Restructure This! Podcast Ep. 1
Inflation and the Search for the Right Interest Rates
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Listen to the original podcast released January 18, 2022 here:
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Inflation is here and seems far from “transitory.” Given this, where is the restructuring industry headed? Which sectors are predicted to feel the pain next, and what are governments doing in response to inflationary prices? This episode discusses the impact of inflation on distress as seen from the perspective of a businessperson. It also explores the challenging role of the restructuring advisor—the person seated next to the C-suite managers at a time of stress and distress.
Guest:
We speak with Mohsin Meghji, managing partner of M3 Partners, LP, a corporate advisory firm experienced in providing financial and operational restructuring. M3 has represented debtors, creditors and equity holders in some of the most complex and contentious restructurings and bankruptcies, including Sanchez Energy, Neiman Marcus, Barneys New York, and Seadrill Partners.
Transcript:
Justin Bernbrock:
On today's installment of Restructure This!, we welcome Mohsin Meghji of M3 Partners. Mo is a nationally recognized turnaround professional with more than 30 years of practice. During the interview, we will explore Mo's background and experience starting with his early days at Arthur Andersen up through and after his founding of M3 Partners. We'll also get Mo's thoughts on the current economic climate, and potential drivers of the next restructuring wave. As always, stay tuned after the interview for a quick rundown of current restructuring news and notable stories.
Justin Bernbrock:
Welcome to an episode of Restructure This!, Sheppard Mullin podcast about all things restructuring, financial distress, Chapter 11 bankruptcy. And as I mentioned, Mo Meghji of M3 joins us today. Mo, it's nice to speak with you again. Thank you for doing this. And just to kick it off here, Mo, can you tell us a bit about you as an up-and-coming restructuring professional? What got you interested? What are some of your earliest experiences or memories with restructuring?
Mohsin Meghji:
So, Justin, thank you first for having me. It's a pleasure to join you on this. Yes, in terms of my background, obviously I have been in the restructuring business for over 25 years. I frankly kind of fell into it in the early '90s. I worked in Toronto, Canada, and when the savings and loan crisis happened there were a couple of mortgage companies in trouble. And I was asked to go and work on one of them for a few months. Ended up really liking the restructuring business because you could make a huge impact in restructuring situations, and sort of ended up developing a career in restructuring.
Justin Bernbrock:
So a lot of that initial stuff was in Toronto. When did you come to the U.S.? What brought you here?
Mohsin Meghji:
Yeah. So I worked in Toronto in restructuring for about five years, from '93 to '98, and was sort of thinking about career options going forward. And I worked with a firm called Arthur Andersen. They had approached me with an opportunity to move to the U.S. as the U.S. restructuring team was growing. And the long-term capital crisis, if you recall, was in process in the late '90s, '98, '99 time frame. So I thought it would be a great opportunity. Initially, it was offered to me as go spend a year, you'll get some good experience. So I did that, but I loved New York. At least from a professional standpoint, the opportunities were tremendous and the opportunity to work on wide-ranging, difficult assignments was great. So I moved here at the end of '98, ended up making New York home, and have been doing this over the past 20 years in New York.
Justin Bernbrock:
And you left Arthur Andersen at some point to start your own firm. What was that experience like? Can you tell us a little bit about the sort of initial phases of going out on your own?
Mohsin Meghji:
Yes. So it's interesting, restructuring, especially on the kind of turnaround and crisis management side, is a business where it looked like the clients were very focused on who the individuals were and their individual capabilities and experience. Combine that with a couple of other things where working at a firm like Arthur Andersen had challenges around conflicts and other issues.
Mohsin Meghji:
So taking on roles as chief restructuring officer or interim management roles was becoming increasingly more difficult. And then finally, in the late 2001 time frame where I'd only been in New York for a couple years but the whole sort of Enron crisis was breaking. So one of my former partners and I decided to go out on our own and start a firm. That firm was called Loughlin Meghji + Company, which we started in early 2002. We had, frankly, no expectation that Arthur Andersen would go out of business, but we were amongst the last two partners to leave the firm. And it ended up sort of going out of business 45 to 60 days later. So fortuitous timing for us, but we were able to leave a few months in advance of Andersen kind of falling apart.
