Cloud 9fin — Jane’s LME Addiction — Will law firm musical chairs bring LMEs 3.0?

In this episode of Jane’s LME Addiction, our head of LME coverage Jane Komsky welcomes back Jon Henes, founder and CEO of strategic communications firm C Street to discuss the market’s shift from the technical "how-to" of liability management transactions to the fundamental "why."

Jon addresses the growing skepticism surrounding the efficacy of these deals, the strategic vision behind C Street’s new law firm optimization practice and explores whether the "musical chairs" of elite legal talent is ushering in a new era of consensual capital solutions or simply more complex bankruptcies.

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Episode transcript

This transcript was generated with AI assistance. Report any material inconsistencies or inaccuracies by emailing podcast@9fin.com.

Jane Komsky

Hello, and welcome to Jane's LME Addiction, a Cloud 9fin podcast where we talk about all things liability management. I'm your host, Jane Komsky, head of LMEs here at 9fin, and with me today is Jon Henes from C Street, founder and CEO. Thanks so much for joining me.

Jon Henes

Thank you for having me. It's always great to see you.

Jane Komsky

You too. And I don't know if you recall, but you are actually my first guest ever on Jane's LME Addiction. You and George Klidonas.

Jon Henes

So I remember it well. I remember being on with George. I did not realize, I don't think, maybe I did at the time that we were your first, but happy that we got to kick that off for you.

Jane Komsky

Yeah. And I think that both the studio, as I'm sure you are seeing, and the LME space has come a long way.

Jon Henes

Yes. There's been a lot of excitement that has gone on in that space, in the restructuring space, in the legal space. There's a ton going on right now.

Jane Komsky

In all the spaces. All the spaces.

Jon Henes

A million spaces. And you, you had a baby since then. And so congratulations on that.

Jane Komsky

It's true. Thank you. And so the last time that you were here, we kind of talked about, it was all about the post-Certa world and how LMEs would work and how strategic comms worked in the space. And since then, I think we've moved on. Well, I mean, we'll talk more about this later in the podcast, but C Street has expanded. But also, it seems like when people are thinking about LMEs, instead of saying sort of, how is this going to work? It's more about, should this work? Why are we doing this?

Jon Henes

Yeah. I think where we've seen the LME space go, and some of this is how the major players in the LME space are talking about it. But there's been this expansion from LME to capital structure solutions. And what the professionals are looking at is they're saying, we want to meet the clients where they are. And so if clients have a capital structure issue, we are there to help fix it, regardless of what that means.

So it could be a simple LME, kind of like an OG LME, which is like when I was growing up in the industry and it would amend and extend, maybe put some new liquidity in, maybe capture some discount, but pretty simple. It could be something much more aggressive, moving assets around, putting them into unrestricted subsidiaries, borrowing money against that.

You know litigation is going to come, but it could be something that could work for the company, or it could roll into a Chapter 11 case or anything in between. But what we're hearing from all of the professionals that focus on this is it's not one size fits all. It's all about capital structures. It's all about finding solutions. And I think that's a little bit of an evolution since last time we spoke.

Jane Komsky

Definitely. And so I'm curious, is your strategic comms team getting more pushback on the way that they're talking about LMEs?

Jon Henes

So with strategic communications in the LMEs, The way that I look at it is there's leaks, there's media management, there's stakeholder engagement, and there is positioning. And so you have those four things. For a simple LME, and not to talk myself out of getting business, But in a simple LME, a lot of clients are going to say, we don't really need much communications help with respect to that LME transaction, because it's really simple.

Even if there's a leak, 9fin breaks that there's some professionals that got hired, it's not going to impact our business in any way. So it's not going to lead to having to deal with the media, it's not going to lead to having to deal with the stakeholders. Now, I always believe positioning is important.

And I think that companies oftentimes don't focus on the positioning of their brands and what they're doing as much as they should. But in a simple LME transaction, you don't necessarily need that aggressive strategic communications help.

