With the benefit of over 15 years of research and tens of thousands of votes from clients and private practitioners, Who’s Who Legal takes a closer look at developing trends in the insolvency and restructuring legal marketplace worldwide.
In these straitened times for the legal profession, one would assume that insolvency and restructuring practices would get busier even as work drops off elsewhere. This has proved true according to our findings in recent years, but perhaps not to the extent many would expect.
In the face of the first instalment of the current global financial crisis in 2009, bankruptcy lawyers stood ready for an expected “tidal wave of work”. By general consent this huge level did not materialise to the levels expected, to the surprise of the market, and the increase that did occur has been followed by a drop in activity. One nominee summarised recent times by saying: “We went through a cataclysmic phase, and then things were quite a bit slower than people would like, and now they are picking up again.”
The nature of the work has also not matched the previous expectations of the leading exponents. In London the market was variously described as “very jittery” and “surprisingly sluggish”, with many reporting a reduction of the more routine work that was previously the bread and butter of restructuring practices across the city (a situation mirrored down the corridor in many of the firms’ finance practices), and more emphasis on large, “slightly unusual” cases such as those resulting from the demise of Lehman Brothers. While levels are said to have picked up since the beginning of 2012, it is still not up to the heights that were once predicted.
Internationally, the feedback was much the same. In Asia there were reports of a general increase in work, but not as steep as had been either predicted or experienced in the wake of the dot-com bust. In the US the story is much the same, with the market characterised as “incredibly lumpy”. The statistics compiled by the American Bankruptcy Institute on business filings show a huge spike of over 60,000 in 2009 – more than twice as many as in 2007 – but this figure dropped to 47,806 in 2011. This fluctuation in workflow led to a similar pattern in the number of US lawyers selected for inclusion in our recent editions: a high point of 172 nominees in the 2010 edition, which has now fallen back to 149 in this edition. The status quo is counter-intuitive: “There is far less work than in the last recession, which wasn’t nearly as bad as this one.”
The reasons for this are manifold. Much can be traced to the attitudes of the banks, which, collectively, have widely been seen to be following an “amend and extend” policy to avoid forcing their defaulting borrowers into bankruptcy, as they are not currently in a position to sustain the losses an alternative attitude would entail.
As it traditionally requires an absence of refinancing in order for companies to ultimately fall into restructuring, the low interest rate environments many are operating in, as well as the conservatism of banking institutions and a lack of yield in other fields has seen fewer defaults than in the past, with a consequent dampening effect on the levels of work for the sector’s lawyers.
But there is a limit to how patient the banks can be. Lawyers are seeing an uptick in work, as the liquidity in the banking sector dries up in the face of new regulatory requirements such as Basel III. As the money starts to run out, transactional and contentious legal work is picking up.
The shipping industry was by far the busiest sector for those we canvassed. According to Reuters, around 10 per cent of the shipping customers of DNB Bank, the world’s top arranger of shipping loans, have already breached their loan covenant and DNB expects this rate to rise. With the notable exception of American Airlines, the aviation sector has not been the source of work that some thought it would be, but we also received reports of activity deriving from the electronics, energy, hospitality and real estate sectors.
The type of work our nominees are seeing has also changed. Bankruptcy cases are shorter and more often pre-packaged or pre-negotiated, and the assets in question are smaller than in the past. Expense is a primary consideration, and a motivating factor in the avoidance of in court restructurings so, with a few large exceptions, clients are looking to adapt or restructure themselves wherever possible.
The same motivation can be seen behind the reduction in the number of cases that actually reach the courtroom. The proportion of cases settling has been rising for some time, with mediation increasingly common, and the onerous disclosure requirements and other considerations can mean that the stakes are raised so high that the prospect of losing at trial impels both sides to settle in the face of a looming start date. “Unless you are dealing with a seven-figure demand, it isn’t worth going to trial,” said one US nominee.
