Roundtable: Insolvency & Restructuring 2011
The International Who's Who of Insolvency & Restructuring Lawyers has brought together four of the leading practitioners in world to discuss key issues facing lawyers today.
Participants
Robert Rosenberg
Latham & Watkins LLP
USA
Abreu Advogados
Portugal
O'Melveny & Myers LLP
Singapore
Blake Cassels & Graydon LLP
Canada
LEVELS OF ACTIVITY
Who’s Who Legal: Many interviewees note that over the past twelve months the level of activity in this practice area has fallen due to a reduction of large filings and restructurings following on from the financial crisis and increasing liquidity in the market. Is this true where you are based? Why? Has the type of work you have been doing for clients changed in any way?
Robert Rosenberg: The capital markets have been amazingly frothy, and interest rates remain at an all time low. That combination of factors means that almost every credit that might otherwise have defaulted is getting refinanced in the capital markets. The major banks have pushed out the maturity wall to 2014. Therefore, absent of a substantial rise in interest rates or a force majeure event that upsets the capital markets, there is little reason to believe that activity will pick up in the near term. Accordingly, much of the current practice has shifted to the transactional side, where we help the finance lawyers structure deals to avoid bankruptcy traps in the future.
Miguel de Avillez Pereira: It is correct that the level of activity has decreased but the reasons are somewhat different in Europe. Actually, the increase in the interest rates and the difficulty in access to credit is the spectrum across many countries within the EU. There have been just a few large court filings. What you see is major reorganisations in large companies, ranging from disposal of non-core business units to redundancies and downsizing of international operations, particularly those less profitable or based in more risky jurisdictions. Most of the activity is therefore distressed deals and business reorganisations. But the scenario can change dramatically depending on how the more distressed economies in the Eurozone will operate and the euro will behave in the near future. Certainly the banks are in the frontline of the exposure to this uncertainty.
Bertie Mehigan: In Asia, levels of activity have slowed due in large part to the abundance of liquidity in the local markets. Australia has been active but most commentators believe that the peak has past. The immediate opportunities may turn out to be in China - where a number of situations appear to be emerging due to concerns around lack of disclosure and transparency.
Steven Weisz: The levels of formal insolvency filngs have decreased in Canada as well, however there has been increased activity in respect of acquisitions of debt, either secured or unsecured, as holders of cash are looking for buying opportunities. It may be that participants see more upside potential in acquiring debt at a discount rather than advancing new funds to a distressed debtor, especially since interest rates are at historically low levels in Canada and it appears unlikely that rates will increase significantly, if at all, in the near term. Subordinate participants in the captial structure may also be prepared to refinance senior debt to protect their initial investments and work with debtors to restructure their financial affairs outside of a formal court process that could be costly, disruptive and time consuming.
LEGAL MARKET
Who’s Who Legal: Do you expect law firms to experience declining revenue streams in this field? How are lawyers adjusting to changes in work flow? Which countries are providing increasing sources of work?
Steven Weisz: I do not expect law firms will necessarily see declining revenue streams in this area. This field of law has historically been cyclical and even if activity becomes lower in certain aspects of the field, there are still many opportunities for restructuring and insolvency lawyers to apply their expertise, including assisting in the structuring of M&A or lending transactions, the acquisition of distressed debt or businesses, advising on tax priority or pension deficit issues, or becoming more involved in commercial litigation that may be related to insolvency or civil fraud matters. Lawyers are adjusting to changes in work flow by assisting in other practice areas at their firms or expanding the scope of their expertise to take into account the changes that may be taking place in the economy and the capital markets. The United States has become a very significant source of work for Canadian law firms as almost all major lending or acquisition transactions and restructuring or insolvency matters of significance have a cross-border component due to the integration of the Canadian and American economies over the last few decades and the ability of US lenders to do business in Canada. In addition, as the world economy becomes more integrated and interdependent, we are seeing an increase in cases with ties to the United Kingdom, the European Union and Asia. The practice of insolvency law is truly becoming global in nature and scope due to these factors and the principles of comity between bankruptcy courts in different countries continue to develop.
Robert Rosenberg: Revenue streams in the US and most of the world where we practice have declined, with a few notable exceptions such as Germany. There is still a substantial amount of out-of-court work on exchange offers and that sort of thing. The capital markets are very active on new deals and refinancings and lawyers have been redeployed to those areas.
Bertie Mehigan: While a decline might reasonably be anticipated in what I would call “traditional insolvency work” in Asia, this may not provide a complete picture. For instance, many distressed investment funds are reinventing themselves and considering and executing transactions that call for precisely the types of skills, experience and analysis that are relevant to traditional restructurings. The key for our clients - and for us as practitioners - is that we be sufficiently flexible to adapt to these changes in market circumstances and (I think) that we be proactive in bringing ideas to our clients. In terms of countries in Asia that might provide increasing sources of work, I expect that China and India will feature prominently.
