Corporate Restructuring: Dealmaking and Litigation to Avoid Financial Collapse

Katya Valasek:

From Law Hub, this is I Am The Law, a podcast where we talk with lawyers about their jobs to shed light on how they fit into the larger legal ecosystem. In this episode, I interview a corporate restructuring lawyer who helps companies get out of financial trouble. We're joined today by Kieran Vacamudi, a senior associate at Vinson & Elkins, an elite law firm with 700 attorneys worldwide. Kiran, you help companies in financial trouble, and this is what you wanted to do after graduation. What do you find so interesting about this work?

Kiran Vakamudi:

I think one of the best things about being a restructuring attorney is that the job changes every day. Companies file for bankruptcy or seek the help of restructuring lawyers for different reasons. And so, one company may be upside down on its hedge book.

The other company may have trouble with employee pension liability that's trying to address. As a restructuring lawyer, you get to be kind of a jack-of-all-trades, master of none, and get exposure to a lot of different areas of the law. But at the same time, you're expected to be an expert in the area of bankruptcy.

Katya Valasek:

I think it's interesting that you knew you wanted to do this work when you were finished with law school. So, how did this type of work land on your radar?

Kiran Vakamudi:

I came into this area of law through a secured transactions course, but basically, it's a precursor to bankruptcy, and that's what really got my interest in the field picked up. Carried that into taking the bankruptcy course, really enjoyed it, and then ended up clerking for a bankruptcy judge here in Houston, and that kind of sealed the deal for me.

Katya Valasek:

Do you think that you were very intentional about your career trajectory because you took almost a decade off between college and law school?

Kiran Vakamudi:

Yeah, I think so, and I think I knew exactly what I wanted to do and wanted to lay out a defined path. Obviously, getting into law school was the first step of that. Clerking was the next step of that, and then finding the job at a firm was the last step in the chain.

Katya Valasek:

Typically, there's a pretty clean break between litigation, which is work connected to lawsuits, and transactional work, which is work related to agreements, but your practice is hybrid. So, what is different about bankruptcy?

Kiran Vakamudi:

Yeah, so that's one of the things that also really attracted me to the bankruptcy practice, Even though you're partly a transactional lawyer and that you're working towards getting an agreement with different creditors, which is kind of memorialized in what's called a plan of reorganization, at the same time, that plan of reorganization is supervised by a bankruptcy court and needs to meet the statutory requirements of the bankruptcy code. So, in that respect, a lot of the litigation comes into play, and different firms have different amounts of practices, some way more heavily in the litigation side, some way more heavily in the transactional side. But as a bankruptcy lawyer, you're expected to appear in court and prove up your case in court at the end of the day.

Katya Valasek:

So, are you still doing things like depositions and cross-examining witnesses?

Kiran Vakamudi:

Yeah, in my practice at V&E, it leans more towards the transactional side. We have very talented and capable litigators who come in when we need to cross-examine witnesses, take depositions, and things like that. We obviously have a hand in that, and we review questions, we review discovery that's being produced, but my practice is primarily focused on the art of the deal, as it's coined, and so do more of the transactional side of it.

Katya Valasek:

You mentioned that you are working towards a plan of reorganization. What does that mean?

Kiran Vakamudi:

Basically, a reorganization is a way for a company to upright its balance sheet. So, a company could be in debt to a point where they can't service that debt anymore or pay it off. A reorganization is tools that the bankruptcy code provides that allow a company to right-size its balance sheet and come out with a new capital structure and continue paying its debts and continue on as a viable company.

One good example of a company that made it through bankruptcy is iHeart, and iHeart filed for bankruptcy when I was clerking. iHeart Media is obviously one of the largest media companies in the United States. They filed for bankruptcy, were able to right-size their balance sheet, and came out on the other end a very successful company.

Katya Valasek:

So, we've talked about outcomes of filing for bankruptcy, but why would a company file for bankruptcy in the first place?