If it's something that's more aggressive, if it's something that will really potentially impact stakeholders, so your employees, your customers, your vendors, your suppliers are saying, what does this mean for me? And if those stakeholders get nervous or anxious, that could have a deep impact on the company, then you need to really focus on the strategic communications. And you need to do it very thoughtfully, very intentionally, very business focused, where all of the professionals and the leadership team are working hand in hand in a cohesive fashion. It's collaborative, it's collaborative, and it's making sure that you're protecting the company and you're using your voice as an asset to be deployed.

Because oftentimes, companies don't think of it that way. They think much more of it as, okay, when we get to the end, we'll put out a press release. But the truth is, if you want to get to the end in a strong way, you want to make sure the company is at its strongest position. And to do that well, you need to be communicating out to your stakeholders, to the market, to the media in a cohesive way.

Jane Komsky

That makes a ton of sense. And I could talk about this part all day and have a million follow-up questions, but I do want to give you a chance to talk about C Street's more recent role in this space, that of law firm optimization.

I'll acknowledge that I'm not the first to cover this, as you recently had a whole article about you, or rather, Financial Times had a whole article about you. But I'd love to hear in your own words about this new law firm optimization practice and how it came about.

Jon Henes

Sure. And I appreciate that, because I appreciate the opportunity to be able to tell the story in full. But interestingly, with that FT article, we were faced with what our clients are faced with all the time. You know, a reach out from a reporter with an article that we didn't necessarily want written, just because it wasn't in our terms and how we wanted it to be said.

And then while the article, there was nothing wrong with it, it didn't take into account what we're actually doing in a fulsome way. So I appreciate the opportunity to tell you that now.

Jane Komsky

So does this mean you are or are not the Ari Emanuel of law firms?

Jon Henes

You know, people have called me a lot of different things and say I'm a lot of different things in a lot of different ways. So I'll take the Ari Emanuel one as a compliment, I believe. But so for law firm optimization, if you think about the law firm world today, the legal industry today, it is changing. You have a couple of firms that have grown tremendously.

They have huge amount of scale. You have other firms, great firms that are doing really well. You have other firms that are doing well, but are trying to figure out where are they going in the world. And there's a lot of firms out there and all of them are thinking about that.

So you have law firm chairs that you'll speak to who will say things like over the next five years, there may be five to 10 large firms out there. And I want my firm to be one of them. There's others that are saying the same thing, but saying, how do I get there? There's a huge amount of competition for talent. There's a huge amount of competition for clients.

And so we're in this world where there's a huge demand for an integrated service to help firms do better, to think through their issues, to figure out how best to grow, whether that's organically or inorganically. So for us, and it really came about by happenstance about 16 months ago, we were engaged by a firm to help them think through an issue with one of their groups.

And as we built that out, what we realized was it was about strategy. It was about communications and it was about talent. And those three things all interact nonstop. And so then we began to get retained by other law firms and some other professional service firms to help in the same way. And for us, what it means is you come in always with strategy.

And what we mean by that is you need to look at yourself and say, what is my firm all about? Who are we? Every firm is unique. So who are we? What is our culture? Who are our clients? Where do we fit in today's legal world? After you do that, it's how do we get better? How do we get stronger? What is it that we're missing? Sometimes that's adding talent.

But when you're adding talent, especially in today's world, it's not just about adding a talented partner to your firm. It's about adding the right talented partner to your firm. And that's hard because you need to really think through who is that person or who are those people? Then how do we go locate those people? How do we bring them on? How do we explain why they should come over?

So it's a real acquisition of talent and it needs to be thought of in that way. It's not just calling up and placing people. It's actually thinking strategically about who fits in and who fits in well. And then it's about communicating, positioning it. Here's why we're doing it. And it's not just once. It's not just a press release and put it out on LinkedIn.

It's really here's what we're doing. Here's why. And now let's think about all the different steps we're going to take to get us in front of our clients in the right way, to get us in the market in the right way. And so it's a real campaign. So that's what we bring together to the table.

And so we do all of that. The Ari Emanuel comment all came down to the, you know, a placing of people or the acquisition talent. And that is part of what we do. But we do it in a very integrated way with everything else that's on the table that law firms need.