CURRENT DEVELOPMENTS
Who’s Who Legal: What are the legal issues that insolvency and restructuring lawyers are facing where you are based? Which industries are in most need of insolvency and restructuring expertise?
Robert Rosenberg: Most of the active litigation involves intercreditor issues in one way or another, and in particular the relationship between contractual rights defined primarily by intercreditor agreements and the rights and requirements under the Bankruptcy Code. Interesting case law is coming out of this area on a frequent basis and is not entirely consistent.
Bertie Mehigan: In Asia, a major challenge is the absence of cooperation between jurisdictions on insolvency matters since almost all major restructurings will have cross-border elements. In candor, this is not likely to change in the short-term.
Steven Weisz: In Canada, there has generally been less insolvency activity this year than last and fewer formal insolvency cases. There has been an increase in Canada of restructurings, especially debt to equity conversions (usually bond debt), through consensual out of court restructurings which may involve an arrangement process under the federal corporate statute or if necessary, a relatively quick (approximately 3 months to 1 year) court supervised plan process under the federal Companies’ Creditors Arrangement Act (CCAA) (the Canadian equivalent of Chapter 11 of the US Bankruptcy Code). Even though there have been fewer formal insolvency cases, there has been an increase in the availability of Debtor in Possession (DIP) financing as the availability of capital has increased following the credit crisis of the fourth quarter of 2008. This increase in the availability of credit and the strong Canadian economy have been the primary reasons why the level of insolvency activity is lower. Significant amendments to Canada’s insolvency legislation came into effect in July 2008 and September 2009 which, among other things, codified certain existing court practices and established new rules relating to employee and pension claims. Those amendments have affected the manner in which insolvency experts and courts deal with troubled companies and creditor claims. The Supreme Court of Canada rendered a landmark decision in December 2010 which helped to clarify the priority of certain claims between the federal government and secured creditors and confirmed that the two principal insolvency statutes of Canada, the Bankruptcy and Insolvency Act and the CCAA, should be read in a harmonious manner as part of one insolvency regime. Recently, in Ontario, the Court of Appeal delivered a decision which held that on the wind-up of a defined benefits pension plan, the Pension Benefits Act (Ontario) creates a deemed trust (akin to a statutory security interest) over the employer’s assets for the amount necessary to fund the deficiency that arises on the wind-up of that plan and that on the specific facts of this case, citing a number of procedural matters, the DIP Charge was not effective to grant priority over the deemed trust. As a result of that case, secured lenders to companies with pension deficits will likely make various structural and procedural adjustments to protect their security value or priority, whether the facility is being provided through a traditional asset-based lending facility or by way of DIP financing. Leave to appeal to the Supreme Court of Canada in that case has been sought.
CLIENTS' NEEDS
Who’s Who Legal: Some lawyers note that an important challenge is to dismantle the stigma attached to insolvency and restructuring experts due to the implications of a company requiring such a service. Do you agree? Is it becoming increasingly important for lawyers in this field to provide a long term approach for their clients to ensure they stay solvent? Has there been any change in the demands and expectations of your clients recently?
Robert Rosenberg: This has not been a problem in the US for several decades. Chapter 11 has long been recognised as a management tool that is available for consideration, with its plusses and minuses. The recognition of the expense involved and uncertaintly of outcome is a far bigger deterrent than potential stigma.
Bertie Mehigan: The stigma issue continues to be relevant in Asia but the change in the creditor mix over the years (for instance the emergence of specialist distressed funds etc) is helping to get owners and sponsors over this. However, it will inevitably take time to get to where the US is and how the Chapter 11 process has been accepted.
Steven Weisz: I believe the challenge we face is that restructuring experts are viewed as the bearers of bad news or the doctor that no one wants to call because they don’t want to hear the results of their tests or find out the cause of that nagging pain. If the diagnosis is unpleasant, restructuring experts need to identify the root of the financial problems and focus on providing the least painful (and costly) prognosis that address the issues facing a business. In many cases, the increased availability of capital covers up the problems, however that will likely not fix them and only defer them to another day (or year). In the meantime, the problems may continue to grow and their effects may be exacerbated. Even if increased funding is available, I think it is important to try to induce clients to focus on repairing the underlying problems to try to avoid a crisis in the future; a crisis which might be catastrophic at that point. Companies should engage insolvency experts as soon as possible once financial distress or concerns have been recognised so that a long term plan to manage their obligations and avoid a contraction of liquidity can be developed and implemented. Otherwise, if an emergency arises (which may be due to uncontrollable outside influences as we experienced in the recent recession), there may not be enough time or available paths to allow for an orderly restructuring of the business and defend against the failure of parts or all of a business and the unfortunate liquidation of assets and loss of jobs. As in any other area of the law, clients’ demands and expectations in respect of legal services in the restructuring field have changed in recent years due to the globalisation of business, the growth of multinational corporations (in numbers and size) and the torrid speed in which technology has developed through the pervasive use of the internet, e-commerce, wireless phones and blackberries. Restructuring experts must be on call 24/7, 365 days a year and be available to assist clients any time, any day and any where.