The worst global recession in generations has not produced the amount of insolvency work that was predicted. Even as entire countries go bankrupt, specialist lawyers report being nonplussed that the expected levels have not materialised and, after an initial blitz, work in many jurisdictions is scarce.
The US market was described as “quiet”, the workflow in London as “lumpy”. The “bread and butter” bankruptcy work that once sustained large firms has dried up due to easy access to further debt, which has allowed many companies’ issues to be swept under the rug for the time being. Mid-market firms are seeing fair levels of bankruptcy work but these are much more commoditised than in the past – and less lucrative. Work for larger firms has migrated to the periphery of the sector, and the nature of this practice area – and how it is addressed by the leading firms – has changed.
The pre-eminent lawyers selected in this edition will be experienced in one or more of the four predominant types of work in this sector: severely distressed rescue financing work; general restructuring; bankruptcy; and investment opportunities arising from distressed companies. A single case can cover all four areas and span multiple countries in the course of its lifetime, and the number of firms with the capacity to meet such broad demands is narrowing.
Access to refinancing is so cheap and easy that there is very little defaulting in general, but restructuring has been busy. Several industries were flagged up as active in this respect, with real estate, financial institution and (in particular) shipping clients cited as sources of considerable work. The maritime industry was described as having “a cocktail of problems all of its own”, including oversupply and depressed rates. Disputes work continues to keep many busy, although a trend towards voluntary mediation was mentioned, driven by clients looking to avoid the cost and uncertainty of litigation.
Bank-related work is an increasing focus for many of the lawyers we canvassed, and in especially hard-hit countries such as Greece it can form the majority of the work being done at the moment. Historic cases, such as BCCI and Lehman Brothers, continue to fill the days of a significant number of lawyers, and for those firms with existing banking clients there is considerable work to be found. Financial institutions are looking to divest and portfolio sales are said to be very active this year – as one lawyer said, “If you are lucky enough to be on the panel for these you will be very busy.” However it was noted wryly that this type of work cannot continue indefinitely.
On the other side of these deals, investment work in this area is booming around the world, particularly on behalf of funds. In the US, lawyers reported that traditional Chapter 11 work has all but been replaced by a focus on “363 sales”, using the provisions of Section 363 of the Bankruptcy Code to facilitate the sale and purchase of assets and distressed loans, for which there is a formidable appetite from the funds. Firms that traditionally represented banks have found their practices greatly changed in recent years, and it is now unusual for the original lender to still be participating in the plan by its conclusion as funds buy into secured debt.
Working for funds is said to make different demands of lawyers than working with the bank clients that they were previously used to, with funds bringing a more aggressive attitude (“If you bought at 65 per cent your attitude will be very different than if you bought at 100 per cent”) unburdened by PR considerations and shareholders and with a more international outlook. Investment in UK debt is said to be a “very trendy space at the moment”, with many US funds taking advantage of opportunities that have now predominantly been grasped in the states and bringing work for lawyers at firms with US fund clients. Lawyers in this sector anticipate an even greater geographical spread to this work, as funds increasingly invest into Asia and demand that their lawyers act as international advisers, rather than domestic counsel.
It was also widely reported that clients, and banks in particular, are becoming even more cost-conscious and sophisticated in their attitude to legal spending. The current view was summed up as “a lot of pressure on pricing; quality is expected to be a given; and response rates need to be 24/7 across the globe”. The use of formal and informal panels by corporates is on the up, while banks are seen to be driving down costs and demanding an ever-greater number of secondments from their law firms. Financial institutions were also reported to have actively grown their own in-house legal capability, which impacts on the amount of work that is available to private practitioners.
Across the globe banks are said to be “tooling up” in this respect, and with the exception of the biggest-ticket restructurings they are much more selective about what work is referred externally. This exception is a major one, however, for when the mega cases arrive the largest financial institutions and governments are not so focused on fees and do not require deals. “There are only certain lawyers that can do the work,” reported one source, “and they are happy to pay to get them.” At the top end of the scale this is still an attractive practice area for firms, due to the rates they can charge and the recovery that can be achieved on them.
Operating in these changed times, the legal market has been reshaped by the new pressures it is under. In the frenzy of 2008 the market grew as many lawyers and firms put themselves forward as experts, moving from the quieter M&A practice into the restructuring sector. There was an outside perception that it can be difficult to define precisely what constitutes a “restructuring lawyer”, as the “amend and extend” work that remains so popular can be done by more generalist transactional lawyers, and litigation arising from bankruptcies often does not require specific insolvency expertise and can be done by the firm’s litigators. Banking lawyers are increasingly required to have in-depth restructuring expertise, and we received reports of many banking lawyer “resprays” doing this work in recent years.
