Jay M. Sakalo is a partner in Bilzin Sumberg Baena Price & Axelrod LLP's Business Finance and Restructuring group and handles all facets of bankruptcy reorganizations and bankruptcy litigation. He has served as counsel to numerous debtors, creditors committees and purchasers of assets in complex Chapter 11 cases. He has represented committees and creditors in some of the largest bankruptcies filed in the country, including W.R. Grace, U.S. Gypsum and K-Mart.
Sakalo is also a member of the firm's Corporate and Tax practice, where his practice focuses on the representation of borrowers, issuers and lenders in the negotiation of complex financings, including capital markets transactions, mezzanine loans and note issuances. He has represented clients in numerous industries, including automotive, finance, health care, real estate and aftermarket aircraft parts. He has been consistently recognized by legal publications, including Chambers USA, The Best Lawyers in America, and Florida Super Lawyers. In 2010, Sakalo was selected by Law360 as one of 10 “Rising Legal Stars” in the bankruptcy practice area nationwide.
As a participant in Law360's Q&A series with dealmaking movers and shakers, Jay Sakalo shared his perspective on five questions:
Q: What’s the most challenging deal you’ve worked on, and why?
A: Identifying the "most challenging" deal I've worked on should be straightforward, one would think. However, as most of my deals have involved distressed businesses over the years, virtually all of them started on the challenging end of the spectrum and veered toward the farthest reaches from there.
The most challenging deal was likely the sale of the Fontainebleau Las Vegas hotel in late 2009. The hotel, as designed, would have been a $3 billion-plus behemoth, with 63 stories and 3,500 rooms on the north end of the Vegas strip, with all of the cache of its sister hotel in Miami Beach. Unfortunately, due to a number of circumstances, including the Great Recession and the bankruptcy filing of Lehman Brothers, the project failed when it was about 70 percent complete. My firm served as debtors' counsel to the various entities that owned the property and the hotel.
Once we filed the bankruptcy case, it became apparent quickly that the ability to restructure the balance sheet was not a possibility due to a complicated lender structure that included original holders, purchasers of distressed debts and a number of CLOs and CDOs, all with widely disparate goals and incentives and all of whom were dealing with multiple melting ice cubes in their portfolios due to the Great Recession. Thus, we moved rapidly toward a sale of the hotel. That process, however, encountered significant resistance from the "mechanics lienholders" who claimed they had a first lien on the property due to Nevada's construction-friendly lien laws and the right to a credit bid. After significant sparring with the lienholders, we defeated their attempt to obtain credit-bid rights.
What ensued was an around-the-clock sale process to engage a stalking horse bidder, have it approved and move toward an auction. After embarking on that process, the debtors entered into a stalking horse sale agreement with Penn National Gaming to acquire the project for about $100 million in total consideration. However, nothing in this deal came simple — in a rather unusual turn of events, a few days before the hearing to approve Penn as the stalking horse, Carl Icahn approached the debtors with an offer to serve as the stalking horse for about $150 million in total consideration. Continuing with the "truth is stranger than fiction" story this case evolved into, we conducted an in-court auction for the purposes of naming a stalking horse bidder, with Icahn being the successful party. Thereafter, there were no other competing bids for the hotel and we moved forward at a breakneck pace to close the sale to Icahn.
Q: What aspects of regulation affecting your practice are in need of reform, and why?
A: Thankfully, regulatory oversight does not play too large of a role in my practice; however, decisional law from bankruptcy courts have a significant impact on my practice and there is a recent issue that is worthy of being mentioned.
Historically, there have been flare-ups in bankruptcy courts challenging the ability of a distressed debt buyer to credit-bid the full amount of the underlying debt it has purchased and the law seemed fairly well-settled that a buyer could credit-bid (or enforce) the full amount of the debt. Recently, there have been a few decisions that have challenged that doctrine. While these decisions have been fact-specific, this is an issue worth keeping an eye on in the near future.
As funds continue to chase yield, there will always be deals for opportunistic buyers of discounted debt. However, if there is disruption in the courts (or markets) about the ability to enforce the underlying instruments in court, we could see a further shift away from fixing the target's balance sheets in bankruptcy as opposed to out of court.
Q: What upcoming trends or under-the-radar areas of deal activity do you anticipate, and why?
A: The "amend and extend" and "delay and pray" lending arrangements since the Great Recession will soon be reaching their reset dates and I expect to see a number of out-of-court restructurings and refinancings as a result. That said, the continued low-interest environment is creating a conundrum for lenders. They want to make new loans, but when compared against extending higher-rate loans on their books, there's a push-pull they are dealing with in their own portfolios.
As mentioned before, if challenges to full credit bids from distressed lenders gain traction, we could see an even greater amount of balance sheet restructurings taking place out of court. We have already seen a dramatic downturn in the number of corporate filings around the nation and there are many different views as to why the filings are down. Further risk to lenders on leveraging their debt in a bankruptcy case will push the filings down even further.
Q: What advice would you give an aspiring dealmaker?
A: When I was in business school, one of my professors was an ardent fan of Andrew Carnegie and encouraged me to learn as much as I could about him. While my adoration for Carnegie has never risen to a level close to that held by my former professor, there is one quote from Carnegie that has stuck with me: "People who are unable to motivate themselves must be content with mediocrity, no matter how impressive their other talents." I've taken that statement to heart throughout my professional career.
It is absolutely critical that you understand your client's business goals from day one of putting a deal together. Once the deal train starts rolling down the tracks, it is exceedingly difficult to redirect the train to another track. If you're on the sell/borrower side, you need to understand all of the moving parts of the business to the same extent as if you were one of the businesspeople on the deal. On the buy/lender side, it is critical to understand not only the target business, but the industry as well, as there are many industry-related issues that must be addressed when acquiring a business that are not directly tied to the target.
Another piece of advice is to remember it's your job to get the deal done so long as you've explained the legal risks and potential implications to your client's business. Don't get hung up in "winning" against the other side. You may impress yourself by winning an argument over reps and warranties, but if it injures the deal, you'll be the only one impressed by that "win" and more than likely it will be viewed as a "loss" by your client. Remember, you want to be considered a "deal lawyer" not a "deal killer."
Q: Outside your firm, name a dealmaker who has impressed you, and tell us why.
A: Craig Hansen at Squire Patton Boggs is a consummate dealmaker in the restructuring arena. He has a keen business acumen, a calm demeanor and an intellect to grasp complicated matters in a matter of minutes. I've been on both sides of transactions with him and have walked away impressed each time. He manages expectations, both on the client and lawyer side, assembles the right multidisciplinary team and understands the tempo of a deal.
This article is reprinted with permission from Law360.