Who’s Who Legal has brought together Constantinos Klissouras of KP Law Firm, Michael Pluta of Pluta Rechtsanwalts, Mark Traynor of A&L Goodbody and Donald Bernstein of Davis Polk & Wardwell to discuss the type and volume of work they have been seeing, the impact of possible rising interest rates, the trends for out-of-court or pre-packaged insolvencies and private equity involvement, and the legal market in their jurisdictions.
KP Law Firm
Davis Polk & Wardwell
WWL: We have received mixed reports on the volume and type of work seen by practitioners over the past year. While some (such as those in the UK and US) have commented on a very quiet year in terms of traditional bankruptcies, others (notably those in Asia and the Middle East) have described themselves as being exceptionally busy. How has your practice been over the past year? Are there any particular changes in regard to the type of work you have been seeing?
Constantinos Klissouras: Greece has seen an immense number of SME and consumer bankruptcies over the past three years as a result of the fiscal and generalised financial crisis. Most of these businesses were from the secondary and tertiary sectors, and receivables were almost invariably the main or only asset. In consequence, efforts to liquidate, ie, collect on those receivables, have amplified a domino effect in a highly leveraged economy. By contrast, larger restructuring and privatisation work has been slow, as a direct consequence of political uncertainty and the absence of domestic finance caused by the collapse of the banking system. What is striking, even if partially explained by cultural factors, is the hesitation of international distressed investors to pursue non-consensual acquisitions of operating assets at deeply discounted prices through insolvency proceedings.
Michael Pluta: Since 2009, the height of the financial crisis, the German market has seen a continuous decline in the number of corporate insolvency proceedings, with 2013 seeing at least one-third less in terms of number of insolvencies compared to the peak period. Additionally, the size and scale of corporate insolvencies have become smaller with fewer big companies filing. Our own practice has basically seen a stable inflow of cases in terms of numbers, in terms of scale, we see the same trend as the general market.
Mark Traynor: We have noticed a reduction in the number of formal insolvencies taking place such as court liquidations. The market has been extremely busy on the loan sales side and we have been very busy on that front as well as on a number of examinerships and enforcement type work. Since January 2014, the level of enforcement work has reduced due to the fact that loan sales have only completed and purchasers are reviewing and working with borrowers on the loans purchased and so have not needed to use enforcements much.
Donald Bernstein: Activity levels for insolvency professionals in the United States are certainly lower than they have been over the past few years. Among other things, many over-leveraged firms have been able to refinance at low interest rates or even raise equity, which has permitted them to defer or entirely avoid restructuring. Still, there have been a number of domestic and cross-border restructurings and bankruptcies that have kept activity levels reasonably high for many practitioners. These include James River Coal, OGX, City of Detroit, TXU and Lightsquared. In addition, some US firms have been advising large financial institution clients on “resolution plans” required to be submitted to financial regulators under the Dodd-Frank Act. Also known as “living wills,” these are detailed plans for the orderly restructuring or wind-down in insolvency proceedings of distressed systemically important financial institutions.
WWL: With low interest rates concealing a multitude of problems, many companies have been able to survive the economic turmoil of the past few years. However, with economies improving this is expected to change and lawyers are predicting a strong flow of work. Is this something you are expecting to see in your jurisdiction? Are there any other developments you are expecting that could have a strong impact on the volume of work?
Constantinos Klissouras: Low interest rates have not operated as a cushion for any but the best Greek businesses over the past few years, since virtually all domestic lending dried up as a result of the Greek crisis. On the eve of general economic turnaround, rising interest rates will no doubt impact the feasibility of restructuring some debtors. However, with their recapitalisation now substantially complete, Greek banks are much better placed to take restructuring losses and/or trade away even restructured debt to improve their liquidity and ability to provide new lending. The rate of foreign direct investment is also on the increase, and large classes of formerly underutilised assets (utilities, infrastructure, ports and marinas, tourism assets) are on the market. We, therefore, do expect to see a series of significant restructurings, both in and out of court, from Q3 2014 onwards.
Michael Pluta: Contrary to many other European countries the German economy has been going strong for the past few years and been fairly favourable to industry, although in some sectors output has been less. However, this has not been a major factor contributing to the decreasing number of corporate insolvency cases.
At this time it is difficult to predict if certain measures that the government is implementing will affect the insolvency market. For example, we are unsure yet how the introduction of a new minimum wage of €8.50 per hour will affect the market.
Mark Traynor: We have seen property held debt being worked out extensively over the past number of years but very little “public” work out of trading/SME debt. With the increase in liquidity back into the market we expect to see a marked increase in this type of work, away from the forbearance and extensions that have typically been the norm within the market.
Donald Bernstein: There have been predictions of rising interest rates for some time, but global economies continue to be less robust than predicted. It is possible this may change, but with the amount of money available for refinancing and the likelihood that interest rates could continue at relatively low levels for a considerable period of time, the predicted resurgence in restructuring activity may be further off than some people think. As a result, restructuring and insolvency professionals should plan for a continuation of the current very competitive environment for new work in the short and medium term.
WWL: In countries around the world the insolvency process is speeding up as clients want to spend less money. Are out-of-court or pre-packaged insolvencies on the rise in your jurisdiction? If so, what impact is this trend having on your practice?
