St. Vincent’s Catholic Medical Centers (SVCMC)

st-vincent.smThe Challenge
SVCMC went through the Chapter 11 bankruptcy process twice and ultimately liquidated as part of the second bankruptcy.  Kelly represented the PBGC in both cases and led efforts to improve the pension plan funding in the first case and maximize the recovery on the PBGC’s claims in the second case. 

In the first case, the unsecured creditors were looking at receiving a very large recovery on their claims (90-plus cents on the dollar plus additional recovery from litigation).  The emerging SVCMC would continue to sponsor the pension plan but would need to service a significant amount of secured debt that was borrowed to make the distributions.  The debt was to be paid off when a real estate transaction closed after necessary zoning and development approvals were received.
In the second case, the unsecured creditors faced the prospect of no recovery on their claims because of the secured debt borrowed in the first case.  SVCMC began the process of shutting the hospital down and selling assets as soon as it went into bankruptcy.  It was not operationally self-sufficient and could not find a merger partner or purchaser.  The real estate transaction from the first bankruptcy had still not closed because of delays in the approval process, and the New York real estate market had collapsed, making it impossible for the deal to close on its original terms.  The PBGC, unlike most other creditors, had claims at multiple estates.  Because all the assets backed the secured note and values were depressed, it was unclear that sufficient proceeds could be produced to pay the secured debt.

The Strategy
Because funds were being borrowed to pay creditors, there was significant concern that the leverage would be unsustainable for SVCMC if operations did not improve, or if the real estate transaction was delayed. In the first case, Kelly led the case team in its negotiations with SVCMC and the unsecured creditors’ committee to secure additional funding, above the required minimums, for the pension plan.  In the second case, Kelly’s goal was to maximize recovery to PBGC.  She led the team, which included investment bankers retained by the agency.  Her successful strategy maximized the value of the real estate and shielded the assets in other estates from the claims in the main estate.

The Advocacy
Kelly was able to leverage the concern that the PBGC would terminate the pension plan in order to capture a large share of the funds being borrowed to pay unsecured creditors.  She advocated that the large claim that would result from plan termination would cause other unsecured creditors to see their recovery cut in half. 

Kelly was able to leverage the PBGC’s influence because it was a large creditor to push for a more expansive and aggressive real estate sale process to maximize estate value and aggressively assert the rights of creditors at different estates to benefit from the value at those estates.

In the first case, Kelly was able to achieve SVCMC and creditor support for the pension plan to continue and achieve a settlement that would provide additional funding to the plan.  Kelly negotiated for additional cash to be put immediately into the plan instead of being distributed to other creditors.  Those creditors were granted liens on other property that were intended to produce cash recoveries when the real estate transactions closed.

In the second case, Kelly led the case team, in close cooperation with committee professionals, to achieve a more competitive real estate process that resulted in sufficient funds to pay off secured creditors and produce a small recovery for unsecured creditors.  Kelly’s efforts also led to an enhanced recovery for the PBGC from other estates, including the assignment of assets at below face value so that PBGC benefitted from the assets’ performance.  

New London Service For Nashville, Tennessee

nashvilleThe Challenge
As a result of amendments to the U.S.-UK aviation agreement, three new routes between the United States and London were available to the U.S. Government to be awarded to U.S. airlines.  Nashville wanted one of those routes.  The competition among U.S. airlines and U.S. airports was intense. Garfinkle was asked to develop a strategy to secure one of those London routes for Nashville.

The Strategy
Garfinkle developed a very public, multi-faceted strategy.  The first order of business was to build grassroots support. He developed an outreach campaign to inform the community, its business and tourism interests and its local politicians about this opportunity and what it would mean for their city.  He also engaged the state’s U.S. Senators and Congresspeople, securing their active participation and support.  He reached out to the Administration and the various U.S. agencies that would have indirect input in the decision.  At the same time, he ensured that the airline that would fly that route was actively supportive of Nashville’s efforts.  He also engaged the local and national media to promote nonstop service between London and Nashville. 