Jane Komsky

So to put you on the spot, did you guys pitch this specific field of law firm optimization or did it sort of just happen as part of the strategic communications engagements?

Jon Henes

Yeah, it's a great question. So if you take a step back, C Street was started with the principle of we are a strategic advisory firm to help our clients in their most important moments. Right. So whether that's a restructuring, whether that's an M&A transaction, whether that's an IPO, whether there's a crisis, we jump in and help.

And that was really on the strategic communication side. When you think of law firms and other professional service firms, they're going through those same types of moments. And as a result, we come in and provide that high level advisory and judgment to them.

So it really evolved out of that. But again, it was happenstance, serendipity, however you want to say it. And a firm that believed in us, believed that we could help, invested in us to help them. We invested right back. And that has just led to, I mean, really, I don't want to overstate it, but so many firms that have reached out to help us. It's incredibly busy right now for us in that area. It's growing tremendously. It's fascinating work.

The partners that we meet are amazing. The leadership teams are great. And I think where we really provide something different and differentiated, you know, I came from Kirkland and Ellis. I was there for almost 20 years. I saw the growth. I was part of the growth. I helped in the growth. We went from when I started at Kirkland, there were 20 people in the restructuring group and 120 in the New York office.

When I left, we had 220 in the restructuring group and over 800 in the New York office. I watched Jeff Hammes, who was the chair of Kirkland for almost a decade or more, grow that firm. And I watched how he did it. And it was all about acquiring the right talent. It was about making the culture collaborative. And it was about going out and being competitive in the marketplace to go get clients. That is something that I learned and I saw.

I apply it to C Street, but I also apply it when we talk to firms. Michael Frishberg, who is the president of C Street, was also at Kirkland, then went and started a company, prime clerk in the claims administration business, sold it to Carlyle, sold it to Kroll. He did all of the operations. We have an amazing team. We pull data, we collect it, and then we look at each firm uniquely because each firm is unique and help them grow.

Jane Komsky

Very interesting. Or optimized. No, it seems like, you know, that C Street kind of started out when LMEs were getting popular. And the same way that sort of LMEs have evolved and aren't really just one thing.

Maybe they started off in one way, but they continuously, I guess, morph to fit whatever companies need. It seems like C Street's kind of playing the same book. And it's very cool to see as, you know, the years go on how C Street morphs in that way.

Jon Henes

Well, thank you. Appreciate that.

Jane Komsky

I will move the conversation back to LMEs for a minute, which is recently a study came out in the Yale Law Journal by a Harvard professor and fellow about how sort of LMEs are not necessarily what they appear to be in that they're pitched as a way to keep companies completely out of bankruptcy. And if you actually look at what's been happening, and they only analyzed those that have been made public.

So there's obviously a lot of private LMEs that we don't know about or that they just weren't able to include in their study. But that most or at least they said 71 percent had filed for bankruptcy within at least three years. And that on average, the aggregate debt did not actually fall.

And when they do go into bankruptcy, that they're more complicated. And so I guess my question to you is, do you think that clients are still going to try to make this push to keep all of their restructurings out of court? And does it actually create value? Or is this more of just sort of going back to our law firm optimization, a game of musical chairs where we keep bringing different lawyers together and seeing what will happen?

Jon Henes

So I guess I would I didn't read the study, but I will. But based on what you just said, I would look at it and say, you know, almost a third of companies that do LMEs succeed. So if you are involved in a company, you're a leadership of a company, you're the ownership group of a company and you have a capital structure issue. And you say there's two options here because we need to fix our capital structure.

One is to try an LME or second would be let's just get it ready and file it for bankruptcy. I think there in certain situations and obviously it all depends on what the capital structure looks like and what other issues the company might have or might not have. If you have an opportunity to potentially fix the issue through an LME, a much more cost effective way of doing it, a way that's going to have much less of an impact on the business and all of your stakeholders.

And somebody said you have at least a 30 percent chance of success. I think you probably take that chance. So I think we're going to continue to see that. Whether LMEs that don't work and companies that go into Chapter 11, they're more or less complicated. I'm sure they did their data and, you know, research. And maybe that's true.