Kiran Vakamudi:

Depends on the company. So, one company may file because they were hit with a judgment and litigation that they cannot pay off. Another company may file because they have a segment of their debt that they can't pay off fully.

Another company may have something such as a pension liability that they can't handle. One good example is the COVID-19 pandemic. Obviously put immense stress on lots of businesses for lots of different reasons, but particularly the oil and gas companies were the hardest ones hit because people stopped traveling, people stopped flying, people stopped driving overnight, and companies needed to find a way to keep going through that pandemic, and the bankruptcy code provided that opportunity.

Katya Valasek:

So, filing bankruptcy is an affirmative step that is taken by your clients. Do you start working with them before or after that filing?

Kiran Vakamudi:

There's always a rare case where a company gets hit with a judgment that they don't expect or something like that and call you and say, what can we do now? But for the most part, we're typically brought in well in advance, get to know the company, and kind of to be clear, bankruptcy is almost always the last option. Bankruptcy is an expensive process, involves a lot of time and preparation and the work of multiple professionals, not just lawyers.

The goal is always to get something done out of court if possible on a consensual basis. And so, we'll start discussions and negotiations with creditors on finding alternative solutions long before we ever filed for bankruptcy. And, you know, a couple of cases that I worked on started one, two years before and ultimately were able to resolve out of court.

Katya Valasek:

Is there anything that you have to do differently if you're brought in with short notice versus a client that you've been working with for a while?

Kiran Vakamudi:

Yeah, I think when you're brought in on short notice, your options are much more limited. And especially if you have a hard deadline where somebody can, you know, collect on a judgment and actually seize your assets, that's a deadline that just can't be moved. And so, you work to get everything done in time to address that.

Katya Valasek:

What does it mean to resolve the matter out of court?

Kiran Vakamudi:

Resolving a matter out of court is coming up with a consensual deal where whatever stressor was there on the company that was causing it to consider filing for bankruptcy is somehow resolved. And that could be addressed through, you know, raising new money through an equity raise. It could be done through something called a rights offering where more money is brought in in exchange for new equity.

It could be done with something as small as a forbearance where a lender says, even though I was supposed to collect my money on this date, I'm going to give you another six months to keep going and see if you can pay me off. So, it really depends and there's no general solution that applies. It's typically a bespoke agreement that ends up coming into play for each company.

I think it's also important to say that it's not just restructuring lawyers who would help with something like that. It would also be the work of finance lawyers, M&A lawyers. A lot of times we'll also have employment lawyers who come in and help.

And so, part of being a bankruptcy attorney, as I've talked about, is being able to identify issues where you need other people's help, bringing them in, getting up to speed, and then helping them come in and apply and solve the problem as well.

Katya Valasek:

How do you find out what the creditors want from your client?

Kiran Vakamudi:

Yeah, it's really not that hard. You just ask and you say, we have this problem. How can we come to a mutual agreement?

And a lot of times they'll say, I want to get paid on X date. And you just have to tell them, look, we don't have the money to pay you. You can come and take these assets.

I don't know how much they're worth to you, but it's probably not what we owe you. So, let's come to a mutual solution. Let's figure something out that gets you satisfied and allows us to keep going.

Katya Valasek:

This process can get pretty complicated quickly. So, like in law school, let's work through a hypothetical. A CEO or a CFO comes to your firm and says, we have a large debt payment due soon, but don't have enough money to pay it.

What are some of the first questions you're asking them?

Kiran Vakamudi:

Yeah, I think the very first question we ask is, what's your current capital structure? And that really aligns to what are the different, what are called tranches of debt that your company has to pay on a consistent basis. The analogy my law school professor made is a champagne tower at a wedding, where the first cups at the top get filled up and any remaining champagne flows down to the lower tiers.

And so, at the very top, you have what are called your secured lenders. And those are lenders who have a credit agreement where their loans are secured by assets. And it's typically all assets of a company.

