Lawyer Tom Lauria on a Future Bankruptcy Wave, Crypto ‘Liquidation Boom’
• Tom Lauria runs the bankruptcy team at White & Case where clients have included Hertz and Johnson & Johnson.
• His hardball tactics have earned him a reputation as a “bulldog” in restructuring circles.
• Lauria spoke to Insider about what to expect when the next wave of corporate loans come due.
Tom Lauria has seen a lot of nasty battles in bankruptcy court. With interest rates and inflation soaring, he anticipates that he’ll soon see a lot more.
As the leader of the financial restructuring and insolvency practice at White & Case, a top law firm, Lauria is regularly sought out by struggling companies and their creditors for advice on saving their businesses or getting a leg-up over their adversaries. The firm’s team of some 272 lawyers in its restructuring and insolvency group, which Lauria refers to as a “merry band of pirates,” have advised companies like power company Dynegy Inc., car rental giant Hertz, and electricity company Mirant Corp. He has also represented bondholders in the bankruptcies of autoparts company Visteon Corp. and amusement part company Six Flags Inc.
Notably, when Lauria represented Hertz in its Chapter 11 case during the coronavirus pandemic, even its unsecured creditors were repaid in full. Usually these next-in-line creditors have to settle for the pennies-on-the-dollar recovery. The Financial Times, in a 2021 story on Hertz’s mirculous recovery, dubbed Lauria a “bulldog.”
With business bankruptcies ticking upward and interest rates rising, Lauria spoke to Insider about the cases his team has been working on, how struggling crypto companies and tech firms differ, and where he came up with the tagline — “Walk In, Fuck Shit Up, Walk Out” — on his infamous business cards.
This interview has been condensed and edited for clarity and length.
You’ve been through several major downturns — 2001, 2009, 2020. How do you think the next few months and years will compare?
I think that we’re looking at a massive restructuring in the next couple of years. I don’t know exactly when, but since 2010, 2011, companies have had enormous access to incredibly cheap debt financing. I’d venture to say the run-up in high-yield debt is record-setting.
And when they have to refinance, the cost of that debt is going to be double or triple what it was.
So I think we’re kind of sitting on top of a bubble of financing. And as this debt matures companies are gonna have an incredibly hard time refinancing because the cost of that debt today is gonna be double or triple what it was over the last 10 years. So you’re going to see companies that have debt maturities coming on, which is going to result in sometimes more painful resolution processes in and out of court.
I think it’s going to be enormous, almost mind blowing.
During the pandemic, you led Hertz through a process that helped eliminate $5 billion of debt. Can you talk a little about the challenges of lining up a new lender group and managing the expectations of various constituencies there?
When the pandemic first hit, the travel space just crashed. Hertz was seeing revenue at roughly 10% of its historic levels. Hertz is an enormous used car seller, and the price for used cars had collapsed.
We went in with about $19 billion in debt, about $15 billion of which in the US. About $10 billion of Hertz debt, when they filed, was related to financing in connection with their US fleet.
We used some provisions of Chapter 11 to first, not pay any rent, in respect of the US fleet. And then second, to negotiate an arrangement with the lenders, where the monthly [payments] for the vehicles was reduced by over $300 million per month.
Between not paying the rent prior to the bankruptcy, and then cutting a new deal, we saved billions of dollars of liquidity for Hertz. What we didn’t want to do is have to borrow billions of dollars of additional debt, just to keep operating the business. That could well have been the death knell for the company. So the strategy in dealing with the financing of the fleet was really designed to minimize the company’s need for new financing in Chapter 11.
We tried to raise capital by issuing equity. [Read more about how retail investors piled into Hertz.] Hertz was in a position where it had the ability to sell about 250 million shares of stock for four or five bucks a share. We asked the court for permission to do that. The judge approved it, and the SEC said nothing. A few days later, the SEC — I think because of political pressure — came back in and really put us in a position where it was untenable to go down that path.
Nevertheless, because of the deal we cut with the finances for the fleet, and because used car prices skyrocketed in the summer and fall of 2020, we were able to create liquidity.
We learned a lot of lessons there, including: you can’t follow the playbook. There’s a standard playbook for restructurings. If we’d followed it, we probably would have handed the keys of the company over to the secured lenders. All of the junior creditors would have gotten pennies on the dollar, and equity would have been wiped out.
Let’s turn to tech and crypto. We’ve seen a few bankruptcies in crypto, and there’s talk of tech startups that are struggling to raise new cash. Do you expect to see a wave of tech restructurings? And are there any special considerations — reasons to throw out the playbook?
I think that tech and crypto are very different. From my perspective, crypto has always been a little bit like the tulip bulb craze in Holland. I don’t think there’s a real asset there at the end of the day, and it’s very hard to reorganize when you don’t have a real asset.
These things are built on the ability to keep bringing in new capital. And when that stops, there’s not really much there to reorganize. So I’m not sure that what’s happening in crypto right now is really going to be a reorganization boom, but really probably more of a liquidation boom.
Tech is different. Tech companies have real assets. I believe that there will be reorganizations in that space. And in fact, we’ve seen a number of tech reorganizations successfully through to conclusion in the last year or so, and I think that’s going to continue.
