Elite, Unique and Enduring: Wachtell Lipton’s Restructuring and Finance Group
By Matthew Heller | November 20, 2024 | Wachtell Lipton Features, News & Features
Standing, L to R: John Sobolewski, Josh Feltman and Benjamin Arfa. Seated, L to R: Gregory Pessin, Michael Benn, Emily Johnson and Emil Kleinhaus. Photo by Michael Paras.
Wachtell Lipton Rosen & Katz is a rare and remarkable force – a dominant player in corporate law with a single office in Manhattan, and fewer than 300 lawyers. In a world of global legal behemoths, it’s Wachtell that regularly gets the call from clients including Broadcom, OpenAI, RTX Corporation and even basketball legend Michael Jordan.
Its success derives from its culture that embraces small, tightly crafted practices that routinely work through multidimensional approaches to billion-dollar puzzles. Take, for instance, its restructuring and finance expertise, which Wachtell offers clients as a one-stop shop handling everything from acquisition financing and capital structure design to liability management and corporate restructurings. And if anything ends up in court, the Restructuring and Finance group also includes litigation specialists.
“It is a relatively unusual structure in terms of having a group that covers the full spectrum from pure finance on one side to restructuring on the other and having litigators working side by side with transactional lawyers,” says Emil Kleinhaus, a partner in both the Litigation and the Restructuring and Finance groups.
Wachtell’s recent restructuring efforts have included the Chapter 11 reorganization of drugmaker Mallinckrodt and the purchase by Overstock.com of certain intellectual property of Bed Bath & Beyond out of the latter’s bankruptcy. On the financing side, the firm has recently advised clients including Salesforce, Hewlett Packard Enterprise and 3M on securities offerings and bank financings. In the emerging liability management space, Wachtell has advised principal constituencies in several of the most high profile transactions of the last couple of years, including Lumen, Envision, AMC and Team Health. Partner and finance expert Gregory Pessin was even part of the Wachtell team that helped X Corp., formerly Twitter, prevent Elon Musk from terminating his agreement to acquire the social media platform for $44B, as Musk’s relationship with his financing sources was a major issue.
“The first place we go with a client is: What is the overall business and legal situation? How do we attack the problem?” says Michael Benn, a Restructuring and Finance partner. Once they nail down the possible menu of solutions, the firm’s unique structure provides a prime position to execute whichever strategy is chosen.
“We're there,” Benn adds, “to give advice and to add value and to help clients along the way, as opposed to trying to push an agenda.”
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Emily Johnson joined Wachtell as an associate in 2010 after graduating from Duke Law School. She was elected partner in 2018 and practices transactional law as part of the Restructuring and Finance group. Her clients have included NBA legend Michael Jordan, whom she advised on the $3B sale of his majority stake in the Charlotte Hornets last year.
“Rather than restructuring and finance, I think of us as all things debt,” Johnson explains. “Debt is really a life-cycle product, and understanding how you put it together for a healthy borrower informs your approach when times are tougher, and vice versa.”
Johnson’s practice extends all the way from investment-grade acquisition financing in support of M&A to liability management. But, her practice tends to sit more on the healthy side of the ledger.
Debt is really a life-cycle product, and understanding how you put it together for a healthy borrower informs your approach when times are tougher, and vice versa.
In Johnson’s early years at the firm, as is typical for a Wachtell associate, she handled a wide variety of matters, including on the restructuring side, which helped round out her understanding and engage with the full complexity of the capital life cycle. By seeing the healthy side and the restructuring side of this work, Johnson and her colleagues learn how to draft precisely, but strategically.
Working at this level of dealmaking, the technical precision of drafting a contract is paramount. “The contracts that we write often outlive the tenure of most of the people implementing them,” Johnson says, “so the drafting is so critical.”
In one of her more noteworthy matters, Johnson steered the financing aspects of the 2020 separation of industrial giant United Technologies into three public companies and its simultaneous merger with Raytheon. The existing $45B debt load was rebalanced among UTC/Raytheon, the separated Carrier heating and ventilation business and the separated Otis elevator business.
“It started as one company with a single capital structure,” she says. “But to do the separation you've got to, in essence, reallocate the debt among the three businesses and set up the new public companies’ inaugural capital structure. If you owned debt in United Technologies, I couldn't just tell you, ‘Now you own debt in Otis, and now you own debt in Carrier.’ It’s a refinancing process, but it's also a design process. What do these capital structures look like? What should they look like? And how do we incentivize holders to get that result?"
Wachtell worked for over a year on the United Technologies spin/merger, Johnson recalls. “How do you untangle a 100-year-old company? There's a lot of detailed planning work on that. And then, just as we started to execute the bond deals for the spin companies in February 2020, Covid-19 stormed onto the scene requiring new methods and quick thinking to execute transactions.”
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After Wachtell was founded in 1965, it initially followed the more conventional practice model of separating restructuring and finance. “The firm had a very strong bankruptcy practice that was focused on creditor committee representation,” says Josh Feltman, who chairs the Restructuring and Finance group. It did not have a major finance practice until the firm concluded that it was impractical to have a leading M&A practice if it was without a substantial finance practice.
