Creditor vs Debitor Restructuring
Hello,
I'm going into restructuring working for a group for my SA that does a good mix of distressed M&A, debtor, and creditor bankruptcy mandates. I just wanted to ask - why is it that many on this forum like the debtor side more than the creditor?
I'm looking to go into distressed credit HF investing after my stint. From what I know, the creditor mandates are much more similar to the work a hedge fund does, and debtor is much more from a PE shop perspective in terms of buyside opps. Can someone gives me the pros/cons?
Also: Stupid question but I'm still wrapping my head around it, what are UCC mandates and why does everyone hate them? It seems to me its just creditor side deals focused on unsecured debt tranches, but I was hoping for some more perspective.
I'm familiar with the academic answers, but was hoping to learn more for folks working in the field.
Thanks!
UCC mandate is an Unsecured Creditor Committee mandate. I’ve only interned in RX and haven’t started FT yet, so I’m not 100% sure why people don’t like those mandates, but if I had to guess, I would say it’s because UCC creditors are low on the waterfall, and having no collateral gives you far less bargaining power than secured creditors. Because of that, there’s less the investment bank advisor can do for their clients.
I think debtor mandates are better for HFs because you learn the inner workings of a debt restructuring in a way you wouldn’t if you only did creditor. For example, in many cases, companies will do things to hide their distress. If you’re the debtor advisor, many times you’re advising before an RX has been announced. Once you move to the buyside, you’ll have a stronger understanding of how debtors are thinking and what their advisors may tell them to do.
only a few months on the job so someone can correct me if I’m misinformed. I have two main arguments as to why debtor mandates are seen as more “prestigious” than creditor mandates:
1) for every RX Deal, there’s 1 debtor and usually multiple (1~5) creditors, so by simple math there’s always going to be more creditor than debtor mandates
so if you can get a debtor mandate, that’s simply more of an achievement
2) and as the commenter above said, if you’re a debtor, you obviously have advance notice that you’re in distress
so you line up advisors and you choose the best one… the banks that are considered the most “elite”
as to why UCC mandates are not as popular, I’m not super sure either, but my guess is that (1) lower recoveries (as above commenter said) and (2) in some, but definitely not all, RX transactions, the UCC may include “unsophisticated” members (I.e. people with non-finance background) which could introduce some unexpected behavior
Probably because there's a lot less optionality for the GUCcy bois.
This has been covered at length elsewhere
Company side:
You have to solve the problem here
You’ll run 100 scenarios and write 100+ page options paper on all possible alternatives and will probably run multiple parallel streams to get the company out of whatever bind they’re in (e.g. new money raise, sell assets, D4E swap etc.)
Creditor side:
You’re in receiving mode. You don’t usually drive much, you receive the proposal from company side advisors and you can basically say
(i) yes, but subject to tweaks or
(ii) no and become hostile eg use your exposure to buy the company out which is very interesting but has low chances of success and only if aggressive hedge funds have bought into the debt
UCC
You’re most likely fucked and will be fully equitised. If there’s anyone ahead (e.g. second lien) who is impaired and you don’t like the proposal put forward, you will get crammed down. So role as advisor is quite limited as it’s not like there are a ton of alternatives
This is very wrong. The creditors that might be the fulcrum drive most restructurings. They will own the equity, and will get to decide who the next management team is. If the current CEO wants to keep his job, he needs to keep his future equity holders happy.
The company tries to play two creditors groups north and south of the fulcrum against each other to get a fat MIP and get out of BK as fast as possible. Do this poorly however and u get urself fired.
Thanks for the MS - please read the post “if there is anyone ahead who is impaired e.g. 2nd lien, you will get crammed down”. The point is that the unsecured may not be the fulcrum
Put simply, the fees on the debtor side are considerably higher than on the creditor side.
That is the actual reason why people like them.
There is an element of strategy and control, but fees are the answer.
On the UCC side, it's just scummy work. Your entire goal is to fuck up the process for everyone else. A lot of low integrity firms and people competing for business from unsophisticated creditors, so the entire process is a nightmare from start to finish. Also doesn't help that fees are sometimes capped.
I wouldn't call Perella, Moelis, or Jefferies low integrity firms. Are there dudes like Province that bill by hour and run up fees while adding sub zero value? Absolutely. Plenty of normal restructuring bankers also take UCC deals for quick fee for minimal work. Especially if you've already lost a pitch for a different part of the capital structure, what do you have to lose by recycling your deck for the UCC role?
I wouldn't either, for some of the firms you listed, for one I would vehemently disagree with your assessment of their integrity.
Have you ever pitched a UCC?
If Moelis or PWP are doing UCC work they’re probably not happy about it. And Jefferies was who I immediately thought of when he mentioned low integrity firms who do a lot of UCC work.