Justin Bernbrock:
So after that you went to Springleaf, right?
Mohsin Meghji:
Yes. I was there [at Loughlin Meghji + Company] for 10 years, a very good run. We worked on some very interesting things in the sort of global financial crisis, '08, '09 to 2011. Towards the end of 2011, my partner and I had some differences of opinion around strategy for the firm, which direction we should go and grow in a two partner firm. It was hard, when we were aligned, we were very successful. It was sort of hard to have two views of where we're headed. So he elected to buy me out and I had a two year non-compete from restructuring advisory.
Mohsin Meghji:
So I took a management role at a company called Springleaf Financial, which is now called OneMain, a very successful public company. Fortress had acquired Springleaf at the end of 2010, at a valuation of 150 million [dollars]. It was facing some challenges around debt maturities. They brought a new management team in, the CEO had been a former client of mine so he asked me to join the team. Three years later, we took it public for a 1.8 billion dollar valuation. So that was a unique experience for me, because before that, I'd only ever been an advisor, to taking on a management role where my comp and focus all depended solely on creating value… [that] was special and taught me kind of a lot of new things, which have been very, very useful.
Justin Bernbrock:
Yeah. I want to actually take a detour. I knew these things about you because I read them on the page and you and I have known each other for a while. Hearing you describe that experience, what did you take away from that was helpful in, for example, the Sanchez energy case or any other instance where you have stepped in as interim management?
Mohsin Meghji:
Great question, Justin. And what I would say is, if you've only ever been an advisor, which frankly I had been until I took on Springleaf; and Springleaf, at least at some point wasn't in deep trouble, but certainly had some challenges, going in into that role and really putting yourself in the mindset of a management team member and where your entire sort of comp career going forward, et cetera, really depended on creating value, saving jobs and all of that was immensely important. Because before that, my mindset has always been luckily restructuring advisors, whether it's attorneys, bankers, or turnaround professionals, all do that to an extent.
Mohsin Meghji:
But the reality of it is that, most of us still get paid our fees so we'll do our best. That allows one of the great benefits of being an advisor is that you're far more objective than somebody whose job depends on achieving certain results, but there's a balance.
Mohsin Meghji:
And the balance is that, for the first time ever, it was a stark realization that I was working as partners with eight other people on the management team. And if I'd continued to behave like an advisor, they were not going to listen to me. But I had to sort of make the mental leap around making sure that they understood that my comp, which was largely based on creating equity value, if we could, was aligned with them. And I had to recognize that, once they understood that, it made life a lot easier in terms of working with the rest of the management team.
Justin Bernbrock:
Yeah. I often had this thought that folks who do what you do in the context of interim management or chief restructuring officer or any situation where you actually are day to day with the management team, often have the most difficult, most challenging aspect of any restructuring scenario.
Justin Bernbrock:
And I think because you are so close to what the management team does, I think lawyers and bankers can hover outside the blast radius a bit more and hide behind expertise or pseudo expertise of some sort of specialty training. But someone who has to actually sit side by side with the management team actually has a much more difficult role in any restructuring. So it's fascinating. It's really interesting to hear about that experience. So after your time at Springleaf and presumably after the limitations were released or lifted, you started M3 Partners.
Mohsin Meghji:
Correct. I took a few months off and traveled a little bit in 2015 and then started M3 and was very focused on ensuring that we built a sort of strong restructuring team and with a mindset that aligned for the reasons you were previously mentioning have sort of a slightly boutique approach where we're doing stuff more on a hands on basis, as opposed to some of the other firms that are larger firms that are very focused on big teams, et cetera, but big teams can sometimes be required. So you have to sort of have the right staffing around that as well. And so in addition to restructuring advisory, we also have a SPAC business which gives us some diversification, which was a critical goal to make sure that when the restructuring cycle's not busy, we have the ability to do other things.
Mohsin Meghji:
And one of the earlier things I did after starting M3 was raise a SPAC back in 2016. We did a deal in 2018, bought a renewable energy company. But since then in the last year, we've gone on to do a few more of those. So we're also kind of diversifying that. The other sort of element of that is, it also allows us once again, just like Springleaf did, to have the ability to make sure we're in the mindset of investors. Investors who are buying into distressed companies are very focused on creating value and our SPAC business has really taught not only to me, but the rest of my team, that we always need to be focused on creating value.
