Q&A with Jack Butler: Amend-and-Extend at An End in Energy, Gaming

Bloomberg Law

Q&A: Amend-and-extend at an end in energy, gaming – Jack Butler

– Regional airlines, retailers offer distressed opportunities
– Commodity volatility, lending restrictions hitting mid-market

By Aleksandrs Rozens

(Bloomberg) —

**Jack Butler**, a former Skadden Arps partner and Hiko Global executive who recently formed merchant bank Birch Lake, spoke with Bloomberg Brief’s Aleksandrs Rozens on May 27. The interview originally appeared in the **June 3 issue of Bloomberg Brief**: Distress & Bankruptcy.

Q: Where are we in the credit cycle?

A: At an evolving inflection point, coming through a cycle that has had a predominant theme of amending and extending. We are finding some industries — gaming and energy, for example — where it is difficult to find a place to amend and extend to. We are not necessarily going to have a recession but the environment in which capital is provided is at an evolution point. Regulatory influences are a key factor in that which are driving risk from regulated banks to other lenders. There is also some movement away from hedge funds to investment vehicles that more closely align the interests of fund managers and limited partners.

Q: What’s your view of commodities?

A: At almost every large energy producer, managers are struggling with capital structures that are challenged. Many of this latest third wave of energy filings have debt to equity conversion solutions. Funded debt is getting converted while mineral rights interests are largely unaffected.

Q: How is liquidity for energy?

A: Banks and other lenders that have provided billions of dollars of standby credit lines are now actively seeking to prevent them from being drawn down and loan forms are being revised to prevent cash stockpiling, a common restructuring strategy that is under attack and will likely be less available going forward. The reason is those standby lenders have come to find out that in some businesses by the time those lines were being called they had become the fulcrum security. There was nobody below them “in” the money.

Q: What’s happening in airlines?

A: The regionals are still trying to recover from [U.S. Federal Aviation Administration] rule changes with respect to how long pilots could fly and how long they needed to rest. The changes created an enormous pilot shortage across the industry. The main lines called up a substantial number of pilots from regional airlines. The regional airlines had to ground planes because they could not actually pilot them to fly. Most of the regionals are still trying to recover from that. If there is a restructuring cycle in the airline world in the U.S. it will be in the regional space. There is going to be activity in the low cost carriers. Globally, there continues to be substantial pressure in dozens of airlines.

Q: What other sectors are active?

A: Aside from energy, there is activity across a fairly broad range of industries including other commodity businesses, building products, retail and industrial companies. There is notable distress in middle market companies in these industries as they are pressured by interest rate increases, commodity price volatility, and increased regulatory pressure on traditional middle market lenders.

Q: Who’s buying the assets?

A: In addition to strategic buyers, PE funds, hedge funds and other sponsors with specific industry expertise are active in the market. Blank-check or special purpose acquisition companies (SPACs) are back in vogue. At Birch Lake, we are looking to invest in both public and private opportunities where we believe there are high potential, undervalued businesses and where we can influence strategy and improve stakeholders’ returns.

Q: What’s the strategy for your new firm?

A: At its core, Birch Lake is a traditional merchant bank. It will work with healthy and distressed companies and investors on a broad range of investment and advisory transactions: investment grade companies that are undervalued in transitional situations, distressed M&A and financial restructurings, and bolt-on strategies for companies expanding their reach.

Q: What are your hiring plans?

A: Birch Lake will have about 10 employees in the short term. We intend to scale beyond that. We will have our principal offices in Chicago.

AT GLANCE:

Education:
J.D., University of Michigan; A.B. Princeton University

Career history:
Skadden, Arps, Slate, Meagher & Flom partner, corporate restructuring and corporate governance, 1990-2014
Executive Vice President, Hiko Global, 2014-15
Formed Birch Lake Holdings, 2016.

Favorite restaurant:
Smyth & The Loyalist, Chicago (Butler has a stake)

Hobbies:
Officiating high school and college football, raising a daughter and three sons

Alternative career:
Teacher

To contact the reporter on this story:
**Aleksandra Rozens** in New York at **[email protected]**
To contact the editor responsible for this story:
**John E. Morris** at **[email protected]**