Can you speak more on province and the work they do there? I'm interviewing there, so I want to know if its a good place to set up shop as a first job out of college. I want to be in IB and lateral to a bigger firm one day or is Province already a good firm with good reputation on the street? I hear they are one of the best players out there for RX in the middle market.
Just to piggy back (for others sake), part of what makes UCC work so shitty is that UCCs are formed in bankruptcy. Generally speaking, by the time a company is in bankruptcy, creditors have organized and there’s usually (not always) some semblance of a plan of reorg. This is important because it means that a plan has been formed without your group (generally means you get screwed and are aiming for holdup value) and it also means that any ucc financial advisor lost (or frankly didn’t pitch) any of the creditor roles or the company.
This is all in addition to what others have said about less sophisticated clients and lower fees.
Great point -- just to round it out for our collective thread. It's still usually "better" than receiving no fees / not participating at all -- but it's far worse than the other opportunities.
Debtor-side mandates are your best bet. Reason why is that you not only have access to all of the debtor's information, but you are actively evaluating numerous scenarios under which a proposed plan of reorganization would get approved by the various classes of creditors. At times, there's a lot of game theory and creativity involved with thinking through and anticipating responses of the various classes of creditors when putting this together for approval. Every creditor has a motive, whether that's simply recouping what they're owed, if one of them has a plan to credit bid the business to buy it outright or are actively seeking to try and see the company fail (hedge funds that own CDS on the side and looking for a big payday). I could go on with many more reasons, but debtor representation is for sure #1.
Ultimately, being able to identify the fulcrum security is one of the biggest things to consider when evaluating a PoR, as a debt-for-equity swap that provides for a creditor to retain the most influence (greatest ownership %) in the debtor's business upon emergence from bankruptcy is key.
This is much better than the above post that said creditors are in receiving mode with little say. The only caveat here is its really hard to tell what people want - do you really know if Elliott owns the CDS or just wants to u to sandbag ur biz plan so they can cram someone else? Often times as debtor advisors, you have to stay vague and play all options until things become clear.
The search function can be you’re friend, but a quick summary:
Debtor mandates are typically favored because it’s better to be controlling the the process and creating materials than simply receiving them. You also get paid more on that side - in the real world people care about fees and not thing like prestige.
UCC mandates suck cause you are never the fulcrum security and are lowest on the totem pole. You have a seat at the table, but it is the kiddie seat where you cry and try to gum up the process but only get crumbs anyway. Hence, why only the smaller firms get those mandates.
The rx biz is more nuanced than this. No one is turning a juicy UCC role down because u dont do any work. U really going to say no to a 10mm fee where u get on a call every other week just because the mandate is meaningless?
Debtor mandates are favored by senior restructuring bankers for the fee, but senior restructuring bankers rarely have control over whether or not they win debtor mandates, which rely more on your coverage bankers' relationships (see Centerview and PJ solomon in consumer, Jefferies in energy)
How long have you worked in restructuring and how many big debtor side mandates has pj Solomon or jefferies won?
edit: what’s a juicy UCC role and when was the last time a UCC role paid 10mm? Seriously, I’d be shocked.
If your plan is to go to distressed, it really doesn't matter which one u work on more, as long as its not a bunch of UCC stuff. The pros and cons of each from a junior perspective have a de minimis impact on your recruiting process (though they will have a major impact on your quality of life once you start FT).
The real reason students on WSO see debtor side as more prestige is pretty simple - debtor side generates way more fees per deal. This doesn't actually impact your pay or recruiting at all, so I wouldn't worry too much if you get staffed one or the other.
I won't comment on the recruiting side of things, but debtor-side mandates 100% impact your pay versus all others. For one, you're generating more revenue for the firm, and thus, a larger bonus pool come year-end. Also, your hours worked on debtor-side mandates are generally significantly higher (in an industry where it's standard practice to see your total hours worked being strongly correlated to your year-end bonus).
Eh, maybe for like Jim or Neil, but I just generally disagree outside of that. At the junior level, I have never found the bonus pool being dependent on total revenues, as much as being dependent on what industry standard is for all in comp at your level. When the bonus pool is smaller than normal, it almost always is because it was a shitty year for restructuring across the board, not because your group didn't do enough debtor sides, but maybe you worked longer in restructuring than I did and have more data points.
At the senior level, debtor sides are not your clients, they're your coverage guy's clients. PIMCO, Carlyle CLO, Voya, and Apollo distressed are your clients that you can take with you if you go to a different bank. But again, maybe you've had more conversations with senior people that faced the choice and have a better sense of earnings power and leverage between the two.
Also strongly caution against trying to get paid more by working long hours. Doing a good, efficient job for people that are loud during bonus season tends to work pretty well, regardless if you averaged 90 or 110 for the non-summer months.
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