Goldman Builds All-Weather Restructuring Business

Goldman, Sachs & Co. has signed up an impressive roster of professionals to its restructuring team over the last few years. But co-heads Dhruv Narain and James Sprayregen said the firm is not preparing for an avalanche of distressed companies.

In a recent sit-down interview with Buyouts, Sprayregen described his team’s work as “an all-weather business.” And Narain pointed out Goldman got the ball rolling on the group well before storm clouds began to gather. “When I joined three years ago there was virtually no sign of stress or distress,” Narain said. “I think we probably do better in times of stress and distress, but that doesn’t mean we’re not doing very well even in good times. The last three years or so, which has been one of the greatest periods of financing activity, our business has been doing perfectly well.”

The key for the team, which has at least 10 dedicated professionals, has been to provide an evergreen service, just one more option on Goldman’s ample menu of financial services available to clients in both good times and bad. The goal: to make Goldman the restructuring advisor of choice for what Narain likes to call “story situations.”

Story situations, Narain said, entail everything from a healthy company that fails to file financial statements on time, to one that becomes subject to a government investigation, to an ailing company that’s staggering out of bankruptcy protection.

For 16 years as an attorney Kirkland & Ellis LLP before joining Goldman last year, Sprayregen played Virgil to countless corporate Dantes wending their way through the inferno of Chapter 11. While there he helped shepherd through bankruptcy such behemoths as Ameriserve Food Distribution, Conseco Inc., Trans World Airlines Inc. and UAL Corp., the parent company of United Airlines. Narain, whose background is in investment banking, worked in the restructuring department of Credit Suisse before joining Goldman Sachs in 2004.

But despite Sprayregen’s extensive experience with Chapter 11, the team doesn’t necessarily urge companies in that direction. “We’re product agnostic, we’re industry agnostic,” said Narain. “What we bring to the table is situational expertise.”

When the next wave of restructurings hits, Sprayregen and Narain believe the dominant trend will be for companies to endure “synthetic bankruptcies,” out-of-court solutions that adjust capital structures without the need for a bankruptcy proceeding. “I think the markets have gotten more sophisticated in being able to deal with these situations without taking them through what we sometimes call ‘the car wash,’” Sprayregen said. And his team is designed to do just that.

Deal Flow

Goldman’s restructuring crew has worked on dozens of transactions over the past three years, securing for companies financing as little as $250 million and as much as $8 billion. Sometimes the firm invested its own money, but more often it lined up capital from other backers

The restructuring group is divided across New York and London. In addition to Narain and Sprayregen, the team includes Lachlan Edwards, the former restructuring head at Rothschilds, and Andrew Wilkinson, a former lawyer at Cadwalader, Wickersham & Taft LLP.

Both Narain and Sprayregen said the appeal of joining Goldman was the chance to chart their own course. A stand-alone restructuring group hadn’t existed at Goldman before, and they were given free reign to build the department. Plus, the firm is known for its collaboration across departments, and an average restructuring deal has Narain and Sprayregen working with a host of other Goldman professionals in the financial sponsors group and at the capital markets desk. Both men enjoy the multi-tentacled approach.

An added bonus for Sprayregen was that he was able to shed the image that led one executive to refer to him as Darth Vader. “At Kirkland, if I was associated with a company it meant the company was going bankrupt. That’s not the case here. People are more willing to walk down the street with me now,” he said.

Given how heavily they leverage their portfolio companies, buyout firms have provided a steady source of business for the Goldman restructuring team. Clients have included Spectrum Brands, a consumer-goods company in the portfolio of Thomas H. Lee Partners, Boston; Gate Gourmet, a company sold last year by TPG, Fort Worth, Texas; and Ziff-Davis Media Inc., a portfolio company Willis Stein & Partners.

Avy Stein, managing partner of Willis Stein, believes Sprayregen and Narain are uniquely positioned to help private equity professionals with troublesome portfolio companies. “Both Jamie and Dhruv were able to put themselves in the shoes of a regular businessman going through a restructuring and look at it from a general business point of view and come up with good solutions, rather than just pure restructuring solutions,” said Stein. “These guys were good at speaking our language and advising us.”

Stein had worked with Sprayregen in the past, as a client when Sprayregen was still at Kirkland & Ellis, and described him as someone with a superb understanding of the buyout business. “Where others that we spoke with had long, drawn-out processes and approaches, theirs was very surgical, very specific, cutting right to the chase of one or two key things we had to do to get something done.” Were it not for the help the Goldman team provided Ziff-Davis Media Inc., the company stood a good chance of going into bankruptcy, a source close to the situation told Buyouts. Willis Stein bought the technology publisher for $780 million in 1999, when its magazines, including PC Magazine, PC Computing and PC Week, were all the rage in Silicon Valley. But the company was soon under a mountain of debt after the tech bubble burst and advertising dollars disappeared. Adding to the skyrocketing costs was the pricey transition the company needed to make from print to online publishing.

While neither Willis Stein nor the Goldman team would discuss their solutions, Willis Stein has begun to disentangle itself from the company. In June 2007, Ziff-Davis sold its enterprise division, which includes several print and online publications as well as its trade show business, to Insight Venture Partners, a venture capital and buyout shop. A month later, the company skipped an interest payment and began negotiations with debt holders to restructure $390 million in debt. Alvarez & Marsal worked on the restructuring as well. Ziff-Davis is still searching for a buyer for its game and consumer divisions.

In the coming months, the Goldman team would not be surprised to see more distress hit portfolio companies. They also expect more trouble to engulf mortgage companies and other financial companies that lend money to consumers. Narain, in particular, thinks waning consumer confidence can be seen in the increase in credit card charge-offs and auto loan delinquencies. “I think those are things that are going to have a tough time—anything related to consumer discretionary spending.”