Justin Bernbrock:
Yeah, absolutely. And so how long have you been with M3? Remind me how long that has been.
Mohsin Meghji:
M3 started in sort of late '15, early '16. So we've been at this for about five and a half years.
Justin Bernbrock:
That's great. And growing pretty significantly, I was on your website the other day, just looking at the roster of people and it's an incredible and growing cadre of restructuring professionals, a lot of folks that I've run into in various cases and in situations. So congrats, well done. Yeah. Do you have plans to continue to grow the advisory practice or more on the investment activity? What's the future look like from your vantage for M3?
Mohsin Meghji:
Justin, thank you for those comments. Look, I think the greatest thing I have going for me personally, is that a super group of professionals and partners surrounds me. So, in a little over five years, we've got a team of about 50 plus professionals, which has been great. But when you go through lulls and the restructuring cycle where we've been through in the last few months, it also presents other challenges. And that's one of the reasons we've for instance, gone out into the SPAC market and done some of that. Additionally, one of our key areas of focus has been performance improvement service. So this is where we go in and assist companies around specific operational consulting issues.
Mohsin Meghji:
We've recruited a couple of individuals to help lead that and begun getting some success in the operational consulting area. A couple of companies have just retained us in the last month to focus on that. So that's a key area of focus so that we can have some diversification from restructuring. Most of the restructuring work we do, two thirds of that involves helping companies perform better. So whether it's cost cutting, strategy improvements, focusing on the kind of finance and treasury function, all of those apply to normal companies as well. And so we're pretty focused on doing that in a market when restructuring slows.
Justin Bernbrock:
Yeah, that makes a lot of sense. It makes me grateful for my large and growing group of M+A Partners here at the law firm. Although we're able to keep busy a bit ourselves on the restructuring side as well, which is nice. So shifting gears a bit here, and I want to talk about some specific topics. Obviously the impact of COVID 19 pandemic timeframe. And really the last 18 months or so has been a really unique time period in at least my lifetime.
Justin Bernbrock:
And I can think of probably a couple of other time periods where there has been such disruption or significant events going on globally that have really changed the course of human events. What does the future look like for corporate America, for companies and firms. I'm hesitant to say come out of the pandemic because there's still quite a bit of pandemic activity across the country, but how have things changed from your perspective?
Mohsin Meghji:
So it's a fascinating time we live in. I've got a few years on you, Justin so I would say it's probably the single most globally impactful event even in my life. And I've seen some regional things that impact the world that we can all sort of think of over the last 30, 40 years, but nothing that's has sort of broadly impacted the world as COVID 19. Now having said that, I think it's astonishing how adaptable and so on human beings are. And so when you sort of look at that and step back, we live in fascinating times. There have been some negative impacts, but there's also, depending on how you look at it, some positive impacts. If you look at sort of how we live in America and some of the issues we were dealing with in our business lives, there's been a massive acceleration of some of these events in certain industries.
Mohsin Meghji:
So I'll give you two or three examples. If you step back and look at the retail industry landscape, there was a massive secular change going on towards e-commerce from bricks and mortar. That technology adoption, if you'd asked me this in 2019, I would've said -- and we worked on some of the largest retail bankruptcies as you know -- happening pretty quickly over a period of time. And you could look out and say, "Over the next five to 10 years, that's really going to change." Well, guess what? Given the challenges of COVID 19, all of those retail companies had to massively accelerate those changes. And what would likely have taken five to 10 years happened in 12 to 18 months. So e-commerce platforms, delivery chains, all of that have sort of grown, not without challenges, but that's happened.
Mohsin Meghji:
It's not clear how this is going to play out but the work from home versus work in the office dynamic, that's still not settled, certainly in cities like New York and Chicago and maybe other sort of large urban centers. But it will be interesting to see how all of that settles out clearly. I've just been retained to be chief restructuring officer of one of the largest office buildings in New York City which filed for bankruptcy -- 45 Park Avenue. And clearly there is going to be an impact on the office real estate market. What that will be in the long run sort of remains to be seen. Another final example that I would give you is healthcare. So telehealth, which was at a very 'early stage' in '19, suddenly accelerated.
