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The domino effect – restructuring counsel brace for deluge as Covid-19 means no more business as usual

‘Even two weeks ago no-one predicted such a catastrophic impact from the coronavirus. Things have turned very quickly.’ This City restructuring partner’s words carry some irony, given that the restructuring and insolvency community has for years waited in vain for a sequel to the global financial crisis of 2008/09.

However, the trigger event in this disaster – the global spread of the coronavirus of which there are so far more than 500,000 confirmed cases around the world resulting in well over 20,000 deaths – is a crisis of the unknown. It has left restructuring lawyers reeling along with peers as everyone hunkers down through an indefinite lockdown.

Nonetheless, it looks certain that the current crisis will provoke a flood of insolvencies, a grim trend underlined this week by the staggering 3.3 million spike in unemployment claims in the US. The recent trend for ‘cov-lite’ loan agreements and years of low interest rates had given many borrowers flexibility to ride out adversity and left many ‘zombie’ companies limping along. But even with huge state support and radical monetary policy measures, it is hard to see how many such companies can continue. Insolvencies had already been climbing and a number of sectors were under intense pressure before the crisis, notably retail and High Street businesses. Many restructuring veterans are now predicting multiple ‘waves’ of company failures through the next 18 months to three years.

‘The memorable day was Monday last week, when I took five calls for new jobs in a single day,’ notes Jat Bains, Macfarlanes head of restructuring and insolvency. ‘The key aspect right now is crisis management. That’s primarily come from clients in retail and leisure given the social distancing requirements we now have to live with.’

Kon Asimacopoulos, a partner in the City restructuring group of Kirkland & Ellis, agrees. ‘We are seeing engagements across a range of sectors including retail, leisure, logistics, manufacturing, business services, wholesale and some sub-sectors of financial services and health. The first wave has already hit and we expect further to follow.’

Liz Osborne, a partner in the financial restructuring group of Akin Gump Strauss Hauer & Feld, comments: ‘The legal market is already seeing a lot of activity on the debtor side with companies facing issues and asking advice on what they should be doing.  Liquidity is the key issue. On the creditor side, distressed investors are doing their homework and getting ready to put their money to work. For creditors the immediate concern will be existing investors stabilising the ship. In a few months there will likely be a bigger wave of restructurings.’

With a deluge of larger-scale insolvencies appearing inevitable, many are talking about spreading the workload between corporate lawyers, whose deal flows have abruptly dried up, and their restructuring and insolvency counterparts.

Suhrud Mehta, Milbank’s co-managing partner in London and partner in its financial restructuring group, reflects: ‘There will be a lot of people with multidisciplinary skillsets who can chip in. Restructuring is not just bankruptcy, it is ultimately a transaction and corporate lawyers can have an impact.’

It is yet to play out to what extent businesses immediately hit by the pandemic can expect succour from emergency state protection earmarked by UK Chancellor Rishi Sunak last week, with abandoned UK airlines and airports this week told not to expect an industry-wide bailout.

But the UK Government has made noises around following Germany, Spain and Australia in enacting emergency laws that could include a moratorium on winding-up petitions against companies, and suspending rules on wrongful trading to afford more protections for directors. The proposed measures have, unsurprisingly, been met with trepidation by insolvency advisers.

Says Akin Gump’s Osborne: ‘Proposed changes to the insolvency regimes across the globe are hugely problematic for creditors. The protective legal framework which we are all used to working within might evaporate and be replaced with one which is not so certain.’

Macfarlanes’ Bains echoes the views of many in his forecast: ‘There was a block on forced eviction from landlords. That means tenants are not paying their rent, and therefore landlords are the next domino to fall: they have their own payments to make and are getting squeezed. The next domino after that is the lender community. They have been relying on repayments, not just from businesses but also from landlords. That’s putting a lot of pressure on financial institutions and fund lenders out there.’

This still leaves thorny practical matters such as how advisers go about due diligence from the comfort of their living room and how long this uncertainty will prevail. Previous insolvency booms for lawyers and accountants did at least allow some level of orderly winding down – is this still possible without a considerable easing of the lockdown? Big-ticket insolvencies don’t come cheap and require a level of stability for money to be recovered to pay those multi-million pound fees. A totally chaotic collapse is one where no one recovers much of anything.

For now, the lawyers are simply banking on some level of normality returning. Concludes Osborne: ‘The sense I’ve got from clients is that debt pricing is down, there are opportunities out there but there is nervousness about piling in and investing. People don’t know how long it’s going to go on or what the world is going to look like after this. The trouble is that business as usual is not business as usual any more.’ And if market sentiment is to be believed, it won’t be for a long, long time.

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