The 500 View: Restructuring hires are in vogue but is there enough work for everyone?

Georgina Stanley assesses a City restructuring scene offering rewards for some but a lack of clear direction

‘You can only grow this business when people aren’t busy – when everyone’s flat-out, you can’t hire for love nor money,’ reflects Paul Hastings restructuring veteran David Ereira of his chosen trade.

Such comments come amid a string of aggressive lateral moves in the City by US firms in what has been a solid if unspectacular period for big-ticket mandates. Most recently RPC hired the head of DWF’s business restructuring team, Finella Fogarty, and Weil, Gotshal & Manges recruited the well-regarded Neil Devaney from Akin Gump Strauss Hauer & Feld. Others making significant appointments in the last two years include Milbank, Latham & Watkins and Macfarlanes (see box).

The practices of key players in the City can differ markedly between those aligned with corporate debtors, outfits working with traditional lending banks and counsel targeting bondholders and credit funds. But there is no question that it is the more specialist credit funds that are the hot space in the market now, given the increasing amount of money provided by alternative lenders.

It is one of the reasons why the hires of Yushan Ng and his team at Milbank and Yen Sum and Jennifer Brennan, who left Sidley Austin for Latham in 2018, are so often cited. It is also one of the motivations for Weil’s recent hire of Devaney from Akin Gump. Adam Plainer, who heads the now seven-partner restructuring team at Weil in London, acknowledges that credit funds is an area everyone wants to hire in. He adds: ‘We are looking to increase our firepower here, so Neil’s mandate is to work with Andrew [Wilkinson, the bondholder veteran who Weil recruited from Goldman Sachs in 2014] and the team and grow this side of the practice.’

‘A lot of people who call themselves restructuring partners don’t know real insolvency work.’
David Ereira, Paul Hastings

According to many at US firms, credit fund and bondholder committee work is an area where UK firms are lagging behind US rivals, because of the dominance of New York law for bond issues and the heritage of many alternative lenders.

The Magic Circle firms, of course, counter that their practices have far more range than this self-interested critique allows. At Allen & Overy – which, with 13 London partners focusing on restructuring, has the largest practice in the City – team head Ian Field says: ‘US firms bang on about our practice being bank-side but it simply isn’t reflective. We have a strong relationship with a number of funds and Tim Watson’s rehire [from hedge fund Davidson Kempner in 2019] has been a nail in the coffin for anyone saying we’re not a funds-focused firm. Our practice is very diverse and we act for a broad range of stakeholders.’

Field’s equivalent at Clifford Chance (CC), Philip Hertz, is equally adamant that CC’s efforts to widen its client base have been underestimated: ‘We work on both lender and debtor side, with mandates from PE houses, hedge funds and CLOs – we saw the writing on the wall in solely acting for financial institution clients ten years ago and started to expand our funds offering. US firms often try to box the Magic Circle away from acting from funds but that isn’t fair – we now have deep relationships with several big fund clients.’

A quick look at some of the most high-profile UK restructurings and collapses over the last year or so (see box), however, shows in most instances UK firms have held the key roles for corporates and bank lenders, with US firms frequently on tap for other credit funds/other bondholders.

While some US firms have yet to make their mark – such as Ropes & Gray, which unhappily parted ways with some of its City restructuring partners in 2018, and Skadden, Arps, Slate, Meagher & Flom, which has yet to replace the retired Chris Mallon – the table highlights the impact of some of those making aggressive hires. Kirkland & Ellis, which added the much-liked Sean Lacey from Freshfields in 2017, for example, features on no fewer than seven of our highlighted deals in some capacity, Milbank on five and Latham on three.

Kirkland is the firm most challenging perceptions of US outfits as niche operators, with UK partners pointing to significant progress in recent years, with the firm winning work not just from its traditional private equity clients or from its US practice but also from corporates and bondholders in Europe. Through Elaine Nolan, Kirkland has also carved out a niche for CVA work on retail collapses – work that would once have been more traditionally associated with mid-market UK firms. ‘Kirkland is a machine right now – how Kon [Asimacopoulos] and Partha [Kar] drive it I don’t know,’ concedes one partner, citing the firm’s most high-profile partners. Another adds: ‘Five years ago it wasn’t weren’t really competition but it is now.’ And, obviously, it doesn’t hurt to have one of the largest restructuring practices in the US.