Mohsin Meghji:
And as an example, two weeks ago, I had a cold, not COVID, but a cold. And I was not really that comfortable going into my doctor's office. I called him up and said, "Can we just do a video consultation?" He was happy to do that. It took 15 minutes as opposed to three hours. And that's just an example of the kinds of things I wouldn't even have thought of doing pre COVID.
Justin Bernbrock:
Yeah, I think those are great examples. I think I'm certainly having similar experiences on my end with telehealth. Particularly with two young kids that get sick frequently. Mercifully not on anything that some rest and chicken noodle soup can't handle, but seeing the pediatrician on FaceTime rather than going into the office, it's convenient. It's nice. I'm curious, just building on that topic Mo, and it doesn't have to be limited to sort of telehealth, but I'm curious whether there's something that, by going to a more robust virtual environment, where court hearings and meetings, mediation is taking place virtually, whether you think that we're losing something or there's something missing?
Mohsin Meghji:
Well, look, I think if you look at sort of simply the process of human interaction and connection, I will tell you notwithstanding the examples I've just walked through. The M3 office in New York reopened right after Memorial Day. So we were one of the earliest to come back. Now we took the approach that it would be three days a week on a semi voluntary basis, but a big reason for that was my belief, you can't develop people, you can't mentor people. We have a lot of intelligent, young professionals, but interacting and kind of working together is a critical part of developing them. Another major part of my job is developing business and connecting with people on new things that we're doing. And that's pretty difficult to do on Zoom or simply via a conference call.
Mohsin Meghji:
So when you're meeting new counterparts, new relationships, new partners, you can never replace the kind of interpersonal connection through seeing people in person. That's never going away. But I think what is clearly a bigger part of life now is whereas before the pandemic we had, the first instinct in every instance was let's jump on a plane and go see somebody, I think now you're much more likely to say, "Well, does this make sense? Is it worthwhile? Is it worth the time and effort and so on because there are other ways to do it." So I think over time, if we can get to the right balance between those two, that should get us to a good place. But there's definitely going to be an adaptation period, which we're going through now, which might take a few years to settle out.
Justin Bernbrock:
Yeah. I think that's right. Whether we're in the midst of it now, or whether it's coming in the future, but almost an over correction and then some rebound to whatever the new framework is that we operate in. But I think you're right. I think there will be quite a bit more reliance on virtual now that folks have seen the benefits of it and candidly, the cost savings.
Justin Bernbrock:
I think a lot of companies and a lot of firms experience significant expense cost savings that we're able to in some ways alleviate some downward pressure on the top line to weather the pandemic in a way that didn't require any significant restructuring activity. I'm curious about your thoughts on the involvement of state local federal government and how the policy has shaped the economic landscape, not only during the pandemic, but as we emerge from the more significant government involvement? What's your view of economic policy?
Mohsin Meghji:
Yes. So look, I think it's very interesting when you step back and I spoke at a conference a couple weeks ago where we talked about some of this. If you look at when the pandemic hit in March of 2020, there was a period of a couple weeks where the world kind of froze in terms of how to react to this. I'm sure everybody in the restructuring industry was literally, in the March, April timeframe, overwhelmed with calls for help from different companies. But the federal government swung it to action and very rationally sort of generated some stimulus. The Fed started buying corporate bonds which was sort of unprecedented previously in prior cycles and did that very aggressively. So if you look at, I'll just keep this at a relatively high level, the Trump administration before the change, before the election had pumped in something $4 trillion or a little less of fiscal stimulus, the feds had been buying bonds at the rate of 130 billion a month literally up until a week or two ago when they announced they're going to start reducing that.
Mohsin Meghji:
And then that was sort of followed with the change in government with the Biden administration coming in with 2 trillion as part of the American rescue plan. And that's before the infrastructure bill, which is just passed and maybe another 1.75 trillion or somewhere thereabouts with the build back better act.