The Advocacy
Position papers, tailored to meet the needs of each stakeholder, were developed to demonstrate why Nashville’s home airline should be awarded a London route. Garfinkle met regularly to brief Congressional officials and staff on the progress of the project.  He developed a comprehensive and complete packet to support the carrier’s application to the U.S. Department of Transportation, replete with statistics, demographics and charts as to why this city should be selected.

But Garfinkle believed that this might not be sufficient.  Nashville needed to do something “out of the box” to show its deep interest in and commitment to a London route.  So, when the Department of Transportation started the proceeding to award the new London routes and invited applications, Garfinkle devised a plan to submit an application to DOT on behalf of the city, not an airline, to fund and be awarded a route.  Never before had a community attempted to “own” a route.  Of course, the city’s application was not accepted, but it achieved its dual purpose: enormous national publicity and demonstration of the community’s commitment to London air service.

The Result
The carrier was awarded a route between Nashville and London and Nashville reaped the economic benefits of this route for many years.

Kaiser Aluminum & Chemical Corporation (KACC)

kaiserThe Challenge
The Pension Benefit Guaranty Corporation (PBGC) had terminated the defined benefit pension plans of KACC and sought to recover on its claims against all of the estates in the bankruptcy.  KACC was an integrated worldwide aluminum company with operations and assets around the world.  There were three main challenges. First, there was not enough money to provide payment in full for all claims. Second, if the PBGC’s claim was reduced or capped, the other creditors would benefit. Third, some of the creditors had a bias and only wanted cash.  In addition to maximizing its recovery, the PBGC also wanted to make sure that policy issues related to the valuation of the claim for underfunding in the plans and the joint and several nature of the claims against all entities, including non-U.S. entities, were properly acknowledged.  All of these goals needed to be accomplished.

The Strategy
Because the PBGC was less concerned about what proportion it recovered in cash versus stock, the case team, led by Kelly, developed a strategy for negotiating the settlement. The settlement would have to require that all the estates that had value to distribute acknowledge the full claim. It agreed to a less than full pro-rata distribution from the estates that were paying claims primarily in cash.  At estates where the claims were being paid in new equity, Kelly pushed for a full pro-rata distribution to the claim.

The Advocacy
Kelly led the process of educating the PBGC leadership on the issues in the case and how the proposed settlement would satisfy PBGC’s need to avoid any negative precedent. It would set a precedent that PBGC could effectively balance both its economic and policy issues.  Kelly worked closely with the indenture trustees to persuade them that a settlement of the issues related to the pension plans produced a better outcome than litigation, and that the proposed settlement levels produced the recovery they were aiming to achieve.  Kelly worked closely with the unsecured creditors’ committee in the negotiations with KACC to develop a settlement to which all parties agreed.

The Result
The final plan of reorganization incorporated the structure proposed by Kelly. It ensured that claims were recognized in full at all estates, and that estates that paid claims in new equity were distributed to PBGC based on its full share of claims at those estates.  The settlement also capped PBGC’s recovery at the estates receiving cash, which allowed the bond holders to achieve a significant portion of their desired recovery in cash, which was their preference.

Lufthansa German Airlines and U.S.-Germany Aviation Relations

lufthansaThe Challenge 
The aviation treaty signed by the United States and Germany at the end of World War II created a structure in which the benefits of aviation rights were heavily tilted in favor of U.S. airlines.  For a variety of reasons, political and otherwise, successive German governments were reluctant to try to re-negotiate a more balanced aviation treaty with the U.S. Government.  The German airline, Lufthansa, was heavily disadvantaged, competitively and commercially, by that aviation treaty.  Garfinkle was asked to help Lufthansa develop an approach to get both its government and the U.S. Government to enter into a new, “modern,” balanced aviation agreement.

The Strategy 
The goal was for the parties to agree to a revised and balanced aviation agreement.  Garfinkle’s strategy involved creating a trigger to get the U.S. to the negotiating table. At the same time, he educated the German Government about how the negotiating process would work and prepared them for possible outcomes.  Success depended upon securing “buy in” from Lufthansa’s Supervisory Board and several agencies of the German Government.