The clients are becoming increasingly sophisticated, their minds sharpened by economic pressures. This is seen by the reluctance to pursue litigation with all its attendant time and cost implications, and also in a concerted push towards alternative billing arrangements, although there was some scepticism about the extent to which this has caught on. Clients were widely reported to be requiring discounts from their outside counsel, and often receiving them.
Turning to the legal market itself, there were reports of increased levels of lateral movement. The general feeling was one of firms looking to bulk up their practices in this sector, either as a result of a previous scaling back in the face of reduced work levels, or else in expectation of higher levels in the future. There remains a turnover of individuals looking to set up their own boutiques, motivated by conflicts or the increased opportunities outside their current firm, while the UK bar has seen leading figures leave established sets to take their in-demand experience elsewhere and further develop their own practices.
The increasingly globalised nature of commerce has led to a growing emphasis from clients on cross-border expertise from their counsel, and firms are responding. Many lawyers reported more work coming in from other countries than had previously been seen, and on a wider scale firms perceive the need to offer an international restructuring capability as part of their overall service to the biggest clients. This is also reflected in a drive to recruit leading insolvency experts to the local offices of international firms, as well as in the formation and promotion of best-friend networks, where restructuring advice can play a key part. We received several reports of US firms looking to recruit in London, and the redistribution of Dewey & LeBoeuf’s well-regarded bankruptcy practice has also seen some firms augment their reputations.
With a reduction in the levels of court work and a drop in the number of filings overall, we received reports of full-service firms with large restructuring departments taking on more “middle market” cases, with a corresponding squeeze on those smaller firms in the face of heightened competition. A similar pattern has been observed in financial advisory work and other sectors, a consequence of the difficult trading conditions all firms find themselves in.
Indeed, as the downfall of Dewey shows, some firms are being found out as less fiscally sound than had been supposed. Those firms struggling to manage their costs as well as their competitors may find their partners looking to pastures new, another driver behind the aforementioned rise in lateral recruitment. In general terms, our research shows that bankruptcy practices of large international firms are home to many of the world’s leading experts, and there is also significant expertise in the sector’s outstanding boutiques, and these two ends of the spectrum are likely to gain further ground in the market in the coming years.
Looking to the future, the uncertainty that afflicts the global economy makes prediction difficult. Levels of optimism varied depending on where we canvassed; in the US many firms are hiring and looking to expand their restructuring capacity to gain a larger proportion of the high levels of work they expect to continue. There was a general feeling that clients are becoming more prepared to pay for litigation, and that patience from investors is running out.
Others were more equivocal, pointing to the current ease of debt servicing and consequent lack of restructuring work. Oddly enough, an economic recovery would prompt greater activity in this market, as an increase in interest rates would push many potential clients into trouble. Refinancings of two or three years ago are coming around for renewal and may no longer be successful, and the continued uncertainty in the eurozone continues to hold the potential to drive more work. “No-one would say that is over yet,” as one nominee noted. Others commented on what they viewed as an over-commitment in the BRICS countries and a potential bubble that could also burst in years to come.
It is also virtually impossible to predict whether any more huge cases are in the pipeline. One nominee mentioned that his firm had been working for years on work relating to the Swissair and Lehman bankruptcies, and both are “textbook examples of cases no-one ever thought would happen”. Few thought the respective governments would let the companies fall, and in the vast majorities of cases since, they continue to step in. The occasions where they do not can in future lead to huge amounts of work for the lawyers we list here.
In general terms the recovery is predicted to be a “long, slow burn”. While there are unlikely to be huge increases in the levels of work in this sector in the short-term, there is at least the assurance – absent elsewhere – of the current levels continuing for the foreseeable future, and this enables a greater level of strategic planning and expansion on the part of the leading law firms. Market-leading expertise, which has been demonstrated by each lawyer selected for inclusion in the following pages, will continue to be in demand from other firms and clients from a range of industries and countries around the world.