of how to do leverage loans and, you know, like what kind of leverage you should have. And I remember a bunch of bankers freaking out about them at the time. But it doesn't seem to have had much of an impact. Yeah. So that was the idea that a bank couldn't extend a leverage loan. loan where the debt to Iba ratio was more than six times. And that was because, you know, it's a bank and they can't do, they shouldn't do these risky, these risky deals.

So a couple of things happened. One, there's just a whole non-bank market. Two, you know, there's some banks like Jeffries that are not subject to these guidelines. Three, there's this private credit, which is, you know, a whole different world, which is obviously not regulated by banks. And four, I think banks, you know, found ways to push the limits or change the definition of EBAA. But even six times, if you go up to six, that's like a lot of leverage.

And, you know, even if you're doing it at six. Banks themselves, I think, there's a story somewhere about Citibank or Citigroup, which hasn't been a big player in leverage loans, has been kind of usurped in market share. Now suddenly has a new guy from JP Morgan. There's a story yesterday in the journal, I think, about how he's going to push to get more into the leverage loan market. There's a reason that he is not, like, aggressive in this because, you know, it's risky, right?

So we'll see how that works out for them. So, yeah, there is the actual idea of, you know, how much leverage is their total? and then these kind of interpersonal dynamics once the loan is extended. A lot of short daily news podcasts focus on just one story. But right now, you probably need more. On Up First from NPR, we bring you three of the world's top headlines every day in under 15 minutes. Because no one's story can capture all that's happening in this big, crazy world of ours on any given morning. Listen now to the Up First podcast from NPR.

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Apple Podcast, or wherever you get your podcast. As a former banker, you know, again, you mentioned the law firms come in. They have new ideas, up-tier exchange offers, asset drop downs, et cetera. They have the whole choreography of how it's going to play out, et cetera. These are skills that they bring to the table that are something different from valuation and, you know, debt dynamics and so forth. Is that visible in the pie? There's a certain amount of money that gets spent every year on certain. services for transactions by companies, by borrowers, or lenders, et cetera. Has there been a shift in the tilt of the pie of like how much goes to lawyers versus how

much goes to the dealmakers? Yeah, that's a great point too. So you've now seen these stories about the law firm or as the lawyer is getting paid $20, $30 million a year. And they're shifting firms like baseball players or like hedge fund guys typically do. And that's unusual because historically, if you started a law firm as an associate and you made it to partner, you stayed at that firm your whole career and it was prestigious and you got a huge pension. You made a few million dollars a year. It was less than being a banker and less than being

a hedge fund star. But it was a stable and respectful job. So now there was this like warfare because there are a set of lawyers who matter in this world and who specialize in private equity and are thought to be, you know, the big brains around these crazy contracts. So that is something that's happened. And also, and this is actually the accompanying point, which is really interesting, the hedge funds and the private equity firms and the investors in this market, the people who actually put money to capital, they are increasingly horrified

how much lawyers cost, how much bankers cost, how much the whole kind of process costs. In bankruptcy, if you do end up filing for bankruptcy, there is transparency because your fees are approved by the court. You can see now there's lawyers who are charging $2,500 an hour. There's bankers who are getting success fees for a pretty standard deal for like $50 million.

Like we work, for example, a relatively small company, at the end of the case, $750 million. There was, you know, something like $100 million in fees. Wow. And there is real money in these kind of professional services in a way that is relatively new. And the cost are so much that it's affecting the returns of these funds. And they're thinking kind of proactively, how can we limit the damage? Because it's affecting, you know, how much we're going to make in the deal ourselves.

If I'm a distressed debt investor in the current environment, would it be better to be really good at valuation and math? or be really good at reading legal documents. Yeah, I mean, I was going to wonder, it's like if our lawyer, you know, make sense, why doesn't a lawyer to start a hedge fund? Anyway, keep going on. There are a lot of lawyers who start hedge funds.

