Heads-Up: James Leda at KRyS Global USA

Originally posted on GRR

KRyS Global USA managing director James Leda talks to GRR about the evolution of insolvency regimes and litigation finance, the rising cost of bankruptcy and how practice leaders with “skin in the game” are going to become the portfolio managers of the future.

Leda started his career in corporate recovery at what was then Price Waterhouse in the mid-1990s, primarily focusing on debtor-side advisory work in the steel and retail industries.

After going back to school to get an MBA from the University of Chicago, he moved to Wall Street and was responsible for preparing Merril Lynch’s recommendations in the fixed income space, predominantly in distressed sectors including telecoms during the early 2000s and the automotive sector as the global financial crisis approached.

“Having that restructuring advisory background really allowed me to produce differentiated research at the time for my institutional clients that comprised of large mutual funds and hedge funds,” he tells GRR.

While his competitors were writing about the operations of companies, Leda says he was able to write about how pensions and other post-employment retirement benefits would be handled in Chapter 11 situations, like those of auto companies Delphi and General Motors.

“It was a great time to be on Wall Street, specifically in research,” he says.

But when the great recession came, he pivoted to find a client that needed someone with a deep distressed background and he was recruited as the managing director of debt restructuring at PPM America, the US money managing arm of Britain’s largest life insurer.

While at PPM, Leda was a principal on behalf of clients in many significant restructuring situations, including those of financial giant Lehman Brothers and multinational food group Pilgrim’s Pride. During that time, he was also appointed to the liquidating trust board of Washington Mutual.

“It was fascinating hands-on experience, but from the investors’ perspective, as opposed to being the adviser,” Leda tells GRR. “And, of course, along the way, I was also the banker that brought these deals that ended up in restructuring.”

Coming out of the global financial crisis, Leda says a development in the private placement market fuelled his desire to move into more international work. Historically, in private placements, the issuers were mostly from the US, Canada, the UK, Australia, Germany and some other European countries.

“This was rapidly changing in 2013 to 2015,” he says. “New jurisdictions had issuers that were coming to the market in large volumes; we were seeing issuers from India, Brazil and the UAE, to name a few.”

“It was a fascinating time to see this happening because those jurisdictions were also updating their insolvency regimes in conjunction with this change,” Leda says. “If creditors were going to invest in these issuers from these new jurisdictions, they needed to understand they would have a fair shake in any kind of restructuring process that would happen.”

The new developments led Leda to do a lot of work on comparative insolvency regimes, which he says led him to the 2017INSOL International Quadrennial Congress in Sydney, shortly after which he met KRyS Global founder Ken Krys before eventually joining the firm later that year. The Cayman-based firm focuses on uncovering information to bring about recoveries for creditors or victims using civil litigation and insolvency proceedings, usually in situations where there has been some kind of alleged fraud or malfeasance.

“I loved the business model of KRyS Global,” he says. “Working with Ken and the firm was a great fit because as I had developed my understanding of and appreciation for insolvency regimes at a time when they were evolving so rapidly, I’d also built a global network of insolvency practitioners to partner with.”

What skillset is necessary to be successful in your role?

First and foremost: problem-solving ability. Each case and each matter that we come across is going to be different, but you need to apply what you’ve learned and see how that’s going to affect the pieces on the chess board.

You really must be able to think outside the box in this business. It usually starts with understanding your client’s objectives but also requires taking time to understand the objectives of the other parties at the table. Having sat in those other seats, I have an appreciation for that. A good adviser and practice leader will have a good handle on those aspects. Then working together, the parties can work to grow the deal value.

There are some other things that are important for our practice, which I call “flexibility in engagement economics”. Billing by the hour is an increasingly antiquated model. Clients prefer their advisers to have skin in the game when they can so that they know that interests are properly aligned. Many of our competitors just throw an army of staff at engagements, all at hourly rates. But we try to work on mixed fee or contingent fee arrangements wherever possible.

And that leads on to another important skillset: risk management. When our client sees our willingness to work on an engagement and we’re putting our balance sheet behind it, they know we see a path to a good resolution otherwise we wouldn’t take the engagement on an at-risk basis. We must assess the risk in every deal and participate in a way that makes the most sense for our client, first and foremost, but also for the sustainability of our firm.

In a way, and it brings it full circle to my prior investing experience, practice leaders who put skin in the game are going to become portfolio managers in a sense. The engagements are individual investments when you’re putting your own balance sheet into the deal. Each one of those deals has its own risk profile. They also have correlations between them; you don’t want to put all the same kind of deals in your basket.

What has changed in the sector since you started working in the restructuring space?

Insolvency regimes have continued to evolve and we’ve had to adapt to that. There are really three primary steps involved in getting there. First you’ve got to read everything you can about the changes that are taking place. Then you’ve got to reach out to practitioners in those regions and try to get an understanding through their eyes of how the written law is being applied. And finally, of course, experience is the best teacher, and being involved in the cases is the best way.