According to Feltman, the practices merged into a single entity as their focus on creditor representations and bankruptcy waned, and the emphasis on being able to service clients on the finance side of M&A deals waxed. By 2007, the Creditors’ Rights group had been renamed Restructuring and Finance. Ever since, the ReFi group, as it’s known within the firm, helps to underscore the firm’s singularity in the market as an elite strike force of dealmakers, able to tackle the most pressing legal issues from every angle and at every stage. While other firms may have attorneys from six or seven practice areas on a call to discuss liability management or out-of-court restructuring deals – such as separate specialists in securities, bank debt, bond debt and derivatives – Wachtell’s ReFi group is devastatingly lean and effective.
“The trend of the market over the last 15 years has dovetailed nicely with the design of our group,” says John Sobolewski, a partner in the group who is regularly tapped to handle the firm’s liability management work.
As Benjamin Arfa, who previously worked as an analyst at Goldman Sachs, says: “Having one set of people with expertise across practice areas enables us to deliver a superior result for clients who are looking for ways to put money to work safely or restructure investments in ways that achieve their aims.”
The ReFi group helps to underscore Wachtell's singularity in the market as an elite strike force of dealmakers.
Wachtell’s approach is, first of all, to understand the client’s business. According to Benn, who recently advised The RealReal in liability management transactions related to its existing convertible notes, the first step with any client is to understand where the issues lie and explore the various avenues for solutions. He looks at whether the business has a short- or long-term problem, whether it requires a balance sheet restructuring or liquidity infusion, and if the latter, whether capital markets are open to them and, if not, whether private credit provides a path forward. Whatever the best route is, the Wachtell team can guide the client through it.
“We know how and when to capitalize on financing trends,” says Benn. “We have deep knowledge of and experience with the syndicated loan and high yield bond markets. We interface well with direct lenders.” In fact, there is very little that this team can’t do. For that reason, they frequently get called in to sort through the most complex, novel deals.
In one novel financing, Arfa and Benn helped put together a complex $250M credit facility in July 2023 for Rayonier Advanced Materials, a maker of cellulose specialty products, that included a “double dip” or “pari plus” loan with alternative investment firm Oaktree Capital Management. The dealmakers had handled the company’s existing debt financing, so they knew the debt documents cold. They were able to go through them and show the client the seams, then engineer a transaction to raise the financing that they needed to get through a rough patch of the business. Finally, this past November, Rayonier Advanced Materials again tapped the Wachtell team to refinance existing debt maturities and unwind the “double dip” structure into a more conventional secured loan package.
According to Benn, some law firms might advise a similarly positioned company to explore bankruptcy. “That may be the immediate place where they go,” he says. “That's not where we're going to go. Bankruptcy is expensive. Bankruptcy brings a court into the equation right away. It's a forum that's adversarial by nature. We ask, ‘Is there still a deal to be done?’”
In a deal that closed in March of this year, Wachtell represented Lumen Technologies in the biggest liability management transaction of all time. The firm led the global telecommunications company in intense negotiations with creditors, who had initiated the talks after inquiring about the company’s debt maturities and what they described as an apparent default. Wachtell led the company through a comprehensive debt realignment transaction that secured new avenues for growth and expansion.
While bankruptcy was never on the table in the deal, the negotiations had a restructuring-style dynamic. It was non-linear, dealing with multiple counterparties, more like a heads-up negotiation rather than taking a proposal to the market like with a new issuance. “There were hawks and doves in the creditor group,” says Sobolewski, “and to some extent you’re balancing their interests against each other. You have to be sort of a restructuring ninja to navigate that type of a deal dynamic.”
We know how and when to capitalize on financing trends.
The Rayonier and Lumen deals exemplify the types of bespoke problem-solving that the Wachtell ReFi group is primed to handle, time and again. They are hybrid deals where, to do it really well, you need the elite skills of both finance attorneys and restructuring attorneys. Silos won’t cut it.
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Josh Feltman has been problem-solving at Wachtell since he joined the firm in 2002. He worked on Enron and WorldCom, then spent 2004 through early 2007 working almost exclusively on huge private equity, take-private deals with large financings, he recalls. Wachtell’s standard partner track is eight years, and the associate training is designed to show the young lawyer the spectrum of a business cycle. They are exposed to bankruptcy, out-of-court workouts and restructuring deals, along with stalwart M&A and related investment grade and high yield financings.
This learning process, Feltman says, “gives you the toolkit” to do complicated stand-out deals like the July 2024 drop-down financial restructuring of AMC Theatres that enabled it to extend the maturity of up to $2.45B of its debt.
“We're a small firm,” Feltman notes, “and everyone is exposed to multiple fields. The people who do public company M&A and private company M&A and spinoffs are not separate. Everybody does everything. And even if you're not a perfect expert in something, you know who to go to, you understand what questions to ask.”