So, theoretically, if a company were to stop paying that debt, that lender could come in and seize all those assets under various state laws. Below them, you often had unsecured debt that are typically issued as debt instruments. And these are unsecured bonds, could be unsecured credit facility.

And then below that, you also have trade debt. And at the very bottom, you have what's called equity. And equity are people who own the company, and they have sort of the devil's bargain where because they get the upside, they're also last in line when it comes to receiving any residual value of a company if things go wrong.

Katya Valasek:

So, you gave examples of what a secured lender is, what unsecured lender is, and the position for shareholders. What is an example of trade debt?

Kiran Vakamudi:

Trade debt would typically be any sort of company or entity that provides services in the ordinary course of another company's business. Thinking about an oilfield company, you would have a company that actually operates an oil rig, and they would charge that company X dollars a month to operate that rig.

Katya Valasek:

So, after you ask about the capital structure, what's the next question you ask?

Kiran Vakamudi:

Yeah, typically, then we'll try and figure out who the fulcrum is in their capital structure. And the fulcrum is basically the level of debt where value of the company runs out. And that's your key stakeholder where you start to begin negotiations.

So, if we took a hypothetical company that had $100 million of secured debt, $500 million of unsecured debt, another $350 million of trade debt, and then at the very bottom, equity. If that company only had $300 million of value, if we were thinking about this in terms of that champagne tower again, the champagne would fill up that $100 million cup at the top, and then only $200 million would flow down to the next level to address that $500 million of unsecured debt. And so, in this hypothetical, that unsecured lender would then be the fulcrum security that you begin negotiations with.

Katya Valasek:

And what are you negotiating about with them?

Kiran Vakamudi:

Yeah, basically, what you'd start negotiating with is, what could we give you in this situation? We only have $200 million to address your $500 million worth of debt. How can we find a way to come up with a consensual solution that addresses this?

So, in this case, we would start talking with that unsecured lender and try and find a new debt instrument or some other way to address their debt obligation that would allow the company to continue as a going concern.

Katya Valasek:

What about the trade debt entities? Do they have any say in this process?

Kiran Vakamudi:

And that's kind of the difficult part about the situation is you may have some trade debt that's very upset with the company because they're owed a significant amount of money. But the reality is there's only so much value to go around. And in this case, the unsecured lenders who are only receiving $200 million worth of value are taking a significant haircut.

And so, that's one of the unique positions where the bankruptcy code comes into play. And the bankruptcy code allows a company to eliminate that trade debt in the reorganized entity and continue on as a going concern.

Katya Valasek:

So, the trade debt is not going to be repaid and the unsecured lenders are going to get part of their debt repaid and the secured lenders are going to be covered. What determines the order of who gets paid?

Kiran Vakamudi:

Yeah, the order is really determined by state law and the rights that people bargain for to begin with. As a secured lender, your assets are secured by the collateral. And so, you're typically treated as the top of the capital structure.

From there, the bankruptcy code gives a debtor flexibility to classify creditors differently, but there has to be a reasonable justification for that. And that's part of what's subject to court oversight and creditors may challenge whether they are properly classified.

Katya Valasek:

So, you've talked about the bankruptcy code and you mentioned challenging their classification. And so, you're alluding to another major player in this bankruptcy process and that's the bankruptcy courts.

Kiran Vakamudi:

It is a true Article I court, but it's unique in that an Article I court normally doesn't get to make final decisions absent consent of the parties. Under the bankruptcy code, bankruptcy judges are allowed to render final verdicts in these bankruptcy cases. And so, that is the primary goal of the bankruptcy court is to adjudicate different disputes and issues that arise in bankruptcy cases.

Its other role is oversight. And as a debtor in bankruptcy, you have to comply with certain obligations. And in order to confirm a plan, you have to meet the bankruptcy code's statutory requirements.