I do think, though, that this kind of legal creativity, that is becoming a little bit commoditized. And ultimately, if you're going to make a lot of money, it's going to be less on a technical factor. and the technical part I think is defensive. Ultimately, to make money, I think you have to be an entrepreneur and have a thesis around,

how is this business going to turn around? And if I end up owning it, how do I grow the market share and have more customers and that really kind of commercial business aspect? And there are cases, like Hertz, I think it's a great story. That was a big bidding war during the bankruptcy

and there was two competing private equity firms with different plans for growing the business. And that stuff, I think ultimately is important. The gamesmanship, again, truly defensive, and it's hard to differentiate yourself consistently. It is interesting now in this market to see in one deal, XYZ famous hedge fund is on the outs, the other one they're in the inn, and that's kind of coin flip. And for that reason, you know, you just don't know how it's going to. You think you're in the winning group, and then you wake up and you see the press release and you're not.

That's a hard way to make a living. It's a hard way to sleep. And I don't know how long that will continue. I'm going to ask a devil's advocate question. But one of the arguments that used to come up with the rise of covlight loans was this idea that, well, maybe it's actually a good thing for companies because they get more flexibility and there are more options available to them in terms of raising capital. On the other side, you know, maybe there is like a long-term cost associated. with legal wrangling over every single deal, what Joe was kind of alluding to. Where do you fall on that argument? Is this ultimately good for companies or is it a bad thing? Because maybe it makes people feel a little bit different about capital markets. Yeah. So if we go back to like the Serta case, which I think is a good example.

Again, you've got two competing groups, two aggressive transactions, and someone's going to win, someone's going to lose and someone's feelings are going to be hurt and there's going to be litigation. But from the company's perspective, you have an auction and you're trying to get the lowest cost of capital for the $100 million that you need. And who wins or who loses to you doesn't matter. And this whole kind of distributional point, who wins, who loses. Like, why do any of us care if famous hedge fund acts on the outs in this deal and in that deal and the winning side of that deal? That doesn't really matter. But if a company can raise capital, at the best terms and avoid bankruptcy,

that seems like a social positive. The points to temper that are, I think, are two things. One, does the overall cost of capital go up because... Well, if the investors are getting less returns because they have to factor in their legal fees, that sounds like higher costs of capital. Yeah, less returns, and there's some chance you're just going to get, you hold a senior loan and you're going to be at the bottom of the totem pole.

And that, that, and you're just a boring ceiling. LO, that's going to be like, seems bad. And then two, if the company, this is something that we're seeing a lot of, if the company ultimately does file for bankruptcy and ends up in bankruptcy court, you end up with this like Frankenstein capital structure where you have super senior first lien, 1.5 lien, third out of, and the bankruptcy court and the bankruptcy process has to figure out what the actual order is. There's probably litigation.

That happened with Cesar's, right? It did. I mean, Seizers, there is a little bit of creditor on creditor violence, which, again, is the idea of inter- or intra-conflict of Seizers is more the classic case where you have a fight between the equity holders, the junk bond holders, and the senior loans. And there are people who are holding all the things. But I just mean, in terms of having a capital structure that was so complicated that, like, the bankruptcy court was struggling to understand it and deal with it. Like, Seizers is a good example. Yeah, you have, like, the company before bankruptcy is trying to lower its cost of capital by selling a whole. these like bespoke securities for this particular type of investor. And it seems like a good idea

at the time and it maybe is. But then when you're actually trying to divide up a shrunken pie, that is a mess. And that process ends up being like very costly. And we've seen cases where there is a credit on credit violence refinancing. And then six months later, the entire company's in bankruptcy. And the bankruptcy is much more complicated T plus six months rather than if they had just decided to do it on day zero. This is always the crazy thing when I think about distressed stuff is like, man, there's just a risk that it all. Like everyone is trying to like eke out their extra pennies or extra dollars.

But you could really just like collapse the whole thing. Yeah, you're picking up pennies in front of the steamroller. And that is bad. So speaking of Caesar, there's one more question I wanted to ask you, which is what's the deal with Apollo? Like, can you just explain Apollo to me? because they seem to be everywhere nowadays. I see like headline after headline about what Apollo is doing, what they're thinking about doing.

