SCP’s Perkins on Middle-Market Workouts: State of Distressed Debt
Apr 12, 2025
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Lawrence Perkins, Founder and CEO of Sierra Constellation Partners, discusses the vital role of relationships in reviving middle-market companies. He reveals a rise in 'distressed by accident' lenders due to the private credit boom and contrasts different bankruptcy procedures like Chapter 11 and Assignment for the Benefit of Creditors. The conversation also touches on the significance of company culture and employee support in overcoming financial turmoil, emphasizing strategies that keep businesses resilient in volatile markets.
Building strong relationships with employees is essential for successful turnaround efforts in distressed middle-market companies.
The rise of private credit has changed dynamics in distressed debt management, introducing both experienced and inexperienced lenders into the market.
Alternative methods like Assignment for the Benefit of Creditors provide expedited options for distressed companies, balancing cost and efficiency against complexities of execution.
Deep dives
State of the Distressed Market
The current state of the distressed debt market shows significant volatility, particularly with high-yield bonds demonstrating fluctuations between rallying and retreating. Recent market activity has seen dramatic shifts in recession predictions, swinging from high odds to a more optimistic outlook, indicating market uncertainty. Analysts are pointing toward a potential reset in the distress cycle, evidenced by a distressed ratio that surged to 5.9%. The arrival of Liberation Day has further complicated assessments, as macroeconomic factors and policy changes could also influence the direction of distress levels in the coming months.
Insights from Larry Perkins
Larry Perkins, CEO of Sierra Constellation Partners, shared the evolution of his firm and the unique challenges of working with distressed middle-market companies. His extensive background includes experience in investment banking during the dot-com bubble, which ultimately shaped his interest in turnaround management. Perkins emphasized the importance of addressing management culture and ensuring employee retention during distress situations, noting that retaining key personnel directly impacts a company’s recovery ability. He underscored that creating an environment where employees feel secure and motivated is fundamental to navigating through tough times.
The Shift in Distressed Debt Management
The conversation highlighted a noticeable shift in the dynamics of distressed debt management influenced by an increase in private credit activity in the middle market. Distressed debt investors now encounter diverse approaches from lenders, categorized as either distress-on-purpose or distress-by-mistake. 'Distress-on-purpose' lenders typically have the infrastructure to manage troubled investments effectively, while 'distress-by-mistake' lenders are often inexperienced and may not navigate the complexities of distress well. This juxtaposition underscores the importance of understanding the varying motives and capabilities of lenders when dealing with distressed companies.
Challenges in Bankruptcy Alternatives
The podcast detailed alternatives to traditional bankruptcy proceedings, such as Assignment for the Benefit of Creditors (ABC) and strategic Article 9 foreclosures, emphasizing their rising adoption among distressed firms. These alternatives often provide a less costly and expedited route for asset liquidation compared to federal bankruptcy processes, albeit with limitations regarding contract transferability. Given the nuances of state laws and evolving approaches to distressed situations, these methods can serve as viable options for companies looking to restructure. However, the success of these alternatives largely depends on the specific circumstances and effective execution of the underlying strategy.
Management During Distress
Companies facing distress often need to revisit their operational fundamentals and cash flow management to improve their liquidity situation. Key strategies involve renegotiating vendor terms, enhancing collections, and managing expenses while maintaining team morale. Perkins noted that building relationships with management and conveying transparency during fiscal challenges can lead to long-term stability. As he indicated, addressing the need for realistic adjustments, such as making published earnings before interest, taxes, depreciation, and amortization (EBITDA) figures more accurate, is crucial for navigating distress effectively.
Franchise and Packaging Group Updates
Recent developments in the Franchise Group's litigation and negotiations indicate a push towards unifying opposing lenders for a collective restructuring plan. Progress has been made in bridging gaps between the first and second lien lenders, yet ongoing litigation raises concerns about potential delays and disputes. Meanwhile, in the RDOG Group's restructuring efforts, the incompletely defined proposals and negotiations show a trend toward outlining specific preferred equity stakes and debt liabilities, which could drastically impact recovery outcomes. As both groups navigate these complex scenarios, the focus will remain on achieving a consensus that ultimately facilitates an effective resolution.
Building relationships is fundamental to turning around middle-market companies, according to SierraConstellation Partners (SCP) Founder and CEO Lawrence Perkins, as employees are “in the center of the bullseye [and] doing the work every day, taking the calls from the vendors, taking the calls from the analyst, the private equity sponsor...the direct lender.”
In his feature interview with Bloomberg Intelligence analysts Noel Hebert and Phil Brendel (7:36), Perkins shares he’s encountering more “distressed by accident” lenders these days, courtesy of the private credit boom, than the “distressed on purpose” ilk. He delves into the differences between Chapter 11, Article 9 sales, and Assignment for the Benefit of Creditors (“ABC”). Prior to that, Hebert and Brendel open up with thoughts on April’s market whiplash. The podcast concludes with BI’s Negisa Balluku joining them for a roundtable discussion on Hertz, J&J, Ardagh, Franchise Group, Yellow Corp and Telesat (67:28).
Links mentioned in the podcast: https://www.distressedinvestingconference.com/media-night.html
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