And the bankruptcy court is there to call balls and strikes and be sure that debtors are actually meeting those when they file a plan of reorganization and try and confirm it and come out the other side a new company.

Katya Valasek:

What do you think is the role that bankruptcy plays in our economy?

Kiran Vakamudi:

It's a very important role and I didn't fully appreciate this until I worked on a recent transnational case where a company had some assets in the U.S. and it had other assets in the Netherlands. The bankruptcy code is unique and that allows businesses to take risks, fail, and find a way to keep going. A lot of other countries don't have this flexible bankruptcy code and it's very difficult to get a reorganization done.

Other countries also have much more strict and onerous employment laws and other laws that the bankruptcy code in those countries is not able to kind of bend or compromise in order to allow a company to keep going. And so in a lot of these other countries, businesses just aren't able to take the same risks that they are here because there's no, I'll use the word safety net, of the bankruptcy code that allows a company to recover from its mistakes and keep going.

Katya Valasek:

Code you think loses out in other countries where there is less flexibility and less opportunity for a company to recover? Is it the consumers or is it the companies themselves?

Kiran Vakamudi:

I think it's really everybody because if you think about it, employees lose out because they have to go find new jobs. Customers lose out because they're not able to attain the things that they need to do at potentially more favorable prices. And then also other companies lose out because they lose a potential business partner that they've been providing services to and interacting with.

And so I really think it is a unique tool that's in the U.S. and one that really benefits businesses.

Katya Valasek:

I think that's such an interesting example because it really highlights that some risk is good, but bankruptcy is also painful. So it's not like it's a great resolution to problems. So basically what I'm hearing is that risk means we see progress and economic growth over time.

Kiran Vakamudi:

Yep, I think that's right. And to be clear, I think we focused a lot on the let's call it rosier side of bankruptcy, which is reorganization. There's also the less fortunate side where if a company is really in dire straits and they just cannot service their debt, they may just have to liquidate.

And that means that they're basically dissolved piecemeal. Their assets are typically sold at a very reduced price. Employees lose their jobs.

But sometimes when a company's so upside down on its balance sheet or just has no other alternatives, that's all there is left.

Katya Valasek:

So I think it's interesting to think about why any of the stakeholders choose to cooperate in this process. Why aren't they just saying, just give us the money you owe us?

Kiran Vakamudi:

Yeah, I think the real reason is that some payment is always better than no payment. And a lot of times with these reorganizations, what happens is that fulcrum debt holder ends up becoming the new owner of the company through new equity shares. And that's the way you compromise their debt is you say, we will pay you X dollars, but we will also give you X dollars of equity in this reorganized entity.

And in that case, the existing equity gets wiped out. Other trade debt holders, for example, would also get wiped out. But those unsecured lenders would end up coming out the other side as the new owners of the company.

Katya Valasek:

I can see how much you enjoy the work that you're doing. So I want to talk a little bit about your professional development. You are a senior associate now.

How did your work evolve from the work that you were doing as a junior associate?

Kiran Vakamudi:

Bankruptcy is kind of unique in that it ties into the quasi litigation part. You spend a lot of time doing research and writing and honing those skills as a younger associate. And then you start to build on that as a third and fourth year associate, typically a V&E start managing other junior associates and be helping them hone their work product before it goes up to partners for review.

And then the next step in the chain is becoming a senior associate where you're typically expected to manage the law firm side of the deal, manage younger associates, keep workflows streaming, interface with other lawyers. And then as partners, they're typically working on the overall aspect of the deal, interfacing with clients, those sorts of things.

Katya Valasek:

As you've moved into that greater leadership and management role, have you enjoyed that part of your day-to-day work as well as the bankruptcy work?

Kiran Vakamudi:

Yeah, I have. And it's also been probably one of the most challenging parts of the job because taking care of your own work is one issue and it's pretty easy to manage your own workload. But then also being sure that folks are on task, doing things correctly, are well supported and understand what's expected of them is a different challenge because everybody looks at things differently and comes at things at different points of view.

