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Off the table

by Jaewon Kang  |  Published August 24, 2011 at 5:34 PM ET
bankruptcy_227x128.jpgFiling for Chapter 11 with a prepackaged deal in hand or avoiding the courtroom altogether may be good for companies, but it's bad for the bankruptcy-related workload of restructuring firms.

The reduction in work is evident in The Deal Pipeline's bankruptcy league tables, both by number and volume, for the quarter ended June 30, particularly when compared with the volume table of a year ago.

Around this time last year, firms were capitalizing on the massive filings of the fourth quarter of 2009 such as CIT Group Inc. ($71 billion in assets) and Capmark Financial Group Inc. ($20.1 billion), as well as the large filings of the first quarter of 2010, such as Orleans Homebuilders Inc. ($440 million). Large filings since then, however, are finishing more quickly, and fewer -- and smaller -- filings have replaced them.

As evidence, take New York law firm giant Skadden, Arps, Slate, Meagher & Flom LLP, which was at the top of the volume ranking in the second quarter of 2010 with 102 active cases totaling some $1.23 trillion in assets. This quarter, the firm has nearly half of those cases, 60 totaling $1.06 trillion, partly due to database cleanup of terminated and dismissed cases.

Many law firms have felt the pinch of having fewer large cases to work on as distressed companies explore other means to address their financial issues in a more cost-efficient manner than bankruptcy.

But Skadden's slip to fourth in volume from first last quarter allows Duane Morris LLP and Latham & Watkins LLP to grab first and second place, respectively. Duane Morris had an $18.3 billion spike in volume mainly due to an assignment working with the insurers of Delphi Corp.'s estate, while Latham & Watkins' loss of 12 cases did not prove a hindrance. (The volume tables involve U.S. bankruptcies for companies with $10 million or more in assets.)

Latham may have lost a few cases this quarter, but it still continues to hold tight to assignments on large cases. D.J. "Jan" Baker, global co-chairman of the firm's insolvency practice, uses Boston Generating LLC as one example. The firm is wrapping up representation of the power producer, which needed to sell its assets.

Constellation Energy Group Inc. purchased it for $1.1 billion, "enough to pay off the first-lien debt but not the other secured debt," Baker says. "We have filed a plan of liquidation to wrap up the case." A confirmation hearing is set for Aug. 30.

Also experiencing a loss in caseload was Winston & Strawn LLP. The firm tumbled 17 spots to 41st (49 cases), the largest decline among law firms on the number table.

Saul Ewing LLP, on the other hand, catapults 48 spots to sixth place ($1.05 trillion) in volume, primarily due to a creditor assignment on the Lehman Brothers Holdings Inc. case ($639 billion).

Joyce Kuhns, a Baltimore bankruptcy and restructuring partner at the firm, nevertheless says there are fewer bankruptcy cases up for grabs. "Out-of-court restructurings and refinancings continue as companies who can take advantage of continued low interest rates are candidates for both. The ups and downs and extended duration of the economic recovery also has created pressure on companies to clean up persistent problems."

Kuhns works primarily on real estate filings and is on two of the largest retail filings this year: Borders Group Inc. ($1.28 billion) and Sbarro Inc. ($471 million), along with David Pollack, landlord counsel at Ballard Spahr LLP. Pollack is No. 1 in active assignments this quarter (417), his first time atop the lawyer table since the fourth quarter of 2005.

"We have a large number of landlord developer clients, so that in almost every major retail case, at least one or more is likely to be involved," he says. While both may work on different areas of a retail case (Kuhns works mostly with creditors), both agree a slowdown in large retail filings is likely to continue.

Noninvestment bank BDO Consulting (418 cases) can attest to a slowdown in filings, as it has lost a large sum of cases compared with the second quarter of 2010, despite keeping the No. 2 spot that it has held for the past eight quarters. Bill Lenhart, national director of the business restructuring practice, says business is almost frozen and it is the slowest he has seen, but he is handling a greater amount of bankruptcy-related litigation. "With the aftermath of the large cases, often it is the only way the unsecured creditors can get a recovery on their claims. As far as nonbankruptcy litigation, I would say it has been slow due to the lack of funds and the economy, as entities don't want to spend money litigating."

While business may be slowing down for BDO, Deloitte (1,682 cases) has seen its caseload skyrocket since last year. Its jump from 1,251 cases primarily stems from cases in Australia, South Korea and the U.K., but this quarter it added Spanish filings, such as lighting company Biosca & Botey SL.

Another global firm that has boosted its caseload is FTI Consulting Inc. (230 cases, up from 171 last quarter). FTI has managed to broaden its lead against its nearest competitor in the crisis management category, GlassRatner Advisory & Capital Group LLC (46 cases) mostly due to an influx of Hong Kong filings. Some 45% of its cases now are foreign, compared with 22% last quarter and a meager 11% a year ago.

Executive Sounding Board Associates Inc. (11 cases) has also seen a spark in its caseload due to being retained as a liquidating trustee on several cases. Managing director Rob Katz says that his firm is capturing more testimony work, and he emphasizes that looking at broader opportunities is crucial to the firm remaining busy. "We all have to be more creative in finding opportunities and leads and making the most of the ones that we get," he says. "How we differentiate ourselves from the other players in the industry is going to be critical going into 2012."

Investment banks also certainly have seen their caseloads dwindle in the past year. Houlihan Lokey Inc., which ranked first a year ago with 35 cases, has slid to No. 5, with less than half of the caseload (16 cases). (Houlihan Lokey slipped one rung, to third, in volume.)

That's good news for Duff & Phelps Corp., which remains No. 1 (22 cases) for the second quarter in a row. Though the firm has an assortment of cases, such as large second-quarter filings Nebraska Book Co. ($657 million) and Vitro SAB de CV ($1 billion), it hinted that the availability of credit for the middle market may have a significant impact on the decision to seek bankruptcy protection.

"For private middle-market companies," managing director Brian Cullen says, "the lack of public equity markets and equity-like securities, along with private equity sponsors' preference for leverage, contribute to the prevalence of debt financing. This dynamic of high leverage and deteriorating operating fundamentals [often is key to triggering] restructurings and bankruptcy filings among middle-market companies."

It's tough to say what the future may hold for bankruptcy practitioners, but most agree middle-market retail deserves close attention through year's end, as companies' performance over the peak shopping season will serve as an omen for 2012. "Difficult economic times," Kuhns says, "make for tough choices for both the company and the consumer of its products. ... The well-run, efficient, market-responsive company with good core assets and product obviously has the best chance of survival."