Two rivals striving in recent years to catch up are Latham and Milbank. For Milbank, the four-partner team from Cadwalader, Wickersham & Taft hired in 2018 has made a dramatic impact, while Latham’s team has more than tripled in size since Simon Baskerville joined from Ashurst in 2017 to kick-start the sponsor-side of the business in the City. As one Magic Circle partner comments: ‘The biggest surprise with Latham is why it hasn’t done better until now, given its strong finance practice.’

Baskerville sums up Latham’s approach: ‘Restructuring and special situations has been a key focus for the firm over the last few years. It’s clear that, for a top-tier global practice to thrive in the modern financial world, it must be capable of advising across the spectrum of investors and investments in the main financial centres.’

But with all of these firms – and more – ramping up their practices, how are they keeping everyone occupied at a time when activity levels are relatively subdued? Speak to many veterans and they concede an unease that the forecast restructuring boom is not extending beyond a rash of much-publicised High Street collapses. Figures from the Insolvency Service showed there were 17,196 corporate insolvencies in 2019, the highest figure since 2013, while administrations were up 24% on 2018 to hit 1,814. But the long tail of small insolvencies has not yet been enough to keep all the teams vying for complex workouts busy. Conditions are a good deal better than the tumbleweed years of the mid 2010s, when there was nervous talk of restructuring hands reskilling, but neither is the sector booming.

Over at Freshfields Bruckhaus Deringer, where its famously consistent team has won roles on a string of marquee mandates – including six of those in our table – practice head Ken Baird comments: ‘Our level of activity isn’t reflected in the market generally. We’ve had deals like House of Fraser, Debenhams, Arcadia, Steinhoff and Nyrstar but the work levels in the restructuring market as a whole remain quite fragile and the timing of any global correction is more uncertain than ever.’

Holding back activity levels has been the current vogue for cov-lite debt and years of ultra-low interest rates, allowing struggling companies to ‘amend and pretend’ for years without a reckoning. Kirkland playmaker Asimacopoulos comments: ‘A consequence of the projected global economic growth forecasts and continued openness of the debt markets is that while there will continue to be a constant level of distressed activity due to company performance, we are not anticipating a tsunami of insolvencies or restructurings. There is simply no big catalyst on the near-term horizon – from history, you’d need something seismic to cause things to break in the way people have been speaking about.’

‘Companies are getting to a point where they have so much debt and need so much new money to save them that liquidation is inevitable.’
James Roome, Akin Gump Strauss Hauer & Feld

As James Roome, who heads the seven-partner practice at Akin Gump, reflects: ‘Traditionally a lot of our work is driven by the PE process – they come in and buy businesses, leverage them up and give them a few years to achieve ambitious earnings projections. In the past, a significant number would fail within a couple of years, but low interest rates mean that many now survive as zombie companies, sustained by just enough cash to avoid default.’

The danger, according to Roome, is that by the time companies get to the point of no return, and are unable to refinance mounting debt piles, there is little left to save. Which could mean more companies going into compulsory liquidation like Thomas Cook, Carillion or British Steel, with no money left to pay for even an administration and no viable business remaining. ‘Companies are getting to a point where they have so much debt and need so much new money to save them that it’s inevitable. Thomas Cook was so far over the cliff that it was impossible to save.’

CC’s Hertz echoes the point: ‘Companies that are not properly advised leave it and leave it and then it’s too late; management think they can keep the plates spinning but then the plates start crashing down.’

Should the plates start crashing en masse – and not all agree they will – while it may be good news for those advising the liquidator, it may mean less work for advisers in general because in these instances the liquidator displaces all of the creditors who would be involved in a rescue deal.

It would also raise questions about who can cover this work, given the lack of experience many younger restructuring lawyers will have of old school insolvency. ‘A lot of people who call themselves restructuring partners don’t know real insolvency work,’ argues Ereira, who points out that regardless of insolvency experience, this work – like company-side roles on large administrations – is likely to remain in the hands of the largest UK firms rather than US players. ‘None of us yet have the numbers needed to deploy the teams required to do a major administration – I couldn’t do a Lehman Bros here, but no US firm could, and only a few UK firms could.’

And while most plates keep spinning, it would be a bold firm indeed to take on those kind of numbers.

The new UK edition of The Legal 500 is out now.

georgina.stanley@legalease.co.uk