Over the last decade, many of these insolvency regimes have been tested and continue to evolve. It’s great watching this happen when we’re not involved, but it’s even more rewarding when we’re participating and we get to help guide the practical application of the written law or, in many cases, set precedents.

The other big change in the industry has been the continued evolution of litigation finance. Courts have warmed to the idea of third-party litigation funding. In that sense, the game really favours advisers who are better at managing and taking risks. In our case, it helps being a smaller, essentially conflict-free shop, which allows us to participate when some of our larger competitors may not be willing or able to.

How have case dynamics shifted in the years you’ve been practicing?

The US bankruptcy courts have always been debtor-leaning, at least in the three decades that I’ve been in the game. That has not always been the case in jurisdictions outside of the US, in fact oftentimes they are quite the opposite.

But the recent changes to insolvency codes around the globe that have drawn a lot from Chapter 11 could have shifted the balance, which makes it even more important to have seasoned restructuring counsel and advisers in those jurisdictions.

It’s a fascinating area of study. I’d love to be a professor in that area someday but one of my counsel that I work with in France gave me a quote referring to the differences between regimes that I really like: “Things are different; they’re not necessarily better or worse.”

To the extent that jurisdictions continue to evolve and may start to incorporate other aspects of Chapter 11, capital markets are also evolving and the world is becoming more global in its investing view, so you really need those insolvency regimes to have adequate tools. That’s changed the game.

It all seemed to me to start around 2012/2013 as we came out of the Great Recession. The pace of the change was so rapid that it was fascinating. I developed a rating agencies-like rating system for the different jurisdictions around the world, with one being desirable and five being less desirable. I could constantly monitor and update those ratings given the speed of change, especially in the early years.

What kind of work does KRyS Global do?

We work on asset recoveries but one of the key tools we use to uncover information is insolvency proceedings. We are often appointed to be the holder of the ring – the trustee, liquidator or administrator, or the controller of various entities where a timeout needs to be taken and assets need to be overseen. That could just be a straightforward insolvency assignment, which we do many of, or it could be an asset recovery exercise.

One case that is keeping us busy is Fairfield, which was the largest feeder fund into the Bernie Madoff Ponzi scheme. There’s currently a decision pending in the Second Circuit that we expect will clarify the extent of assistance the US Bankruptcy Court gives a foreign representative under Chapter 15 of the US Bankruptcy Code.

The foremost issue is whether it is appropriate to apply the bankruptcy code limitation on domestic avoidance powers to curtail the liquidators’ claims under foreign law seeking to avoid foreign transactions and whether it can be squared with the relevant statutory text, the presumption against extraterritoriality, or the broader purpose of Chapter 15.

Those arguments were heard in April 2024 and we’re awaiting what we anticipate will be a precedent-setting decision.

What other type of work do you do?

We do a lot of creditor-side advisory in the US. There’s a light trend of non-US debtors filing for Chapter 11 in the US in situations where all or essentially all the creditors are based outside of the US.

In those cases, you have to prove venue, which these debtors can often do. They may want to do this because creditors maybe less inclined to participate by way of a committee because of time and distance. If there’s anything that’s potentially fraud-related, that might be a good strategy for a debtor, to keep non-US creditors out of the game. I keep a sharp eye open for situations like that; when I see a filing with a large roster of non-US creditors on top of the creditors list, I usually reach out and ask for their perspectives.

We recently had a Singapore debtor file for Chapter 11 in the Northern District of Texas. Eventually, there was a creditor plan that was filed, which resulted in a litigation trust and I was appointed as the litigation trustee. Now the trust is pursuing various management and directors who we assert absconded with funds from the company.

The fastest growth area for us is what I call the “judgments practice”. This fits our theme of being able to put skin in the game. Where there’s a judgment creditor who is looking to recognise and enforce a judgment in various jurisdictions to recover assets, we look at those judgments and do a preliminary asset search to see if we can ascertain where the judgment debtor might have assets. If it makes sense, we put skin in the game. There’s a number of ways that we can do that. There’s obviously going to be legal fees involved; there’s our time involved; and there’ll be other fees involved in having those judgments recognised and enforced.

It’s become a nice practice for us and it utilises a number of different skills: whether they relate to litigation, asset tracing or whether we look for a court appointment of some sort.

Litigation support is another area that is a natural extension of what we do. We can do that through asset tracing, valuations, expert reports or through court testimony. That’s all supported by our robust forensic technology practice, which involves the collection, analysis and presentation of data.

Liability management exercises are a hot topic in the US right now. Have you seen any of these transactions playing out in other jurisdictions?

As a general proposition, I think creditor protections are going to be more heavily negotiated going forward. Investors are really coming to accept that LMEs are part of the landscape.

Thinking about being at the deal table in the next year, I think a lot of those discussions will revolve around whether the issuers are going to be allowed to have any unrestricted subsidiaries at all, whether there are going to be levels of allowable debt, levels of liens, investments and restricted payments.