Wachtell used that toolkit in a precedent-setting case that arose from the financial troubles of Education Management Corp., a Pittsburgh-based operator of for-profit post-secondary educational institutions. With Wachtell’s help, EDMC came up with a plan to restructure about $1.3B in secured debt and $217M in unsecured notes, which had been issued by its subsidiaries, through an out-of-court exchange offer to its debtholders.
“That was a very unusual situation because the client really couldn't file for bankruptcy because it was an education company that would lose government financing,” says Kleinhaus. “So we had to design a rather innovative structure for an out-of-court restructuring transaction.”
A majority of noteholders supported the deal but two investors, Marblegate Asset Management and a related entity, sued EDMC, alleging the deal violated the Trust Indenture Act (TIA) of 1939 by effectively depriving them of the practical ability to collect on the notes. EDMC, as the parent company of the issuers, had guaranteed the notes, which carried a high effective interest rate – nearly 20 percent per year – to compensate for the riskier nature of the unsecured debt.
A trial judge, while declining to enjoin the transaction, held that cancellation of the guarantee would violate the TIA. But in March 2017, the U.S. Circuit Court of Appeals for the 2nd Circuit overturned that decision, accepting Kleinhaus’ argument that the EDMC restructuring, even if it affected the practical ability of noteholders to recover, did not amend the "core payment terms" of the notes.
“Our litigators are really good at helping us structure transactions. Where some litigators will only look at the deal documents after there's a dispute, our folks – Kleinhaus and his team – look at those documents with us at the outset, when we’re fleshing out those issues and we're structuring to make sure we don't get tripped up,” Benn says.
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Wachtell’s Restructuring and Finance Group has been particularly busy of late amid a surge in restructuring activity due to higher interest rates and economic uncertainty. “While Chapter 11 filings increased more than 70 percent year-over-year [in 2023], companies also increasingly turned to ‘out-of-court’ solutions to extend maturities or restructure their balance sheets,” the firm reported in a January 2024 bulletin.
Our litigators are really good at helping us structure transactions. They look at the deal documents with us at the outset, when we’re fleshing out those issues and we're structuring to make sure we don't get tripped up.
“We expect 2024 to be an active year as stressed and distressed companies grapple with a potentially ‘higher for longer’ interest rate environment and, in some cases, approaching maturity walls,” it added.
It's also been a busy year on the financing side, reports Pessin. “The high-yield debt markets, for the first time in a long time, were sort of challenged, difficult, volatile, 18 months ago. Now they seem to be ‘back-ish,’ not to their peak by any stretch, but back in a certain way.”
Much of Pessin’s work is acquisition financing for the firm’s large, strategic, investment-grade clients. He’s finding that debt continues to be available for them to finance acquisitions in large scale. “We just signed up a very large LBO transaction for a private equity sponsor, one of the largest in many years,” he says. “And the debt was available and more expensive than in the [LBO] heyday, but not prohibitively so.”
Having the ability within one group to handle complex financings and restructurings means that, no matter which way the market leans, the group is always busy. “We’re built to be fluid,” says Sobolewski.
Feltman and his fellow partners believe the firm’s collaborative culture is a key to handling the ever-large workload. They have a bi-weekly lunch where they rotate cuisines and discuss the deals they’re working on, including the complexities and recent developments. An associate is tasked with ordering the food. “It's not revealed who made the selection until the end of lunch, after we all have passed judgment,” quips Arfa.
The conversation around the lunch table might be about a particular financing structure or the way certain PIK loans have developed, or about litigation over whether or not a certain contract can be assumed under the given circumstances. It’s cross-disciplinary, always changing and never boring.
“We are an open-door place, and we spend a lot of time thinking with each other,” says Johnson. “The firm is very collaborative and not siloed, and we think about what is the client's problem that we're solving – not how do I solve my piece, but what is the global solution?”
The firm also has “Champagne Thursdays” and “ ReFriday” social gatherings to celebrate the arrival of a new employee, a staffer’s birthday or firm wins.
The ReFi group now numbers 37 lawyers, including six litigators. “We're not above doing anything, but by and large, our clients come to us for more significant problems, and we turn down a lot of work that doesn't make sense given our model,” says Feltman.
The firm makes a major investment in developing its associates to keep the firm tight-knit and operating at the highest levels. Hiring is for the long term, with a goal of bringing on 25 to 30 first-year associates firm-wide each year. “Attrition for us, I don't want to say it's a debacle, but it is not a happy event,” says Feltman. “It’s rare for a Wachtell associate to lateral to another firm. But when they leave to go to private equity offices or academia or to move to California, we feel it,” he says. “It hurts.”
“Marty Lipton likes to talk about the firm as a family,” Benn observes, referring to the firm’s legendary founding partner. “And like every good family, we have disagreements from time to time. But when it comes down to it, we all really like each other, respect each other and enjoy the time we spend together.”
It’s a good thing, too, because the attorneys have never been busier or more in demand. As the markets shift, their nimbleness and dynamism mean there is never a slow quarter. And their ability to craft the most complex and novel financings and restructurings means they have a lot of Champagne Thursdays in their future.