I don't 100 percent know what that means. You know, a lot of Chapter 11 cases are complex. It's why you have great professionals to work through them. And some are not that complex. But I do think that if you're, you know, I operate a business. When I think about my business, what I'm thinking about, number one, is employees. Number two is client.

And those are the two most important things, right? You want to make sure that for the clients, you're providing the best service for them. You want to make sure your employees are doing well or paid well or, you know, enjoying it, that the culture is great.

So anything that's going to disrupt that, you need to be really careful about. So if you're given the option of here's something that you can try, it may work. And there, by the way, there's a 30 percent chance that it will. I think you take that chance, especially if the professionals can walk you through it and your board can listen to it and say, this is a real opportunity to get something done.

I think you take that chance. And then if you have to go into Chapter 11 later because it didn't work, you had to go in, but you took the chance to keep the company out, not disrupt your employees, not disrupt your clients or customers and protect the company.

Jane Komsky

Yeah, that makes a lot of sense. And so I think that with that, you know, it sort of highlights what we've seen, I guess, throughout the bankruptcy restructuring practice of when things seem to be when when people seem to shine a light on what's going wrong instead of sort of addressing exactly that. We just change the name.

And I think that's how we're ushering in the new capital solutions that liability management now is seeming to have some negative connotations. So we see, I mean, with Simpson, they're calling it not liability management or special situations, but rather a capital solutions practice.

And with that, I feel like you're ushering in sort of the next wave. You know, we had the first iteration of LMEs, which were 51%, 49% left in the dark. And then we have the LME 2.0, which is considered the kinder, gentler. What do you see for LME 3.0 or capital solutions? Yeah.

Jon Henes

So I think I'm not sure it's due to the negative, you know, connotations. I really do think that a lot of what happens in the professional service world or the legal world, but we're talking about LMEs. It's not just the lawyers, right? The lawyers, the bankers, sometimes the financial advisors, depending on how complex the capital structure and operational issues are.

It's driven a lot by the clients and by the capital markets. What I mean by that is the professionals are getting involved in situations as they are. And I think what we're hearing, and it's not just Simpson, we also hear it from other firms as well, is clients are actually now demanding a different type of solution. They don't want to put it into a bucket of LME or Chapter 11.

What they want to put it into is we have an issue and we want you, law firm, you, investment bank, to put the best people in front of us who can help us fix that issue. And so for the law firms that are now starting to call it capital structure solutions or capital solutions or whatever the right terminology is, they're saying to the clients, we hear you and we're here for you.

And I think that's critically important because professional service is evolve. I'm sorry, evolve. And I think that that's what we're seeing. We're seeing firms evolving and changing with respect to their clients' needs. So what will LME 3.0 look like? I don't have the answer to that. I think what we're going to see are we're going to continue to see capital structure issues. That happens always, right?

No matter where we are. I think we're living in a world right now, obviously macro world, which is very uncertain with the war and oil prices up and markets going up and down and a lot of statements being made that we don't know what's right or what's wrong.

And we don't know when the war will end. We have the private credit discussion, whether that's a real issue or whether that is more of a positioning problem or really a communications problem. So there's a lot out there. And I think you're going to see a lot of professionals very busy helping clients trying to fix very complex situations.

And when you look around the professional landscape, law firms, investment banks, financial advisors, you have some of the smartest, best professionals out there at all different institutions working really hard and smart, providing incredible judgment to clients on very complex issues.

And it is always easy to look at either the conflicts that are not, and I don't mean legal conflicts, I mean personality conflicts that may arise between, you know, one professional or another, or, you know, LMEs that don't work. But at the end of the day, everybody is, these professionals are really providing the best guidance and judgment possible to help clients work out their issues.

Jane Komsky

And with that, thank you so much. This was really interesting. I think, I don't want to put any words in your mouth, but it sounds like LME 3.0 might just be a whole lot more comprehensive than we've seen in the past.

And so, again, thank you so much for joining me today. And thank you to our listeners. If you have any questions, please reach out to podcast@9fin.com. Thanks again.

Jon Henes

Thank you, Jane.