Counsel to Counsel - May 2008 - (Page 13)

policies by managing their capital well. Neither is out to own the companies to which they lend. That’s not so with hedge funds and distressed-debt funds. Nontraditional lenders often like the fact that debt is in default. If they do their homework right, they can buyin at a discount and gain huge returns, but their primary concern is not necessarily that the borrower pay off the loan. “The distressed-debt community is very sophisticated,” says Reilly. “They’ll buy a little senior debt, a little bit of the term-loan debt, they’ll buy some of the unsecured-bond debt. They’ll buy various strips of investment all up and down the balance sheet at a discount. They’d be very happy, often, to turn some of that debt into equity. It’s really a cheap way to buy a company, and they’ll sell it two years later for even more profit.” Add to the mix credit-default swaps and other exotic derivatives, and the picture gets even murkier. The bottom line is that where borrowers used to go into a restructuring knowing that their creditors’ main objective was getting their money back, today some of them might have a vested interest in default. “ articularly,distressed P debtandhedgefunds areusedtopounding thetableandgetting theirway.It’sa rough-and-tumble atmosphereinthe states.Americanslike it.Itworksforus.You takethatmentality abroad,itcanbackfire bigtime.” pieces, so many restructuring laws have changed to help achieve that result.” But while that may be welcome for Americans doing business abroad, it can be a traumatic change within those economies, creating deeper cultural rifts. “One mistake Americans make is bringing their own culture and ideas to a foreign debt structuring,” Reilly says. “That can backfire like crazy. Particularly, distressed debt and hedge funds are used to pounding the table and getting their way. It’s a rough-andtumble atmosphere in the states. Americans like it. It works for us. You take that mentality abroad, it can backfire big time.” Knowing not just the laws but the culture in foreign jurisdictions is essential to smooth workouts. Insolvency laws deeply reflect a given culture. In the end they resolve who gets what when a business fails, a legal question that comes as close as any to the heart of a culture’s values. “Now people say, let’s not hang in bankruptcy for two years. Let’s just convert all the debt to equity,” Reilly says. “We’ll wipe out the shareholders, appoint a new board, hire new management, and we’ll sell it in two years. You shave off some of the time and expense of bankruptcy.” Capital markets like efficiency; they don’t like things dragged out. Companies are increasingly bought and sold on a distressed basis because creditors have figured out that it’s cheaper to own the equity and try to fix it up themselves. With the entire process moving faster and so many rival interests in play, the restructuring company’s fundamental challenge—correctly reading the situation and acting quickly—is more difficult than ever. “Knowing how and when to avoid, settle or quickly win fights among competing constituents,” Reilly warns, “will often mean the difference between a successful global restructuring and a self-destructive exercise in bravado.” Global Changes Global insolvency regimes have changed considerably since the last downturn. Much of this shift has been toward a Western approach, with more consistent, predictable legal systems, a more congenial regard for property rights, and commercial and bankruptcy laws that are grounded on familiar legal principles. “Most countries are coming to realize that it’s better to keep a company together as a going concern than to break it up and sell the pieces,” Reilly observes. “Most companies are worth more whole than they are in Less Patience Bankruptcies used to take years. All the while creditors would sit on the sidelines, waiting for the company to reorganize its operations, become profitable again and then re-emerge with some sort of consensual restructuring. These days, they’re losing their patience. Bingham McCutchen LLP is a national law firm with global capabilities, with nearly 1,000 attorneys in 13 offices. The firm’s Financial Restructuring group has more than 100 lawyers in the United States, London, Hong Kong and Tokyo who engage in restructuring and insolvency transactions in more than 90 countries worldwide. Michael J. reilly is a partner and co-chair of the Financial Restructuring group at Bingham McCutchen. He is Peer Review Rated. Contact him at michael.reilly@bingham.com. martindale.com/c2c May 2008 13 http://www.martindale.com/c2c

Table of Contents Feed for the Digital Edition of Counsel to Counsel - May 2008

Counsel to Counsel - May 2008 Contents Harassment Policies NEC Corporation of America and Duane Morris LLP Lost or Stolen Data: Minimizing Fallout On-Boarding the Board Drafting Fair, Efficient and Enforceable Arbitration Agreements Responding to Counterfeit Products Crafting an English-Only Workplace Policy Distressed Debt: New Players, Global Sophistication Make Restructuring More Complex IP Confidential: Plan Ahead, Act Fast to Protect Your Trade Secrets Adverse Changes: Think Ahead in a Strained M&A Market Optimizing Web 2.0 Technology: Expanding Your Professional Network Union Pacific Railroad Company and Patton Boggs LLP Warming Warning: Develop Your Climate Change Strategy Now Risk Sharing: Expect New Obstacles and Expenses in Syndicated Loans E-Discovery in Action Diversification at the Gate Energy

Counsel to Counsel - May 2008

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