There are two factors that really weigh heavily on what the future holds. First, modern finance is a living, breathing thing. It’s only been around for a little more than 50 years; there’s still plenty of room for innovation, which we see all the time. That’s what LMEs really are.

But the other side of that coin is that there are always winners and losers. When we break it down, an enormous amount ofwealth has been generated in this country in the post-World War II period and that money needs to be invested somewhere.When I think about being at the deal table in those negotiations, the balance still favours the issuers.

My experience from Wall Street is that investors will usually hold their nose in exchange for an extra 25 to 50 basis points fora new issue or to be part of a deal. And the advisers and lawyers are going to be the people who benefit from that down theroad. That’s probably true regardless of the jurisdiction.

What other trends are you seeing?

Creditors, particularly in the US, have caught on to exactly how expensive bankruptcy is. The result of that is the time to resolution has notably shortened across the board. I think we’ve all seen the length of pre-packs shortening. A lot of folks are trying to get those processes down to a matter of days as opposed to weeks or months, which we would have expected back in the day.

Out-of-court resolutions are much more commonplace too. These are all aimed at shortening the time to resolution and therefore reducing the cost of insolvency. It’s one of the reasons why I really enjoy where we are because advisers that are positioned for an evolving landscape are the ones who are creative and flexible.

It’s not just about reducing costs. It’s about making sure you get a good or sustainable result, and rewarding those who are putting skin in the game and helping you to get that result. I think all the changes are positive for firms that can be more flexible on their engagement economics.

If you were investing in distress right now, where would you be looking?

I would be constantly evaluating the rulings in various jurisdictions that have implemented new insolvency regimes over the last decade to see how the written law is being applied. My focus would be on whether I would get a fair shake as a creditor in each jurisdiction.

It’s often the case that these jurisdictions are trying to develop their capital markets to bring more capital in as the economy becomes more global, notwithstanding the current administration in the US. You really need to look at jurisdictions with a strong rule of law, and right below that you need an insolvency regime that’s been tested so you can try to predict outcomes.

I think there’s also a lot of room for litigation finance to evolve as an investable asset class. There are some really sharp restructuring attorneys and others out there right now working on how to possibly syndicate funding deals. There are challenges with that but if they’re able to get there, or even if not, the increasing acceptance of finance-litigation funding could open up new markets in the space.

Portfolio deals are becoming more commonplace as well; it helps diversify risk. I might have a couple of matters that touch on Asia and some deals in the portfolio that are facing longer-standing jurisdictions with better recovery prospects in Western Europe or in the US. If you can put together portfolio deals, these will present new opportunities for nimble funds to be able to invest.

What challenges are facing restructuring insolvency practices at the moment?

One of the biggest things is the dearth of truly seasoned restructuring professionals in all parts of the business, whether it’s on the advisory side or the investing side.

We haven’t had a true downturn since 2012 and several of my clients have heads of restructuring who started their careers in2014. What have they really seen? There have been some seminal cases, depending on the jurisdiction, and a lot of mass tort cases recently. But nobody has seen in recent times the full-scale recession that we saw more than a decade ago. Those downturns in the economy really provide ample opportunities for mere deckhands to grow into seasoned captains. That’s one of the biggest challenges.

On the private credit side, the investors are going to feel that challenge the most at some point because they don’t really have the restructuring capability on staff.

There are folks of my vintage who’ve probably been around for 25 to 40 years, and I’m concerned that after that, you’ve got really smart people, but they may not have the same distressed or workouts experience. But the positive is they’re more sophisticated and more savvy with a lot of the other things like the financial innovations that have occurred in recent times.

Given you regularly work across time zones, how do you try to maintain a work-life balance?

I guess it’s all in how you define work-life balance. To me, that means finding a work situation that is your passion, such that you don’t really have to draw a distinction between the two.

It’s difficult; you have the needs of your client that you always have to put first. Working at a global firm in multiple time zones, that means a lot of evening calls that can run well into the morning and a lot of Saturday morning meetings when folks are coming in from Asia.

It’s anything but a nine-to-five job, so you make time for the things that are important and fit everything else around that schedule. So I may choose to do something of a personal nature in an afternoon because I know for the following three days I will have calls starting in the evening. It’s about flexibility while still getting the job done.

But that is also the thing that makes the job enjoyable. In one of the cases I worked on, I was helping a liquidator determine whether to file liquidation proceedings in Cyprus or Tanzania. Having to deal with folks on the ground in those jurisdictions to really ascertain how the system works and what that liquidation could look like in those two regimes, that was worth the extra hours. The reward is in the work.

What kind of hobbies are keeping you busy when you can get away from the desk?

Giving back is very important to me. I am currently the president of a university-affiliated foundation board. The university is looking to open a college of osteopathic medicine that’s aimed very squarely at addressing a shortage of doctors in rural Pennsylvania. So that’s a very exciting endeavor to support that will hopefully make a difference.