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| Claude Baum |
Claude Baum is general counsel at Ore Hill Partners LLC advising the hedge fund manager on credits and investments and providing guidance on of compliance and legal issues. Prior to joining Ore Hill he headed the distressed debt practice at law firm Brown Rudnick Berlack Israels, doing credit advisory, settling trades and advising clients on market issues. Baum has a J.D. from George Washington University and a B.A. from the State University of New York at Albany. He is active in The Loan Syndications and Trading Association, including its Forms Committee and Cross-Border Working Group. Ore Hill was founded in the spring of 2002.
Why did you decide to switch from a law firm to the buyside?
I was a law firm lawyer for over 20 years. That career gave me a lot of opportunities, challenges and rewards, not the least of which was the chance to work with a lot of very smart, motivated people. It also allowed me in my small way to contribute to something quite large and important: the building of the secondary loan market. But 20 years is a long time, and I wanted – needed -- to try something new. The hedge fund business is also young and growing, and I view this as another learning and building opportunity.
I'd been working with Ore Hill as their transactional lawyer since almost their inception. I always like their people, and they are very good at what they do. When I started thinking about making this change in my career I thought of them first. Thankfully, they came up with the same idea at virtually the same time. I'm sure you heard the one that it is every lawyer's desire to become a client.
Can the market absorb so many distressed debt funds?
This is still a maturing market. The capital that flows in helps to drive the supply coming out, and vice versa. No one knows when and where it will reach its "natural" level. What I do know is that year-on-year volumes have increased each year that they have been measured.
At this point in time demand is outstripping supply, which is helping to drive yields down and forcing money managers, banks and other interested investors to seek out and create new products, new ideas and new opportunities. The proverbial low-hanging fruit has already been snatched.
Is it really in the interest of investors in the secondary loan market to be more efficient?
Of course. The inefficiencies that we have to do with settlement times and expenses and, relative to the securities markets, they are unreal. Quite understandable, given the market's relative infancy and commercial loan agreement origins, but also quite unacceptable for the long-term. The only ones currently benefiting from these inefficiencies are lawyers like me-in-my-former-life – for whom I have the deepest respect and admiration -- and other back-office professionals who would not be otherwise employed. And if you're referring to those buysiders whom I hear about that sit on their buys getting the coupon (through delayed compensation) without settlement, I can't believe that that is a strategy that keeps people in business.
I have always believed that you cannot stop progress. With the help of the LSTA and dedicated professionals, this market is becoming more efficient every day. That can only help the market reach its natural level. The capital markets serve a social function and the loan market is no exception. The sooner we can get free it of the constraints to attaining that level, the sooner it will serve that function. One could argue that increased efficiencies will tend to tighten yields, but that does not mean that secondary loan market participants are disserved. Hard work and good research will always pay off.
Do you see the role of lawyers being reduced?
There will come a day when virtually all required documents have been vetted and produced through the LSTA and effectively universally accepted in the market place, and at that point lawyers will not needed to settle trades except in extraordinary circumstances. That is a lot of the "progress" that is unavoidable. I happen to think that that time is 10 years away, at best. We have made a lot of progress, but it has been somewhat slow and painstaking. And that's only because there are so many of us so busy dealing with the ever-increasing volumes. What has also kept this market inefficient is the fact that the volume has consistently outstripped the capacity of the infrastructure – that is, trained and experienced professionals.
Lawyers' involvement is vitally important right now not only to settle trades but also to make sure that the market "gets it right" in developing the current forms and conventions. But ultimately, yes, many lawyers currently practicing in this field will have to move onto the next big thing.
As a distressed investor is it better to be on the private side rather than in the public side and is the loan market moving more to the private side?
Most of buysiders I've dealt with have been private side, and that seems to be the more rational and comfortable place to be.
Are the changes to the bankruptcy law ill thought of?
I think it is often the case – Sarbanes-Oxley being another – that legislation addressing actual or perceived abuses in complex areas such as corporate bankruptcies does not take into account many practical realities. And as a result, the laws of unintended consequences tend to take over. Whether and to what extent these changes will actually affect Chapter 11 reorgs. is hard too hard predict. I think that there will be a natural tendency to resist some of the changes. Most of the people in the trenches do not necessarily view the old system as broken.
Is the LSTA still progressing on the distressed side in terms of making things easier?
Yes, they are. That is their most important role to play, and they recognize that. It is shocking, in a way, but again understandable, how much the disparity is between the volumes in this market and its importance, on the one hand, and the lack of iron-clad, universally accepted market standards and conventions, on the other. But the considerable progress we have made in the past three- to five years has been through the facilities of the LSTA, and we should all be thankful for that. Progress is slow but is being made.
What will be your involvement with the LSTA?
I will continue working with the LSTA on its Forms and Lawyers Committee. I will also participate on the LMA's Cross-Border Working Group.
Who do you admire in the market, and who has had more influence in the loan market in the last 10 years?
I very much respect my buysider friends, Ore Hill being the most prominent, who through hard-work and smarts continue to make money in difficult market conditions. Of course, our broker-dealers have been instrumental in helping to create the liquidity that has benefited all over these past few years.
Do you think that banks in the coming credit cycle will sell distressed loans as quickly as in the past? Last year, for example, some investors may have sold too quickly and missed some massive gains.
The important thing is that they know they can if they need to. Taking exit concerns out of the equation helps them to make "pure" lending decisions, based on the quality of the credit. And it's just another tool that enables them to manage risk.
It's the inalienable right of all investors to hold on if they want and get out when they want. That's all we can ask for from a market. The rest is up to the investor.
Where do you think the new supply is going to come from?
I think it has been widely reported, including in these pages, that in the hunt for yield there have been fundings that might not have been made at other times, and that this has possibly only deferred the inevitable for some credits. I don't think that this has been limited to certain industries.
What is that you look for in your investment banks?
From our broker-dealers, sourcing paper and pricing.
What is the most interesting situation that you have been involved with?
As a bank debt settlement lawyer it would have to be Boston Generating, which is very recent and ongoing. This particular credit has just about all the contractual and practical roadblocks to a truly liquid piece of paper that you would ever run into in this business. Regulatory approval requirements, relatively high assignment and participation minimums, lack of access to some fundamental data and information. And a colorful cast of characters, to say the least.
Any parting thoughts?
Besides that "I love you, Josh, Ben, Elijah and Rachel – my four children – very much"? I guess it's that I know that there is a solid constituency out there who question the utility and contribution of lawyers in this field. We run into that all the time. Many question why do we need these thick legal documents in the first place? What value do they add? My answer is that no one cares about or really needs to have good legal documents so long as everything happens they way the counterparties more-or-less expected and without dispute. It's precisely when there is a problem that the existence and terms of these contracts become vitally important. Some would reply that that's not an issue hear because, as far as anyone can tell, there has never been a litigation involving these trades or docs. But it is quite possible that they have prevented many. And who is to say that those disputes will never occur. The mutual fund industry had not had a major scandal until about two years ago – Was that a reason not to regulate it? The time when lawyers should and will fade into the background in this industry is coming. Now is not that time.