By Sarah Gefter & Jason Sanjana, Reorg
Reorg tracks nearly every aspect of medium and large sized chapter 11 bankruptcies, from our editorial content covering case developments in real time to our robust data offerings tracking important case details over time. In particular, our Advisor Fee data set, found exclusively on Credit Cloud, captures an enormous amount of data on advisor engagements and fees.
In this story we aggregate and share some of our advisor fee data for the first time, highlighting trends in financial advisor and investment banker engagements in medium to large chapter 11 cases (generally $100 million in liabilities or more). Specifically, the data captures court-approved fees earned for debtor and UCC-side investment bankers and financial advisors across Reorg’s middle market and core credit universe for chapter 11s filed between 2018 and 2021 where final fee applications have been filed and approved.
Across this data set of medium and large cases, the tables below show top earners from 2018 through 2021, ranked by aggregate final fees, for both debtor and official committee of unsecured creditor engagements. The results are broken out between financial advisors and investment bankers:
As would be expected, UCC engagements - while lucrative - usually involve lower aggregate fee amounts than debtor engagements. UCC engagements are also more centralized in top firms: Jefferies on the investment banking side and FTI on the financial advisor side.
The tables above also show the amount of engagements won by each listed firm. While generally correlative, the number of engagements won by a firm does not always equate to the firm’s position in our ranking of aggregate fees. This is because the amount of fees earned can vary tremendously depending on the nature and length of a particular case.
Below we show the cases generating the highest fee awards for investment bankers, as well as the range of the debtors’ aggregate prepetition liabilities and the length of the case.
Most of these high-fee engagements were significantly longer than the average fee period in our dataset (approximately 185 days for investment bankers). Each case also features $1 billion or more in liabilities, meaning these cases are some of the largest in the dataset. That being said, once a case exceeds a certain size and length, there remains tremendous variation in the amount of fees generated, a fact that can be ascribed to particular case dynamics.
For a single case, Moelis earned the highest investment banking fee, taking in $44.3 million for its debtor advisory role for Hertz. As further detailed in Reorg’s Advisor Fee dataset, Moelis’ fee from the Hertz cases includes more than $31 million in transaction fees from exit and other financing as well as asset sales, $10 million in restructuring fees, and the balance in monthly fees. Moelis earned $29.6 million for its role as debtor advisor in iHeart’s 2018 bankruptcy, representing the fourth highest fee in the data set. As expected, even in these high-fee cases, investment banker fees for committees were significantly smaller than those for debtors.
Here is the same data with respect to financial advisors across the same data set and time period:
AlixPartners and Alvarez & Marsal together dominated the top fee-generating debtor financial advisor engagements, accounting for 8 of the top 10 such cases. FTI accounted for 7 of the top 10 UCC financial advisors engagements. As with investment bankers, almost all of the top earning cases for financial advisors featured a longer fee period than average (205 days for financial advisors) and each case featured more than $1 billion in liabilities (except for FTI’s representation of the UCC in Highland Capital, a particularly long-running case).
AlixPartners earned the highest fee, $57 million, as the debtors’ financial advisor in the Grupo Aeromexico cases. The highest fee for a UCC engagement by a financial advisor was $20 million for Alvarez & Marsal in the Mallinckrodt cases.
The ability of firms specializing in these types of representation to bring in fees is highly dependent on the aggregate amount of activity in large chapter 11 cases.
The total number of cases in 2020 dwarfed the other years reviewed in our data set, largely on account of the Covid-19 pandemic.
Reviewing the aggregate amount of fees earned by top 5 investment bankers and financial advisors in the bankruptcy space by year, the correlation to 2020’s spike in cases is quite noticeable.
One important differentiating feature between investment banker and financial advisor fee structures is the prevalence of aggregate fee caps in investment banker engagements, especially with respect to debtor retentions. Approximately one quarter of investment banker debtor retentions in the data we reviewed above included such fee caps, as opposed to almost no caps for the financial advisor engagements discussed above, which tend to be time-based.
Such a fee cap presents risks when unforeseen circumstances arise. The COVID-19 pandemic and this year’s drastic tightening of credit conditions combined to arguably present such circumstances recently in the Latam Airlines case. Four rounds of DIP financing, tricky exit financing negotiations and complexities in the Latam business plan all combined to expand the work required of the debtors’ investment banker, PJT Partners. This fall, the debtors asked Judge James Garrity to expand PJT’s cap to $37 million from $25 million, but the judge refused.
Judge Garrity found that the applicable section in the Bankruptcy Code, section 328(a), required that any ex ante change be supported by a showing of circumstances incapable of being anticipated at the time the engagement was negotiated, not “merely unanticipated circumstances.” This is a high bar, and one that professionals should bear in mind when negotiating their engagements.