What's your take? Yeah, I mean, I think they're the most interesting example of like the broader theme in either alternative assets, alternative assets or just private capital generally. And that there are a set of firms that started as started out as in the 80s or 90s as like leveraged buyout firms. They bought whole businesses or carve outs of. big businesses. As an equity player, they borrowed a bunch of money, they own the company, they managed it and they sold it five years later, ideally had a big profit. That's a great business. You can make a lot of money pretty risky, but it created a lot of billion dollar fortunes. But there is a limit on how many companies you can buy. And these

firms have realized that they have such expertise in negotiating valuation, understanding businesses and business models, and just being creative generally, that the credit market, markets are just much bigger. And you couple that with the idea that the banking sector has undergone, like, massive systemic changes post-financial crisis. And those businesses are much more constrained and complicated and not equipped, you know, maybe for like the modern capital markets. So they have, for lack of a better phrase, used regulatory arbitrage to encroach into every

aspect of lending. And that is allowing them to, you know, become trillion-dollar managers. And that is like a sea change, whether it's good or bad. of too soon to say, but, you know, Apollo is the clearest example, you know, firm whose heritage is in credit coming out of Drexel. But in fact, you know, credit markets are much deeper, much wider, and there's just much more opportunity to build a massive firm. And that's what they're doing. All right, Suji, thank you so much for coming on all thoughts. Truly the perfect guest. And I cannot recommend your book enough. So everyone who's listening, definitely go check that out

if you haven't read it. Joe, I thought that was so good. And I feel like I have a lot more clarity about what's going on now. I did think that the social aspect that Suji brought up is really interesting because like I, okay, obviously Cove Lights became more of a thing and then you had higher interest rates in recent years and so more companies were under pressure and maybe they got more creative in how they're raising capital. But I do think like the difference or the change in social behavior on the part of investors is also a big part of the story. story. And so I guess the question is whether or not it could change again to Sajit's point about maybe having investors team up and have their own contracts about how they're all going to work

together and things like that. No, I thought there were some really interesting social questions arising out of that. And, you know, I'm not a lawyer, but it does not, so I'm biased because I'm not the beneficiary of this trend, but it does not seem great to have a ton of you know, human hours devoted towards the definition of and or or things that were what we all thought we knew the definition of, et cetera. But actually, technically, if you look at and or, then the second one has to be in there because that's how I've always read it too. But maybe we thought it meant something else, or maybe we just thought it meant and, whatever. Hire Joe for your litigation. I'm glad you brought this up. This has always bothered me.

And it's interesting to think like it's actually eating into the returns these legal costs. that it actually even sitting aside an incident of creditor on credit or violence or even setting aside an incident of bankruptcy, that it would eat into returns just because of how much you're paying the law firms to go over every one of these legal documents. It is crazy also just to think about like the amount of brain power that's being spent on debating this. And again, that's something that comes through in Sijit's book, like how much people are thinking about this. And it certainly comes through in the Argentina book just how like mentally taxing and time consuming sorting the stuff out is. I thought it was also a really

interesting point about the sort of, I don't know if it's like dis-economies of scale from capital efficiency, right? So you have all of these different instruments. You have equity. You have junk bonds. You have all the, you know, super plus, whatever. And individually, each one of these transactions is designed to be the most capital efficient to align the company's borrowing needs with the investors needs. But then you end up with this sort of, you know, Frankenstein's monster of a capital stack. And in the event that that has to be unwound, that is like a tail risk, right? Yeah. It emerges. That in the event that that has to be unwound, it'll be a much costlier process than had it simply been equity in bonds or something like that. Yeah. I mean,

there can be like a parent company, an operating company, like convertible bonds, the loans, preferred stock, like it can go on and on and on. And someone has to go through all of that. Okay. Well, on that note, shall we leave it there? Let's leave it there. This has been another episode of the All Thoughts podcast. I'm Tracy Allo. You can follow me at Tracy Allo. And I'm Joe Wisenthall. You can follow me at the stalwart. Follow our guest, Sujit Indep. He's at S. Indep. And check out his book. He is the co-author of The Caesar's Palace coup came out in 2021. Follow our producers, Carmen Rodriguez, at Carmen Armin,

Dashel Bennett at Dashbot, and Kale Brooks at Kail Brooks. Thank you to our producer, Moses Andam. For more Oddlots content, go to Bloomberg.com slash oddlots, where we have transcripts, a blog, and a new daily newsletter. And you can chat about all of these topics 24-7 in our Discord. Discord.g.g. And if you enjoy Oddlots, if you like it, when we dig deep into creditor on creditor violence, then please leave us a positive review on your

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