And so it can be a challenging part of the job, but one that's also really rewarding.

Katya Valasek:

When you gave that breakdown just a moment ago, the next level is partnership. And that is potentially right around the corner from you. Vinson and Elkin still has a traditional single tier of partnership, which is different from many other firms that have two tiers, a non-equity level partnership and an equity level partnership.

Are you saving for your buy-in?

Kiran Vakamudi:

I think I've worked really hard to get where I'm at, but obviously some of that stuff is out of my hands. I'm just trying to do the best in my job that I can. And I think it's one of those deals where if your work is good and you're doing good work, people are going to notice.

And hopefully that's the next step in the chain for me. But it's also one of those things, if my career takes a pivot, it takes a pivot. I'm prepared and ready to make my next move if that's what it takes.

Katya Valasek:

What are you excited about at the idea of becoming a partner?

Kiran Vakamudi:

I think it's just a logical progression. I've been a senior associate for about a year and a half now, and I'm starting to get my feet underneath me. And the idea of not just managing associates internally, but also managing an entire deal.

This is obviously a collaborative issue, but coming up with ways to address the problems that we've talked about and have primary responsibility for solving a client's issues. And then also going out and pitching clients and bringing them in is also something that I'm very interested in growing and developing into, because those are the keys of being a big law attorney.

Katya Valasek:

Partner or not, you are involved in some pretty intense work at the firm. What is your schedule like?

Kiran Vakamudi:

Schedule varies a lot. Typically, as a senior associate, doing a lot of interfacing with internal teams, as well as external law firms. I spend a lot of my day on my phone, and it can be hard for me to sit down and read and review somebody's work product when every five minutes my phone rings or there's an urgent email that I have to address and respond to.

On a daily basis, I spend most of my working hours juggling those various tasks. And then typically when I'm in the middle of a big deal, I'll go home, have dinner, wind down for a little bit, and then turn the computer back on at night for another couple of hours and then work through some of my review of other people's work product and things like that.

Katya Valasek:

What do you define as your working hours?

Kiran Vakamudi:

Yeah, working hours are typically for me about night in the morning until about six at night. And then I'll typically turn on the laptop again around 930 or 10 and just work until I can get things done. If you're in the middle of a deal, sometimes those hours get extended in both directions.

They can be tough, but it's something you just kind of get used to.

Katya Valasek:

What about weekends? Are those days to relax for you?

Kiran Vakamudi:

Yeah, I mean, I think sometimes it is and sometimes it's not. If you're getting close to closing a deal, it's one of those things where people start to understand as you get a couple of deals under your belt. There are times when you're going to have to cancel on plans, not make somebody's birthday.

I'm lucky that my colleagues and partners at Vinson & Elkins are very respectful of our time. And there have been times when I've had emergencies or issues have come up. And if I put my hand up and say, hey, I'm not going to be available this weekend, people are very respectful about that.

And that's something I really appreciate.

Katya Valasek:

Well, that may be part of your answer to my next question. But with these moments of intense workload and, in general, fairly long work days, what makes it worth it?

Kiran Vakamudi:

In the end, it can be very hard. It's very long hours. I had one deal where we literally stayed up until about 4.30 in the morning trying to make a deadline. We ended up making it. And, you know, it's intense, difficult work. But when you come out on the other side and you look at the work you did, the work you put in, and the company that we ended up doing that for is now, you know, many multiples times the value it was at the time when we restructured it. That's really rewarding to me. It really meant a lot.

Katya Valasek:

What about the money?

Kiran Vakamudi:

I mean, the money is great, but if you're here just to get money, you're going to wash out pretty quick because, like I said, the hours are intense. And, you know, you are expected as a professional to be on call and to get your job done regardless of what the time commitments are and things like that.

And so, if it's something you're just in it for the money for, it probably isn't going to be worth it in the long run.