Distressed Investment Banking To the Abyss and Back

No senior executive or general counsel of a
troubled company should take another step without reading Peter Kaufman
and Henry Owsley's practical and concise primer on distressed investment
banking. With <i>Distressed Investment Banking:To the Abyss and
Back,</i> these senior partners from Gordian Group LLC provide
overwhelmed leaders of troubled businesses with a financial road map of
what to expect and how to successfully navigate waters that most
executives are ill-prepared to swim in.

</p><p>Hailing from a firm known for its zero tolerance of business
conflicts resulting from representing bondholders and banks, the authors
provide insights into the mindsets and likely game plans of all of the
constituencies in the troubled-company game. They deal head-on with
issues such as how to defeat the absolute priority rule of the
Bankruptcy Code in order to allow existing equity-holders to walk away
with value when others ahead of them in the priority scheme may not be
getting paid in full. Steering clear of big-picture theory, they get
down and dirty about the real game that goes on in the chapter 11
trenches. They don't sugarcoat the solutions or the tough decisions that
investment bankers must help management and boards of directors make in
order to maximize shareholder value. They shed particular light on the
plight of public-company shareholders who are often so widely disbursed
that they cannot effectively and aggressively represent their interests.
Kaufman and Owsley point out that old equity may slip in and out of the
money and advocate that "old equity possesses both option value and
control value, and that if advised by zealous, creative and unconflicted
investment bankers, a board may achieve superior results for old
equity." They also highlight the divergent interests that often exist
between parties, including those that sometimes exist between management
and public shareholders. For example, where management holds only
out-of-the-money stock options, they may be focused solely on preserving
their jobs, rather than on realizing value for existing shareholders.
These are the subtleties that are often only learned too late by the
players in these dramas.

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It is rare for top performers in the lucrative market segment of
distressed investment banking to take the time to create a user-friendly
tell-all on how this mysterious process works. Those that enter this
forum in the future will benefit from the concise book that these
industry leaders have written.
</center></i></big>
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</blockquote></blockquote>

<p>Broaching uncomfortable topics, Owsley and Kaufman provide insight
from experienced pros on how to address financial fraud on the part of
existing management in order to maintain board control of the business
and provide a fighting chance to preserve shareholder value. Regaining
creditor confidence doesn't always mean handing over the keys to
lenders, and the authors use real-world examples to illustrate how a
sinking ship can still be saved, even in the face of management
improprieties.

</p><p>The authors provide a primer on the valuation battles that must occur
in order to lay the foundation for the claim that value exists for
equity-holders. They outline how warrants can be effectively used to
deliver a material upside to otherwise wiped-out owners of
distressed-company stock. Thankfully absent is a mud-thick,
treatise-like explanation of how to use valuation techniques like the
Black-Scholes model. Instead, Owsley and Kaufman deliver a
straightforward, practical overview of how true value is captured under
crisis circumstances. Espousing their mantra "few things are more
dangerous in finance than a 23-year-old with a spreadsheet," the authors
also voice disdain for the computer-generated output of number-crunchers
in favor of beginning the process with a street-smart sense for what the
right value ought to be—something the best professionals in the
distressed investment banking game can be counted on to deliver. They
don't suggest dispensing with outstanding finance skills, but suggest
that these mechanics are only useful in the hands of those who know how
to apply them effectively.

</p><p>In exploring all the options for realizing value for a troubled
business, the authors glide through a nice how-to on structuring
bankruptcy auction sales under §363 of the Code. The process of
providing appropriate bid protections for stalking-horse
bidders—while attempting to lure third-party bidders into the
auction—is nicely covered. Owsley and Kaufman conclude by
highlighting the benefits that can sometimes be achieved by proffering
an internally financed reorganization plan. They explain that these
plans don't require material new financing nor the sale of substantially
all of the company's assets. And they prudently detail how these plans
can be used both offensively and defensively to keep third-party bidders
honest in negotiating for a controlling stake or for a purchase of the
company's assets.

</p><p>It is rare for top performers in the lucrative market segment of
distressed investment banking to take the time to create a user-friendly
tell-all on how this mysterious process works. Those that enter this
forum in the future will benefit from the concise book that these
industry leaders have written.