Constantinos Klissouras: Out-of-court restructurings – or, more accurately, “extend and pretend” arrangements – have been ubiquitous in Greece for the past three years. The few viable debtors, which have been successfully restructured at the peak of the crisis, have indeed benefited from pre-packs, not so much because of process cost savings, but predominantly by pre-empting loss of goodwill and the deterioration of business terms enjoyed from trading partners.
Michael Pluta: The ESUG, the law on the improvement of corporate insolvencies, has introduced a change in the market. There are more shareholder and owner-driven insolvencies than we have previously seen, many of them ending with insolvency plans. We see more debtor-in-possession cases and also the number of out of court restructuring has increased. Our practice is adapting to these market trends.
Mark Traynor: The level of pre-packaged insolvencies remains low but it would be our view that this should increase. Ireland already has a well-established out-of-court liquidation process (creditors’ voluntary liquidations) and the level of these has remained constant. We are involved in both types of scenario as part of our practice.
Donald Bernstein: This is a continuation of a long-standing trend in the United States. Speed is all-important, and debt trading moves claims into the hands of investors who can make quick decisions and want quick results. Out-of-court restructurings and pre-packaged bankruptcies are going to continue to be done in the US. Another trend of note is the increasing number of quick sales of companies promptly after the commencement of bankruptcy proceedings. On the one hand, many bankruptcy cases commence with little (if any) value remaining for unsecured creditors and with no ability to provide adequate protection to secured creditors for the use of cash collateral. On the other hand, US bankruptcy judges are increasingly wary of quick sales and are pressuring parties to assure that companies are adequately shopped. Courts are also strictly construing the scope of liens (as was done, for example, in the Rescap case), and taking steps to limit secured creditors’ rights to “credit bid” (bid their secured claims in competition with cash bidders) in quick sales (as was done in the Fisker case).
WWL: We have heard reports of banks taking a back seat and private equity houses and distressed debt traders playing an increasingly important role in this sector. Is this something you are experiencing? What impact has it had on your practice and the market?
Constantinos Klissouras: Absolutely. International investment banks have started to divest smaller debt positions in peripheral jurisdictions at least five years ago, either formally, by trading their debt outright, or informally, by hedging their exposure through funded participations of private equity funds, thereby becoming, in effect, agents for lender syndicates. In addition, the small size of most Greek businesses makes this market a natural playground for more agile and hands-on private equity investors, who can enjoy significant tactical advantages over larger institutional lenders, including domestic banks.
Michael Pluta: We can confirm that there has been a trend in Germany for banks selling loans to other market players. Since this does not take the risk out of the market, the need to work out problems has changed – but not the need for workout. New players have entered the market.
Mark Traynor: Ireland has seen a significant influx of private equity funds buying distressed real estate debt and so in that market they are very important players. They have not been as actively involved to date on the trading side where the banks are still the main players. The only impact it has had on our practice is working with new clients and building those relationships.
Donald Bernstein: There is no question that activist investors have in recent years taken leading roles in many bankruptcies and restructurings in the United States and abroad. Even where traditional banks are the initial lenders, bank debt trades and many if not most of the investors at the time of bankruptcy are secondary purchasers. The involvement of these stakeholders is a positive development when they are willing to become restricted and take an active role in negotiations to resolve the bankruptcy case. These investors have very different attitudes from traditional lenders because of their greater willingness to take equity of the reorganising debtor (the “loan to own” phenomenon) and because of their willingness to make quick decisions. While disagreements among activist investors sometimes lead to lengthy and litigious cases, for the most part disputes are resolved through negotiation. On the other hand, there have been cases where deals have been painfully negotiated only to have those deals fall apart when debt changes hands before the deal is approved and implemented. One way or the other, large bankruptcy cases in the US have become more a change of control transaction than a creditor collection device, and this phenomenon is here to stay.
WWL: The legal market is much more competitive than in previous years, with a much greater pressure on fees, according to many of those we spoke to. Is this your experience? How has your firm adapted to meet this challenge? What do you foresee for the legal market in your jurisdiction?
Constantinos Klissouras: We created this firm in 2011 as a specialist practice with this very competitive future in mind. Our experience and the feedback we receive from our clients leaves no room for doubt that, where larger work groups composed of generalists would add costs, specialists leveraging technology can add value. We work as closely as possible with our clients and their general counsel, and place great weight on fact finding to determine where the value of each matter truly lies, and what particular actions and services will deliver the highest impact on the client’s business objectives.
Michael Pluta: In-court insolvencies have a fee structure and at the end of the case the court decides on the fee for the insolvency administrator. Therefore price competition is not an issue in that sector – yet. There are activities to give creditors a higher influence on insolvency administrator fees than at present.
Mark Traynor: There is significant pressure on fees in the market and we have seen some firms quote rates which are simply not sustainable. We have worked with clients to come up with fee arrangements tailored to their legal needs – whether this means fixed fee arrangements, discounts for hourly rates or otherwise. We expect that with clients seeking to reduce costs in their businesses, pressures will still remain. However, of more importance to clients is the experience and knowledge to ensure the work is done well, rather than solely concentrating on cost.
Donald Bernstein: The legal market in the United States is as competitive as it ever has been. However, this can be a win-win situation for law firms and their clients because lawyers are incentivised to find ways to deliver services more cost-effectively. Most legal work in the U.S. continues to be done on a traditional hourly basis, but sometimes more creative pricing models are being tried. Properly structured, this can be advantageous for both the client and the lawyer. There is no doubt that law firms will have to continue to be creative about cost-effective service delivery strategies if they are to succeed in the current competitive environment.