However, the number of reorganisations has fallen away in the intervening years. We received reports that the number and size of assignments have decreased further since 2011, although both are now said to have stabilised. Some firms kept their insolvency practices purposely lean, and it was generally agreed that while the number of lawyers in the field has fluctuated the best lawyers in the sector have been and will continue to be in demand. Within the industry today there is recognition that the most sophisticated work in this sector “is not something that anyone can do”, requiring not only expertise in restructuring work but also familiarity with a range of other practice sectors. The market has moved away from the recent arrivals due to the scarcity of the work and the complexity of what remains.
“When you have a bank going under,” as one expert put it, “you call the really big hitters”. Further down the scale the remaining work requires a high level of sophistication from firms and individuals; the days when a firm could cover a major case with a team cobbled together from other practice groups have passed. Firms’ focus on the sector is growing as they look to service existing clients on asset finance work and the restructuring of existing deals, as well as expecting the restructuring practice to help win new mandates and to feed work into other groups within the firm. Whereas once the insolvency practice was regarded as the “stepchild of the firm’s finance practice” in the words of one nominee, now it has its own focus and firms are looking to grow. Younger lawyers are selecting the sector to specialise in, and the skills and expertise of the leading lawyers we list are becoming increasingly valuable. The cooperative nature of restructurings requires an attitude on the part of insolvency lawyers that is not always found in their transactional counterparts, and while “amend and extend” is currently restricting the amount of work in this sector, the time will come when the policy will change and these “zombie companies” will need to be dealt with, which will require insolvency specialists.
Alongside this refined set of requirements on individual lawyers, servicing clients in this sector makes a range of demands on the firm as a whole. A single mandate can evolve through various incarnations, from restructuring to bankruptcy and investment, with assets and investors based across the world. Work that is exclusively on a national basis is becoming ever-rarer, and a cross-border presence is correspondingly more important.
The international dimension of this practice area is demonstrated by the success of US firms moving into the London market through lateral hires, mergers and new offices. Exploiting a gap in the market left by local firms with historic ties to domestic banks and hence conflicted out, US firms have built on the strength of their relationships with US funds to build up significant London practices in recent years, as reflected by the make-up of our list. While the work coming down from the UK government and major financial institutions remains the province of the pre-eminent local firms, the new investment opportunities being pursued by international funds is providing another very valuable stream into the London market.
In order to handle the biggest mandates in this sector a firm will need a wide waterfront and be able to offer clients ready access to regulatory, litigation, finance and corporate expertise in addition to proven restructuring experience, and to offer all these services on an international basis. In order to secure a steady stream of instruction and to maintain a specialised team in this sector, firms need to draw upon work from more than just their own country, or indeed their own continent. As deals move around the world and away from the previous centres firms will need to adapt to secure the work, and niche firms may find themselves caught between the international requirements of the largest cases and the increased commoditisation of lower and mid-market work. We received reports of a trend towards larger firms combining with their smaller regional counterparts for smaller mandates in order to provide the value that clients are increasingly demanding. A significant consolidation in the legal market was predicted, with only a few firms able to meet the myriad requirements of clients in this sector.
Looking ahead, there is the expectation of higher levels of work. In the past, this practice area has been at its busiest when the economy is in recovery and money becomes available to address the underlying issues; with cautious optimism returning to some major economies, those days may not be too far away. Similarly, the low interest rates most countries are currently experiencing are concealing a multitude of problems, and when they rise they will be revealed as companies are unable to meet their obligations.
Several lawyers around the world – and particularly in Europe – mentioned the possibility of changes to their local regulatory regimes, and such amendments would generate much demand for advice from clients. Opinion was divided over the continuing preponderance of “amend and extend”, with some citing anecdotal evidence that attitudes were hardening but others seeing no signs of change in the foreseeable future. Some see warning signs in the conduct of businesses, suggesting that the mistakes of the past – lack of covenants, bad loans being underwritten, inappropriate pricing for risk – are being repeated and will have similar ramifications in the future. Many companies remain highly leveraged and have taken on a lot of debt in this low interest rate environment without a sufficient cushion of equity, suggesting the potential for more big bankruptcy work when the rates rise. The casino industry was cited as one to watch, as were the real estate and health-care sectors. Municipal distress is another growth area, with cities and pension funds overspent and vulnerable.
On a sovereign level, the distress in the EU estimated at being five to eight years from solution so many opportunities for work remain, and the recent issues in Cyprus with the government’s controversial bank deposit tax demonstrates that there remains new aspects to be uncovered in this sector. On a worldwide basis, there are several potential sites for further work. “If the eurozone goes down then I’ll need to get a bed in the office,” was how one London lawyer summed it up, while it was suggested that Asia could follow the US and Europe’s path into difficulty. There remains the possibility of another seismic event – on the level of a major financial institution or country – which could send a Lehman-sized shock through the market and act as a catalyst for even more work in the area. However no one saw these coming last time and are unlikely to be able to predict them again, so the world’s companies, governments and leading lawyers alike are waiting to see what the future will bring.