The Advocacy 
Working with a small team of senior Lufthansa executives, Garfinkle developed “white papers” to present to both the U.S. Government and the German Government to demonstrate the current unfair imbalance in aviation rights for Lufthansa as compared to the benefits that were accorded U.S. carriers under the treaty. The white papers explained how the current aviation treaty needed to be modified to create balance, and also allow for a proposed alliance between Lufthansa and United Airlines.  This alliance was the forerunner to the development of the Star Alliance, which was a critical aspect of the new Lufthansa (and United) global strategy.  The white paper advocacy also included a media campaign in the U.S. and Germany, which was developed by Garfinkle and the Lufthansa team.

As Garfinkle had anticipated, the U.S. Government ultimately agreed to renegotiate the aviation treaty.  Throughout the negotiations between the U.S. and Germany over the new treaty terms, Garfinkle communicated with both government delegations and Lufthansa senior management about acceptable terms and terms unacceptable to the German Government and Lufthansa.  Garfinkle also kept the German delegation current on U.S. attitudes, likely reactions to German positions and what the German Government response should be.

The Result 
A new U.S.-Germany aviation agreement was signed.  It was the most important “Open Skies” agreement signed by the U.S. Government at that time.  It restored competitive and commercial balance for Lufthansa and enabled Lufthansa and United to team up and, right thereafter, form the Star Alliance, which today is the largest global airline alliance.

AMR/American Airlines

american-airlineThe Challenge
Four pension plans covered over 100,000 participants with an estimated funding deficiency of over $10 billion.  If those plans were to terminate, the insurance program would be faced with a huge administrative challenge and a severe blow to its balance sheet.  AMR’s lead bankruptcy counsel publicly announced that they intended to terminate the pensions immediately, putting PBGC on the alert.  Each labor group was in contentious contract negotiations with the plan sponsor, further complicating the situation. There was also an opportunity for the plan sponsor to incentivize the unions to agree to plan termination in order to reduce the unavoidable cuts to compensation and jobs facing these groups.  Sophisticated bond holders also understood that, while terminating the plans would increase the claim pool, the resulting business would no longer have those liabilities on the balance sheet. 

The Strategy
Kelly led PBGC’s assembled team, which included outside counsel, investment bankers, and Mo Garfinkle as the industry expert.  A strategy was quickly developed to address all of the competing concerns.  Kelly and the team delivered a consistent message to all stakeholders and professionals that the PBGC would fight any attempt to terminate the pension plans, regardless of what the unions might do in contract negotiations.  Creditors were quickly educated about the size of the potential claims by PBGC and how these claims would affect control of the situation.  They were also warned that these claims would have a dilutive effect on the recovery rate.  The team worked closely with the pilots union to identify a resolution to a unique issue related to lump sum payments.  It also worked closely with the Treasury Department to develop a resolution to resolve the problem so that the pilot plan did not have to terminate and to ensure that similarly situated plans in the future had a path to resolve their issues.

Kelly and Garfinkle led an intensive effort to build alliances with and between a variety of creditors and other stakeholders and supported the unions in their negotiations and litigation efforts to preserve the pension plans in the contracts. They educated all constituents on the current state of the airline industry and the company’s relative place in the industry and the advantages and disadvantages of a merger with another airline, either while AMR was in bankruptcy or post-emergence.

The Advocacy
Aside from sharing his in-depth knowledge of the state of the airline industry, Garfinkle brought the perspective of someone who had worked on all of the airline mergers in the U.S. in the last decade.  Kelly and Garfinkle led scores of meetings with advisers, committees, unions, indenture trustees, and individual creditors explaining why the plan sponsor did not meet the standard to terminate the pension plans and the company’s standing in the industry – both the advantages and disadvantages it faced.

Kelly and Garfinkle also leveraged the unique resource PBGC had with its industry expert to explain to all parties the impact on American Airlines and the industry of the proposed merger with another airline. 

The Results
AMR/American Airlines is poised to emerge from bankruptcy with all four of its pension plans still maintained by the company and the three union plans still required to be maintained as part of the union contracts.  The company is on track to merge and form the largest airline in the world.  It is positioned to be competitive with the largest U.S. and global airlines, all the while providing creditors potentially 100 cents on the dollar and AMR shareholders guaranteed value for their equity. By any standard, this is an extraordinary outcome in bankruptcy.