Could you talk a little bit more about that? In layman’s terms, what sort of assets do companies need to have in order for restructuring to be possible?
The real thing you have to have is a product or an asset that generates revenue. There’s an electric truck manufacturer that went into Chapter 7 bankruptcy, a liquidation process.
I think it is reflective of the fact that you get crazy market valuations and companies that have very little in the way of tangible assets that generate revenue. You have a market that provided capital to these companies on the basis of dreams and unrealistic valuation stories. So when somebody says,’Hey, the king isn’t wearing clothes,’ there’s nothing there to support a real reorganization.
That story has been told time and time and time again. There are numerous tech companies and so-called sustainable technology businesses that are all premised on a future dream that may or may not be realized. When you have hiccups in the financing or hiccups in the market, as you do right now, those companies will not have anything in the way of a real business that can serve as a platform for reorganization.
There were a lot of big changes in the pandemic. Some of the retailers that went under were excused from paying rent, which is historically rare. Do you think any accommodations that bankruptcy courts made in 2020 are here to stay?
The law is the law, at the end of the day. In 2020, exigent circumstances resulted in unusual outcomes, but I think that we all depend on a legal system that produces reliable results. When you start letting the system zig and zag, you create unpredictability that constrains capital.
To me, one of the most interesting things that’s come out of the pandemic is, we all started doing court hearings by Zoom. Many courts are still doing all hearings remotely. I’m a big fan of in-person, myself. Maybe I’m a dinosaur, but I really think it’s helpful to be in the same room with people, to read the body language, as opposed to looking at squares on a screen.
What else is keeping your team busy?
One of the areas that’s really booming right now in restructuring is mass torts. We represented the Boy Scouts in their Chapter 11 case, started by all these abuse claims. We’re representing Johnson & Johnson now in connection with its efforts to manage the liquidation of its tort claims. We’re advising a number of other companies in connection with anticipated restructuring activities around mass tort liability, and I think you’re gonna see a continued flow of very large cases in that space.
The tort system in the United States is very inefficient. You can spend hundreds of millions of dollars litigating these mass tort cases, butI think companies are starting to get smart and saying, ‘look, that’s money we could be using to settle the cases rather than just paying the lawyers.’
You can have two claimants with the exact same injury, one in St. Louis who gets $20 million for his or her mesothelioma case, and one in Cincinnati who gets $200,000 for his or her case. In a centralized claim resolution process, you’re going to have far more uniformity: similarly situated people will get treated similarly. Which feels fair.
You’re probably aware, some senators are making noise about taking steps to ban that kind of bankruptcy, the so-called Texas Two-Step. What sort of impact would that have?
I don’t think that’s going anywhere. I think that that is a political grandstanding by people who don’t understand what they’re talking about and who are probably receiving contributions from the plaintiffs’ bar.
What kinds of parties are trying to invest in these Chapter 11s, either as lenders or to buy assets in bankruptcy sales? Are you seeing more private equity firms and established distressed-investing entities team up with companies to seek opportunities?
There’s a population of distressed investors out there that kind of expands and contracts with the market. You’ll see debt of a company go down to 50, 40, 30 cents. And the assumption is that if you can buy that debt, you either have the right to be paid in full — if people junior to you believe the value’s there — or to own the company.
When I started my career, 30 years ago, there was just a handful of folks in this business. So they were able to readily capitalize on market inefficiencies. But as there have been more market entrants, those inefficiencies have been reduced.
Financial-strategic alliances? You know, it’s happening to an extent, but there’s still a bit of a chasm between private equity-style investment — which is more kind of an upside-optimistic view of things — and distressed investing, which takes a bit more guts and sharper elbows. So. I think they still maintain their status as pretty separate disciplines.
How did you come up with the slogan on your business cards? “Walk In, Fuck Shit Up, Walk Out?”
I have likened the group we’ve built here at White & Case to a merry band of pirates. A lot of the time, we seem to get brought into cases representing junior stakeholders on the cusp of being wiped out. And we’ve got a solid track record of representing those types of parties aggressively. I’m thinking about cases like Six Flags, where we represented junior bondholders who ended up buying the company and getting probably a 20X return on their investment. Thinking about a case like Visteon, similar outcome, we were representing junior bondholders.
People went “uh oh” when we showed up. Out of fun, really, I was talking to my son one day, and he said, ‘Dad, you ought to print up a card that says, “Walk in, fuck shit up, walk out.”‘ So I did, kind of for a laugh, right? I gave it to some friends and some clients. And one of my clients, who owns a large bank, just thought that was the coolest thing ever. In fact, he took the card and put it in a Lucite square, put it on a spindle.
He keeps it on his desk. Flip it around, on one side, it’s just my name and email. On the other side, it’s my slogan. I started handing these things out in meetings. And what I found, surprisingly, was people seem to kind of react like, ‘Man, if this guy’s got the balls to give me that card in an important meeting, I gotta pay attention here.’
Next thing you know, it showed up in a couple of articles, and it’s one of those things — when I don’t have that card with me, people are disappointed.