Blackstone Group’s Restructuring Business Heats Up

Not too many private equity firms these days are turning away deals because there are too many to choose from. One firm that is doing that is The Blackstone Group.

It’s not the private equity group that’s turning away business, though, but its restructuring groups. Tim Coleman, co-head of Blackstone’s U.S. restructuring team told Buyouts in mid-January he had passed on three deals that week, noting the team was already working on at least 20 assignments. “In these busy times, rather than provide less than high-quality service we have, from time to time, turned business away,” he said.

As Blackstone’s share price dawdles beneath $10, and deal-making for its private equity group slogs through a cold winter of illiquidity, one bright spot for the New York firm has been its financial advisory business, and in particular, its restructuring groups. These businesses have offered a much-needed revenue source, acting as a counter-weight to the struggling private equity operations. And Blackstone executives expect the restructuring business to grow in 2009 and beyond. Last year “was a record year for us, and we don’t expect anything less for 2009,” Coleman said.

The U.S. and international restructuring groups have 45 investment professionals in Atlanta, Boston, London, Hong Kong, Menlo Park, Calif., New York and Beijing. They are part of the larger financial advisory segment, which has 227 investment professionals in its mergers and acquisitions and corporate advisory team, and includes the Park Hill fund placement group.

Despite Blackstone posting disappointing results for the third quarter of 2008—a negative $229.2 million in total net reportable segment revenues—the financial advisory group logged record management and advisory fees, with $160.7 million in revenues. That’s up 120 percent from $72.9 million in the second quarter of 2008 and 91 percent from $84.3 million in the same period in 2007.

Companies that the U.S. restructuring group is advising include struggling New York-based insurance giant AIG; Flying J, an Ogden, Utah-based oil and gas company that filed for bankruptcy in late December amid declining oil prices and tight credit markets; Merisant Worldwide Inc., the Chicago-based maker of the drink sweetener Equal, which filed for bankruptcy on Jan. 14 in part because of competition from Johnson & Johnson’s rival sweetener Splenda; SemGroup LP, a Tulsa, Okla.-based oil marketer that filed for bankruptcy in July, citing $3.2 billion in losses from oil futures trading. The restructuring is also advising National Amusements Inc., a privately-held movie theater company owned by Sumner Redstone. National Amusements is the parent company of both Viacom Inc. and CBS Corp.

Restructuring Plans

Blackstone has been offering advisory services since its inception in 1985, and it started its restructuring group in 1991 when it hired Art Newman from Chemical Bank, where he was a managing director and head of the restructuring and reorganization group. Today Newman co-leads Blackstone’s U.S. restructuring operations with Coleman, who joined Blackstone in 1992 from Citibank N.A., where for 12 years he worked on corporate and real estate restructuring. Newman brought Pam Zilly with him from Chemical Bank. Zilly, now a senior managing director at Blackstone, had divided her time at Chemical Bank between the mergers and acquisitions group and the restructuring and reorganization group.

John Studzinski, the senior managing director who oversees Blackstone’s U.S. and international financial advisory team and the international restructuring team, likes to tout his group’s experience. He noted the five partners working with him in advising AIG all have 15 to 20 years of advisory experience. “You’re getting advice from grown-ups,” he said.

The fundamental endeavor of Blackstone’s restructuring group is evaluating a client company’s worth, figuring out how it will operate going forward, and finding financing, which is the most difficult objective today, Coleman said. To illustrate how dry the financing market is, Coleman cited the restructuring of Lyondell Chemical, which is not a client. The company recently obtained $8 billion of debtor-in-possession financing. Of that, only about $3.25 billion is new money. The remaining was a roll-up of debt already outstanding. The new loan and the roll-up were done by the current lenders to protect their existing positions because the company had no choice—there was no new outside money available, Coleman said.

The most typical problem, Coleman said, is that companies have more debt than they are worth. The restructuring team helps its clients create a three-to-five year business plan that evaluates the company’s worth, prospects, viability, total enterprise value and how much debt the restructured company can handle. Blackstone executives believe the firm’s history of buying and selling companies gives it keen insight and a leg up on some advisory firms with no such history.

Assignments can last for a month or years. “So you’re trying to figure out how much debt the company can carry and create a plan based on that,” Coleman said. “If the company is worth $1000, and has $200 of debt capacity, we figure out which creditor has first priority on that money and then distribute the remaining $800 to the rest of the creditors according to the priority of their positions.”

It will be interesting to see how Blackstone’s restructuring capabilities expand in the coming months, as more large corporations assess their balance sheets or slip into default, while at the same time the private equity group grasps for financing to fund deals worthy of the $13.7 billion fund the firm is reportedly raising. Tony James, the company’s president and COO, said in a November conference call that the financial advisory group is hiring opportunistically in the United States and Europe. But it is clear that the firm has no plans to expand to a scale comparable to a major investment bank. James said the firm doesn’t need hundreds of bankers to run a successful financial advisory business, but rather relatively few senior bankers with different sector expertise and sets of contacts. “I don’t think any of us want to try to rebuild a Lehman Brothers or a major firm like that,” he said during the conference call.

Still, analysts expect the group’s business to expand as the noxious clouds of a widening recession gradually choke more businesses in more industries. Jackson Turner, an analyst with Argus Research Co., expects revenue from the financial advisory segment to increase nearly 20 percent in 2009 thanks mostly to the restructuring group. “It takes a while for a lot of these companies to declare bankruptcy and get in a bad position,” he told Buyouts. “You’ll really see things take off in ‘09 and first half of ‘010.” Turner added that he doesn’t expect many large deals to be sponsored by Blackstone’s buyout arm in the next year and he expects it to exit few, if any, of its investments. “Any activity where they can generate revenue without putting up dollars is certainly a good thing right now,” Turner said.

Blackstone’s restructuring group should also benefit from the disappearance of financial advisory and restructuring services offered by Lehman Bros. and Bear Stearns. President and COO James said in the November conference call that the turmoil at major banks was causing “widespread cutback distraction and personnel defections” that benefit Blackstone’s advisory business. “They’re one of only three companies in Europe and the U.S. that specialize in restructuring,” Argus Research’s Turner said of Blackstone, the others being Lazard Ltd. and Rothschild Group.

James added during the conference call that he expects at least two more strong years in the reorganization and restructuring group. Coleman, the head of the U.S. restructuring team, expects much of that to come from such fields as real estate, gaming, manufacturing and hospitality. “Almost anything that is affected by people’s pocket books,” Coleman said.

Studzinski, the senior managing director overseeing the U.S. and international financial advisory team, said he expects a lot of balance sheet restructuring to occur in the financial services sector, a trend he predicts will lead to corporate defaults in 2009. He also expects sovereign wealth funds to shy away from handing cash lifelines to troubled U.S. institutions, and said that companies may resort to financing each other. Studzinski stressed this recession is still in its earliest days. “We’re in Act II of a five-act play,” he said.