Insolvency expertise is in demand. The number of companies worldwide forced into bankruptcy by the recession has surged by 35% this year, according to a recent survey by credit insurer Euler Hermes.
The fallout has spread from the early casualties in the finance or construction sectors to industries across the global economy.
“We have ten times as many files coming in as 18 months ago,” says Josef Kruger, a Calgary-based partner specialising in bankruptcy and insolvency at Borden Ladner Gervais.
“It’s got to the point where we’re being offered big files that we simply can’t take on.” Before the crash, cheap and plentiful capital made it easier to liquidate businesses because buyers could regularly be found. That is no longer the case in the present climate, lawyers say.
This lack of liquidity has forced many businesses to enter into long and hard internal restructurings. “The safety blanket that was the huge well of private equity money has gone. People can’t expect a saviour to come in from the outside and solve their problems,” says Sean Dunphy, co-head of Insolvency and Restructuring at Toronto’s Stikeman Elliott.
“There is much less money around these days. Restructurings generally have to rely on what they’ve got. You’ve got to deal with the stakeholders that you have and rearrange the furniture so that the business works.”
Insolvency filings are taking longer and have become more complex, lawyers say. In addition, the lack of buyers has led some companies to seek out-of-court restructurings and not file for bankruptcy. “It’s an interesting time to be an insolvency and restructuring practitioner,” says Borden Ladner Gervais’ Josef Kruger. “There are new challenges. You have to be inventive on many of these files.”
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The global spread of the financial crisis – combined with international spread of many large companies – has meant that restructurings have become increasingly cross-border, creating a series of new challenges.
“Most of the restructuring work we do is now cross-border. It was an occasional element before, but is now a near constant aspect of the practice,” observes Sean Dunphy.
“It means that virtually every case we do has a substantial number of US-based creditors. The distressed investor community is largely based in the USA. So lawyers have to be familiar with the US bankruptcy code. It doesn’t mean we practise US bankruptcy law.
But it means you have to be quite adept at working with it.” It has become advantageous for insolvency practitioners in many jurisdictions to gain familiarity with foreign systems. “Restructuring lawyers nowadays need to be acquainted with foreign insolvency systems, especially Anglo-Saxon ones, since they have proven to be more debtor-friendly and are usually the choice when forum shopping is possible,” says Antonio Fernández Rodriguez from Spain’s Garrigues.
The surge in cross-border filings has been accompanied by a sharp rise in the number of stalking-horse bids. The process is used in bankruptcy proceedings to set a lowest-bid limit for the auction for a company or division. Under the supervision of the bankruptcy court, the insolvent company agrees an offer with a buyer. That offer is then widely publicised, which neutralises any low bids, and then the auction proceeds. The stalking horse bidder has the option to match or beat the highest bid.
A recent example can be seen in Nortel Networks’ efforts to sell off its wireless technology businesses. The multinational telecommunications equipment manufacturer is in the process of selling itself off piecemeal, having filed for bankruptcy protection in January this year.
First, Nortel sought out a stalking horse bidder for its wireless equipment unit. In July, it received a $650 million bid from Nokia Siemens Networks for its CDMA and LTE wireless technology businesses. The stalking horse bid set the purchase price at a certain level, leaving Nortel able to seek other potential purchasers to top the original bid. The process resulted in an auction and Nortel’s wireless technology division was sold to Ericsson for $1.13 billion. It increased the sale price of the division by $400 million. Nokia Siemens received a break-up fee for lending its name and reputation to the process.
“Its created lots more legal work than before,” says Bruce Leonard, an insolvency partner at the Toronto office of Cassels Brock & Blackwell. The firm acted for the trustees of Nortel’s UK pension plan. “There are many more different people acting for many different interests.” The international nature of major corporate restructuring work presents a lot of complications. For example, one Nortel division that was put up for sale had operations in 121 countries.
“How in the world – if somebody wants to buy the division – do you get those assets safely sold to a purchaser?” muses Leonard. Sean Dunphy points out that stalking horse bids are not always the most efficient way to gain the highest price. A stalking horse bid – while it offers a comfortable floor – has a tendency to fail to find the highest bidder price in a sluggish and relatively indifferent market, he says. The sale of insolvent Canadian wood products company Pope & Talbot last year provides a case in point. Stikeman Elliott acted for the company. “The results ended up being pretty miserable. There was a failed purchase and it ended up in liquidation,” says Dunphy. “Auctions don’t always produce much when the asset is in a less than popular industry.”
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The rise in the number of restructurings, and decrease in the number of liquidations, has been helped by the number of countries that have introduced legislation similar to the Chapter 11 bankruptcy code in the US that allows the debtor a fresh start after the reorganisation of its business affairs.
Chapter 11 provides the debtor with an alternative to liquidation, allowing for negotiations with creditors. An example of this trend can been seen in Spain. The Spanish Insolvency Law was introduced in September 2004 to enable insolvent companies to go through a relatively quick court procedure.
But lawyers complain that regulation was not tested until the recent crisis. The Law’s perceived failings have generated controversy. “The 2004 Spanish Insolvency Law has not proved itself to be successful in rescuing companies,” says Antonio Fernández Rodriguez, head of the Restructuring & Insolvency Group at Garrigues. “Despite the fact that the Law contemplates reorganisation and debt restructuring as an alternative to liquidation, statistics show that almost 95% of companies undergoing court-driven insolvency proceedings end up in liquidation.”
Fernández complains that the 2004 Law is not focused on preserving value, and instead gives greater consideration to creditors’ rights. In addition, he says, the Law does not contemplate out-of-court restructuring, making the lawyer’s task more difficult. “It became apparent that the regulation was not suited for these purposes. A number of issues make it really difficult for a company going through insolvency to emerge clean and operative,” says Fernando Quicios, an insolvency partner at Perez-Llorca.
The downturn has hit Spain’s real estate sector hard. In the years prior to the crash the country was building more houses than Germany, France and the UK combined. A number of major developers, such as Martinsa-Fadesa, have collapsed under billions of euros of debt. Many international banks are seeking to quickly wind up their exposure to bankruptcies in Spain even if it means accepting losses.
Spanish banks, which have generally weathered the financial crisis better, are more willing to negotiate. These competing interests have impacted some restructurings which need unanimous creditor approval. “When the crisis started to hit Spain, particularly its real estate sector, we realised that our clients would probably have many more opportunities to continue in business if we made the restructuring out of court rather than through formal insolvency proceedings,” Fernández continues.
The Spanish government came under pressure to amend the 2004 Law. In April, amendments to the Law made it easier to refinance and grant new guarantees without reducing the risks for the provider of finance. In July, the Ministry of Justice announced that a commission has been set up in order to start formal consultation on proposals to change the Law.
For lawyers on the ground, the changes cannot come soon enough. “The crisis has hit Spain in a big way,” says Luís Martín Bernardo, a restructuring lawyer at Barcelona-based Roca Junyent. “The first stage of the downturn has hit the real estate sector hard. The retail sector will be next. We expect to be very busy for a good time to come.”