A $150mn banker fee to sell the First Brands carcass?

In the circus of US Chapter 11 bankruptcies, this is what counts as prudence:

(iv) any Sale Transaction Fee and/or Minority Sale Transaction Fee shall not exceed $150,000,000 in the aggregate.

In case you have been living under a rock for the last month, the bankruptcy of auto parts maker First Brands has been gripping Wall Street (and the FT’s journalists and editors). Sudden freefall bankruptcies with complex capital structures and allegations of fraud don’t come along very often, unfortunately. And an intriguing subplot for distressed debt nerds is just how much the whole thing is going to cost.

Last week, the major advisers to the First Brand debtors — law firm Weil, Gotshal & Manges, the investment bank Lazard, and the consulting firm Alvarez & Marsal — filed retention applications with the federal bankruptcy court in Houston, providing some preliminary details on how much the firms are going to charge the bankruptcy estate.

The line above comes from the Lazard application, which is the most complex. That’s because investment banks don’t bill by the hour but rather demand lump sum transaction fees. In fact, Lazard lists seven different types of transactions that it can get paid for (though there are various offsets and credits built in, to avoid egregious double-counting and somewhat ease the burden).

First Brands has already said publicly that it is will initially attempt to sell itself. Lazard is incentivised to get the highest possible price in an auction scenario:

The $11bn tipping point is interesting. The company has said that it has $12bn in total debt — on-balance sheet loans of $6bn and another $6bn of off-balance sheet liabilities related to its various infamous working capital financings.

An $11bn deal is then almost enough to cover that pre-existing debt and would be worth 0.0075 x $11,000mn = $82.5mn to Laz. If the investment bank can wring out another $1bn above the $11bn that would be worth another $22.5mn due to the 2.25 per cent upward ratchet.

However, as we mentioned at the top, Lazard graciously agreed to take no more than $150mn, a fee that is reached at a $14bn transaction value (note the definition of transaction value or “aggregate consideration” is 537 words long and given all the off balance debt and liabilities, it is not a straightforward concept).

What is Lazard likely to make? Alphaville is hearing that the First Brands senior lenders may just “credit bid” their $4.4bn in holdings, which would be worth a deal fee to Lazard of 0.0075 x $4,400mn or just $33mn which is, alas, nowhere close to that titillating $150mn ceiling.

In fact, unless the sale transaction value is worth at least $6bn, Lazard makes more money if First Brands reorganises as standalone business through a distinct “restructuring fee”.

One person close to the debtor cautioned against paying too much attention to the terms in the Lazard application, given that it was signed in September — before fraud allegations surfaced and there was a better chance at achieving a blowout sales price.

Still, the terms are instructive about how value for First Brands was understood before all hell broke loose.

In any event, do not cry too hard for these bankers. Lazard is set to earn 1.5 per cent on the $1.1bn new money bankruptcy debtor-in-possession loan — or $16.5mn. And then there will be a couple of million dollars in total ongoing retainer fees.

And expect the real money to be earned by those charging for the actual time spent by their armies. The best recent Chapter 11 analogue for the First Brands case is FTX — a sudden balance sheet collapse of a founder-led company with the stench of fraud allegations.

In that case, the total fees ran up to a whopping $950mn according to court filings analysed by Bloomberg. Sullivan & Cromwell hauled in over $200mn of that, with Alvarez & Marsal taking more than $300mn.

Weil, the First Brands lawyer, wrote in its filing that it has already been paid $9mn for work it had done leading up to the bankruptcy. And its top partners now are going to bill more than $2,500/hr (the $2,000/hr barrier was just broken a few years ago).

Alvarez & Marsal — whose executive Charles Moore is now the new First Brands chief executive — wants to be paid by the hour AND get a success fee.

These filings are just applications and the court will have to approve them. The Houston bankruptcy bench famously allows debtors to mostly get away with whatever they want (and the judges too), but watch for either the DoJ’s Office of the US Trustee, the senior lender group, or the official unsecured creditors committee to enter objections to the fee applications.

After all, the money paid to advisers reduces the recovery value for every creditor, and the explosion in bankruptcy and restructuring fees is a huge topic at the moment within the hedge fund and investor community.

Lazard, Weil and Alvarez all wrote in their applications that their proposed fees were in line with industry norms, which . . . is not quite the defence that they think it is.

One person who is a First Brands lender told Alphaville that professional fee inflation had accelerated in the last decade and had meaningfully cut into creditor recoveries. “The attorneys and advisers always win,” they grouched.

First Brands Chapter 11 docket