Pivot Points Newsletter: November 2023

Q&A: Benefits, pitfalls of acquiring or investing in distressed assets

In this Q&A, Debra Henderson Morgan, Managing Director of the Restructuring and Dispute Practice at CohnReznick, and Ioana Iorga, Managing Director of Transaction Advisory Services at CohnReznick, discuss the benefits and pitfalls of acquiring or investing in distressed assets.

Case studies

Litigation Trustee

Background: A large casino was required by the state gaming board to undergo a significant expansion of the casino complex which was projected to cost $200 million. Just prior to beginning the expansion, the casino completed a $475 million debt refinancing and concurrently transferred $155 million to certain former owners. The casino was ultimately unable to secure sufficient funding for the expansion and filed for Chapter 11. The Liquidating Trustee filed an adversary proceeding against the recipients of the $155 million, alleging a fraudulent conveyance.

Practitioner’s role:  Financial advisor to the litigation trustee

Results:

• Performed a solvency analysis by applying the three generally accepted solvency tests: (a) the balance sheet test, (b) the ability to pay debts as they mature test, and (c) the small capital test.
• Worked with the VAS team to perform a valuation of the casino’s real estate fair market value, including value of the casino operations post-expansion.
• Prepared an expert report proving the following: (a) The casino failed the balance sheet test as of the transfer date (based on our valuation, the casino’s liabilities exceeded its fair market value), and (b) the casino also failed the ability to pay any small capital tests as of the transfer date. Our analysis showed that the casino either knew or should have known that the construction would cost more and take longer than projected. Accurate company projections would have reflected future defaults and covenant violations.
• Analyzed the defendants’ expert report and prepared a rebuttal report arguing that the defendants’ expert made several material errors in their analysis.
• Assisted counsel in preparing and responding to Daubert motions and motions for summary judgement.
• Completed depositions.
• Case settled prior to going to trial.

Aerofarms, Inc.

Background: A sustainable indoor agriculture company, operator of the world’s largest vertical farm, along with fourteen affiliated entities, filed for Chapter 11 protection with approximately $100 million of liabilities, including funded debt of $67.5 million. The Court approved the sale of the Debtors’ assets.

Practitioner’s role: Financial advisor

Results:

• AF NewCo, Inc. was formed and served as the stalking horse bidder (and ultimately the buyer) for substantially all of the assets of AeroFarms leading to a successful outcome from the bankruptcy process for AF NewCo, Inc. to execute their growth strategy.
• Supported the company in fulfilling all financial reporting duties to the Court of the Debtor’s post-petition operating and financial results.
• Worked with the Debtors to consummate their plan of liquidation and wind down remaining operations and sale of assets that were not assumed as part of the sale to AF NewCo, Inc.

Article 77 Proceeding Expert Witness

Background: CohnReznick was retained by counsel on behalf of an investor in certain residential mortgage-backed securities (RMBS) to provide analysis and expert witness reports and testimony regarding the common commercial understanding among market participants of certain provisions of the governing agreements for the related RMBS.

Practitioner’s role: Expert witness reports, expert testimony, and consultation/analysis

Results:

• In part, because of CohnReznick’s efforts, the client was able to obtain a favorable summary judgement ruling from the court.

Recent engagements

Solar Energy Company

Our role: Assisted the company, as its financial advisor, in navigating through the Ch 11 process, culminating in the sale of substantially all of the company’s assets.

Structured Finance Litigation Support

Our role: Retained by an investor in 39 RMBS trusts to provide analysis and expert opinions regarding certain provisions of the governing agreements, and the allocation and distribution of certain collections to investors.

Multi-Tenant Office Portfolio

Our role: Retained by the Sponsor to restructure and extend loan, create opportunity for additional equity infusion to support leasing, and subsequently position property for refinancing.

Statutory Enforcement

Our role: Retained by the U.S. Department of Justice to provide analysis and expert opinions in connection with alleged misconduct by a financial institution related to the sponsorship of 40 residential mortgage-backed securities (RMBS) resulting in a $1.4 billion settlement for our client.

Hospitality Portfolio

Our role: Retained by the Sponsor to negotiate forbearance agreements, pre-negotiation agreements, and pursue restructure or sale of the loans (protecting Sponsor’s interest and creating opportunities).

Structured Finance Litigation Support

Our role: Retained by an investor in several RMBS trusts to provide analysis and expert opinions regarding the common understanding of market participants of the “clean-up call” provisions of the governing agreements. Resulted in a favorable summary judgement decision for our client.

Senior Living Group

Our role: Assist large senior living operator in identifying and implementing revenue enhancements, expense reductions, cash flow management opportunities, and vendor terms.

Pre-Revenue Start Up

Our role: Assist this carbon negative start up negotiate settlement discounts and extended payment terms with their key lenders and vendors in order to maximize their cash runway.

International Arbitration

Our role: Retained by large, sophisticated commercial institutions to serve as the umpire of a three-person panel adjudicating a dispute regarding claims for payment pursuant to a negotiated international special risks insurance policy.

Structured Finance Litigation Support

Our role: Retained by an investor in 21 RMBS trusts to provide analysis and expert opinions regarding industry custom and practice related to the allocation of losses, recoveries, and cash flows within a typical RMBS trust, and the distribution to investors of certain recoveries from loans underlying the trusts.

Upcoming events

• GICLI Ninth Annual Meeting (Nov. 15-17) – Attending
• MBA Accounting & Financial Management Conference (Nov. 15-17) – Attending
• Turnaround, Restructuring & Insolvency Strategy TRI Awards (Nov. 21) – Judging
• ABI Winter Leadership Conference (Nov. 30-Dec. 2) – Attending/Speaking
• TMA Distressed Investing Conference (Feb. 6-9) – Attending
• SFNET Asset Based Capital Conference (Feb. 6-7) – Attending
• Structured Finance Association SFVegas 2024 (Feb. 25-28) – Attending
• ABI VALCON (Mar. 18-20) – Attending