Mohsin Meghji:
So stepping back, the government stepped in and put in an unprecedented amount of stimulus. But when you add all the different pieces and step back and look at U.S. GDP annually, that's about 21, 22 trillion a year. And when you add in something like 12 to 14 trillion of a combination of fiscal monetary and other stimulus, that's sort of what has created this massive rebound in '21. 2021 GDP growth, although it's sort of starting to settle down, is going to be in the high fives to 6% range, a level which hasn't been seen in a very long time, and created some other side effects like inflation and so on, which we’ll need to sort of work through.
Mohsin Meghji:
So to me, look, the bottom line is rational to come in and provide a lot of support from the government. Hopefully they haven't, or don't overdo it. And then the question is, how do you sort of taper things back to normalcy and what will be the hangover effect after we 'get back to normal'? Those are some of the questions that still need to be worked through.
Justin Bernbrock:
Yeah. And I want to focus on that. And we were talking a little bit ago about the restructuring industry, your restructuring space being quiet. We've gone through a period of several months with low Chapter 11 filings. Although there has been a slight uptick and I'm conscious of the capital markets, and I'd really like to hear a bit more on how the private sector if the government is given floaties such that we're all surviving in the deep end, how have the capital markets responded? What's been going on that side?
Mohsin Meghji:
Yeah. So look, what's been going on, we had a very sort of quick increase in the March, April 2020 timeframe of stressed and potentially distressed corporate loans that started to kind of level out and correct as fiscal and other monetary stimulus started to come into the system. And then the capital markets came in massively. I think that '21 has seen a huge rebound in the debt markets. Companies have issued a record level of debt this year. The last sort of record high year was 2007 before the global financial crisis. And literally the debt issuance market markets have been on fire ever since. So I think all of that is really kind of a reaction to the amount of money in the system that's available, number one. Number two, the expectation that companies and the economy are going to rebound.
Mohsin Meghji:
And number three, consumer spending has grown massively because of all the kind of stimulus that's been provided by the U.S. government. So that's really created this very good set of opportunities in the economy for this year, but obviously the federal government cannot continue pumping money into the economy at this rate going forward. So the core questions that sort of arise are when we go back to 2%, 3% GDP growth rate, which I expect sometime next year. And then the year after, somewhere below 2%, which is sort of where we were before the pandemic, what will the impact of that be?
Mohsin Meghji:
My view overall is that the best companies, the top one, two, three competitors in any given industry, are going to have done well. They've taken advantage of this growth and done the right things and so on. But the number four or five, six competitors in any given industry, which will also have taken on debt to get through the pandemic for the most part, from what we're seeing, will be in a much worse position when economic growth normalizes. So, that's really where I think there's a day of reckoning to come. I don't expect a massive recession or a big economic downturn, but I do expect there to be a group of companies that will have a day of reckoning and either get dealt with through sale, M+A getting acquired by their better competitors or ultimately having to go through and restructure or something else.
Justin Bernbrock:
Yeah. That makes a lot of sense. And you've mentioned it, I think a couple of times, but there's obviously a lot of focus on inflation. Chairman Powell testified recently about his own frustration with the growing level of inflation. It seems like the Wall Street Journal's cover article about inflation almost daily. And actually the article from this morning, the headline is inflation helps boost profit margin, companies seize rare opportunities to increase prices and outrun their own rising costs. If you think about managing a balance sheet that has seen a significant rise in expenses, whether they're related to logistics, whether they're related to human capital costs, occupancy costs, trying to balance that with price increases seems to me, at least, to be troublesome and problematic. Do you have a view on how inflation is being fueled? Presently could be curbed, etc.
Mohsin Meghji:
As you well know, I'm the last thing from an economist. So I can't tell you how it can be managed, but what I can tell you is that I've run companies. I advise companies, I sit on boards. So I can tell you how I think about inflation and how I break it down as a business person. And the way I look at this is, there are four major elements of cost where you want to focus on inflation and inflationary risk, and you touched on a couple of those, but let's just go through each of those four. The first one is wages. And if you step back and look at this, one of the, well, unemployment rates have bounced back pretty handily to somewhere around 5%, maybe even lower, it sort of spiked up massively and has really come back.
