Roundtable: Insolvency & Restructuring
The International Who’s Who of Insolvency & Restructuring Lawyers has brought together three of the leading practitioners in the world to discuss key issues facing lawyers today
Participants
Michael Baxter
Covington & Burling LLP
Washington DC
Robert Chadwick
Goodmans LLP
Toronto
Global Activity in Challenging Times
Who’s Who Legal: How has the economic downturn affected cross-border restructuring activity? What effect is this having on insolvency and restructuring practitioners?
Michael Baxter: I think we are seeing more cross-border restructuring as distressed multinationals attempt to execute comprehensive global restructurings rather than the piecemeal country-by-country restructurings that may have occurred in the past. As a result, restructuring lawyers are becoming more familiar with the new chapter 15 of the US Bankruptcy Code, which is intended to facilitate restructurings in the United States when the primary insolvency proceeding is taking place in another country.
Robert Chadwick: The economy has limited various alternatives for companies which has affected overall restructuring activity. Many Canadian companies have been forced to deal exclusively with existing stakeholders as there have been limited third-party transactions available due to restricted credit markets and limited capital markets. Moreover, a decrease in revenue and overall profitability for many Canadian companies during the economic downturn has increased the need to find restructuring or recapitalisation solutions.
Annerose Tashiro: Before the economic downturn, many restructurings were directed and driven by large creditors who were making every possible effort to analyse and find the forum and jurisdiction that would be most favourable to them. With the rise of hedge funds and PE fund investing into distressed debt and companies, there was a lot liquidity in the market which made many forms of restructuring possible. Typically, distressed companies were even made to bear all associated costs and still could take on the rescue exercise. Often, advice on preparation and drafting concepts, etc, took weeks and months before formal restructuring or insolvency proceedings were launched.
Due to the economic downturn, liquidity in the market has almost dried out. It has become far more difficult for distressed companies to find a bridge or rescue loan and funding for the rescue concept. Many hedge and PE funds left the market and conditions have become much more difficult for companies. In addition to that, due to the worldwide recession, economic conditions worsened and companies faced a much faster downturn and more sudden failure than before.
With less liquidity and time available to plan and prepare restructurings, it became much tougher to rescue companies. Forum shopping is almost no longer seen.
The Fallout from the Financial Crisis: Activity Levels
Who’s Who Legal: What levels of insolvency and restructuring activity have been present in your jurisdiction? Are they as anticipated from the global financial crisis? If not, why do you think this is?
Michael Baxter: While the level of activity has certainly increased, it is not nearly as high as I would have anticipated in view of the depth and breadth of the global financial crisis. While there may be many reasons for this, one reason is related to the fact a large number of bankruptcy filings have been pre-negotiated with the major creditors so that the restructuring die is largely cast by the time of bankruptcy. This means that the battle lines have been drawn and the players selected long before the bankruptcy is filed, and, as a result, the duration of the bankruptcy case is generally shorter. Both of which have the effect of reducing the opportunities for insolvency and restructuring practitioners.
Robert Chadwick: The level of activity for insolvency and restructuring matters has been significant since 2008 and 2009. Canada is affected, directly and indirectly, by the economic downturn in the United States and Europe.
Annerose Tashiro: Levels of restructurings and insolvencies have increased but are now steady. Levels do not seem to have risen as high as anticipated. As the automotive industry was hit pretty hard hit by the worldwide recession, the German government undertook several measures to support the industry and maintain sales. Also, in all business sectors, several government programmes were introduced to keep employees on standby without the obligation to pay salaries which would be covered generally speaking by the labour authorities.
However, as many of the stimulus programmes are coming to an end the question is how this will affect the future of many of these companies.
Litigation
Who’s Who Legal: What trends are you noticing in levels of insolvency and restructuring litigation?
Michael Baxter: The insolvency and restructuring litigation has become both more focused and more intractable. Since many bankruptcy cases have been pre-negotiated with major creditors, the usual litigation with these creditors is avoided. As a result, these creditors line up in support of the debtor at the commencement of the case. But creditors who were not privy to the pre-negotiated deal, or whose oxen were gored by it, feel that they have no choice but to engage in no-holds-barred litigation to challenge the pre-negotiated deal for what they believe to be their fair share of the pie. These creditors often have little to lose because the pre-negotiated deal may have left them with nothing.
Robert Chadwick: The litigation that has been developing over the past couple of years has related to intercreditor matters and disputes over claims, priority and overall recovery between classes.
Sectoral Expertise
Who’s Who Legal: Which industry sectors have been particularly busy for insolvency and restructuring work? How has this crossed over with other legal practice areas in your firm?
Michael Baxter: The global financial crisis has had a dramatic impact on the banking sector. The number of US bank failures has been historic. Since most US banks are in a holding-company structure, the failure of a bank usually triggers the bankruptcy of the bank holding company. This brings into play, and often into conflict, the banking laws and the bankruptcy laws. Increasingly, I am working on multidisciplinary legal teams with our banking lawyers when we are engaged in the context of a failed bank.
Annerose Tashiro: We have been advising and working in insolvency proceedings in almost all areas. However, we did see a lot of restructuring and insolvency work in the automotive industry, in the chemical industry and in the retail industry.
We did not notice any specific change of cross-over with other legal practices as our firm has always provided services as a one-stop-shop for all restructuring and insolvency issues. However, the number and depth of cross-border cases continue to grow, so that our cross-border restructuring and insolvency practice group faces increasing volumes of work and is constantly growing.