Morgan Joseph announces appointment of James Schneider as managing director

By Paul A. Harris

St. Louis, Feb. 2 - Although he is a lawyer and an investment banker, Jim Schneider's metaphors tend to derive from the art of medicine.

Morgan Joseph & Co. Inc. announced Monday that it has hired Schneider as a managing director to run its debt exchange offer group.

In that capacity, he said, he will of course administer to "sick" companies, via distressed exchange deals.

However, Schneider also wants to persuade "healthy" companies of the virtues of debt exchanges as "preventative medicine."

He claims to have invented the debt exchange back in the 1980s and 1990s while working for the specialized restructuring groups at Drexel Burnham Lambert, Inc. and at Smith Barney, Harris Upham & Co.

That invention grew out of frustration with conventional distressed tender offers where bondholders who held out often did so based upon a belief that their outcome could be far superior to those who tendered at distressed levels.

"You have to make the difference between the untendered securities and the tendered securities relatively small, or you have to make the new security be superior to the old one," Schneider counseled.

"One of the classic ways to make the new securities senior to the old is the exit consent, which I also happened to invent.

"When the bondholder tenders his bond in order to go into a new bond, the second before he tenders he waives his indenture protection. And one of the primary indentures that he waives is one that allows his new bond to be senior to the people who don't tender, so that suddenly people who tender have a superior claim in bankruptcy to the people who don't."

Healthy exchanges

While he concedes that distressed exchanges tend to be coercive, Schneider insists that exchange deals undertaken by healthy companies need not be so.

"When you do a deal for a very troubled company you have to use a combination of carrots and sticks, such as jumping the seniority," he said.

"When you are doing an exchange for a healthy company there is virtually no stick. Those exchanges are voluntary, and the buyside will be very pleased about them."

Schneider says that the problem with exchanges run by investment banks that are also the underwriters of the bonds being exchanged is that the investment banker has to decide if he's on the issuer's side or the bondholder's side.

"That's why Morgan Joseph fits in so well - because we didn't place the securities, and we will be able to clearly demonstrate to the issuer that we're on their side."

Finally, although there is said to be a vast amount of exchange/restructuring business that needs to take place, Schneider believes that this far into the present business cycle much of Wall Street is still getting up to speed on how exchanges work.

Part of what's missing is expertise, he contends.

"If you need brain surgery you might not be very well served by going to get it from a general practitioner," Schneider said, once again seizing upon a medical metaphor.

"The exchange offers that have been done to date have been done by general practitioners, not brain surgeons."

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