Mohsin Meghji:
Apparently if you look at most recent statistics, 5 million people have left the workforce and that's really creating a big part of the labor shortage. And so I think it'll be interesting to see what companies do to get people back into the workforce, not veering into the political side, but I'll do a quick tangent on this. One of the political debates we've had in the country over the past several decades, but definitely over the last decade in a more pronounced way, is the gap between kind of the haves and the have nots. And at least from my perspective, I would expect that the lower wage earners as a result of this wage inflation have an opportunity in a market driven way to get their wages increased. And so companies are going to have to, for the first time in a while, focus on paying people more to ensure that particularly lower level workers can come in and be attracted to work in places.
Mohsin Meghji:
So, the trucking industry, retail, restaurants, all those kinds of industries have an opportunity to do that now. There's a limit to how much can be absorbed. And it'll be interesting to watch that. The second element is the supply chain. It's my belief that the supply chain piece of it is more transitory than not, because the U.S. has done a much better job of rebounding from COVID vaccination rates, reopening the economy, et cetera. And the supply chain, obviously over the prior two, three decades had become much more global. So you have sort of blockages at various points, which has caused supply shortages and affected various industries. Car prices have gone up, various other things have gone up. So what I personally expect is that over the next 12 to 18 months, as the supply chains kind of normalize globally, those should come back.
Mohsin Meghji:
And the third category is commodities. Oil prices had, as you well know, gone negative in April of 2020, have rebounded very much in part because of the bankruptcies. A lot of oil companies and gas oil, and natural gas companies had constrained investment when oil prices went down. That will take time to come back and that in essence, is its own cycle. Along with that other commodity prices also kind of have their own special sort of dynamics around supply and demand. And then the fourth and last one is interest rates, which is a big challenge that the federal reserve has. And a lot of this depends on who the Powells reappointed to be the next governor or somebody else comes in to look at how interest rates, which obviously can't stay at this record low level, how they're kind of gradually increased in a way that cannot create a big backlash, but get the economy to kind of a more normalized place.
Justin Bernbrock:
Yeah. Makes a lot of sense and I really appreciate the insight on that stuff, Mo. Well, I think that's really all that we have in terms of substantive stuff. Again, I want to thank you, your partners and colleagues at M3 for working through all of these points with us and chatting about them with me now. I do have a final question for you Mo. This is going to be a question that I ask every guest on our podcast here. And you have to assume for the sake of the question, no limitations, no external pressures. And the question is this, if you weren't a restructuring professional, if you weren't involved in this business, what would you do?
Mohsin Meghji:
That's interesting. I haven't thought about that in a while.
Justin Bernbrock:
I'll tell you mine then you can think about it because I recognize that I'm hitting you with this. So I love hotels, I love them. I don't know why and it dates back to being a young kid, taking car trips across the country. For a period of time, we lived in Northwestern Pennsylvania, and we still had family in Southern California where I was born and raised and we would drive across the country and we'd always stop each day at the Holiday Inn Express. I was 10 years old and my sister and I would have the most fun at the hotels along the way. And so I've always had an affinity for hotels. And so if I wasn't a restructuring lawyer in doing this, I think that I would build, curate and run a luxury hotel brand.
Mohsin Meghji:
Which is fascinating and very cool. Look, I think easily, if I wasn't a restructuring professional, then I would probably be in one of two fields. One is either the investment business and I kind of interact a lot with investment professionals in what I do, but I would be more focused on that. Or the other, something more work into the sports business and specifically, I'm a huge European soccer fan. And so I would be in some sort of role to do with professional soccer.
Justin Bernbrock:
There you go.
Mohsin Meghji:
Other than being a player, which is sadly restrained by my lack of God given ability.
Justin Bernbrock:
Well, we are glad that God gave you the ability to be a restructuring professional, because we certainly enjoyed working with you and your colleagues. And I don't know, maybe you saw this Ted Lasso show, maybe there's some future for you in football. I like how you call it European soccer, to tell people that it's not American football, but at any rate Mo thank you very much, really appreciate the time here. And yeah, I'm sure we'll be talking with you soon.
Mohsin Meghji:
Thank you Justin. Really a great pleasure to talk to you.
Justin Bernbrock:
All right. Take care.
Contact Information:
Mohsin Meghji bio: https://m3-partners.com/senior-team/mohsin-meghji/
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