Better late than never?
27 June 2005
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Kirkland & Ellis's fearsome bankruptcy head Jamie Sprayregen oversees one of the pre-eminent restructuring groups in the US. For debtor-side restructuring, there are few firms that can match Kirkland on high-profile mandates. Indeed, the firm's restructuring CV, which includes the United Airlines, Conseco, TransWorld Airlines and NRG Energy bankruptcies, reads like a checklist of mammoth deals.
But while bondholder firms such as Bingham McCutcheon and Cadwalader Wickersham & Taft have forged powerful European restructuring practices, Kirkland has thus far failed to emulate its US success in London. In many respects, Kirkland's London experience embodies the difficulties facing US firms trying to translate a stellar US debtor franchise into the European market.
According to Sprayregen, Kirkland was under no illusions about the impossibility of directly selling its US restructuring practice into the European market. "We knew at the time we weren't going to have a traditional US-type practice," he says. "It just doesn't exist, because [in the UK] you don't have a debtor in possession. It's a different kind of work as a result."
The US firms with the most successful London restructuring practices are all creditor - or more precisely, bondholder - practices, and Bingham and Cadwalader boast the premier bondholder practices in the UK. However, even Weil Gotshal & Manges, Kirkland's traditional rival for debtor mandates, has enjoyed considerable restructuring success in Europe, securing instructions on deals such as Parmalat, Eurotunnel and Telewest. Kirkland, by contrast, has been notably quiet, and despite roles on the Eurotunnel, Jillatte, MyTravel and British Energy restructurings, it has remained largely absent from major roles on the mega-deals.
Sprayregen says that the firm is now aiming to leverage off its impressive private equity client base to secure restructuring mandates in the UK and Europe. "I don't think we're headed towards a debtor-in-possession practice in the UK, but as the hedge funds and private equity funds own more companies and they start to have their own issues, somebody's going to have to represent those companies in sorting out their problems. That's where we have a lot of expertise and experience," says Sprayregen.
However, the strategy has met with scepticism from rivals. "Advising on the venture capital side gets you either a whole lot of conflicts or dull, low-paying shareholder jobs," is how one put it. Indeed, it is understood that the firm had to pass on taking on the debtor role for at least one major automotive bankruptcy this year owing to such a conflict.
In 2004, the number of major bankruptcies declined sharply, and it seems for the moment at least that the US bankruptcy boom of 2002 and 2003 is over. Last year, seven of the top 10 filings involved more than $1bn (£550m) in assets, and only two involved more than $2.5bn (£1.37bn) in assets. The results contrast with 2003, when every one of the top 10 bankruptcy filings was larger than $2.5bn.
Despite that reduction, Sprayregen is confident of the emergence of a new wave of companies in distress. In the US, amid declining car production and an increase in steel prices, the automotive industry is providing rich pickings for bankruptcy lawyers. But elsewhere, says Sprayregen, companies are able to secure easy capital and easy refinancing. "I call these band aids," he says, adding that "band aids merely mask the problem."
It is on the back of this that Kirkland is now actively looking to secure a high-level restructuring capability in Germany. Major advisers such as Alvarez & Marsal and Kroll have opened German operations in anticipation of the big bust, and Kirkland has plans to follow them. London-based restructuring partner Lyndon Norley has been meeting with potential recruits in Germany for some months and says a hire is imminent.
As with all restructuring practices, the firm has also seen its share of criticism regarding fees. There is no denying that when companies go bust, the cash registers start ringing at law firms. Kirkland and others have enjoyed massive fee windfalls from their bankruptcy practices. On the United Airlines file, for example, Kirkland billed $2.4m (£1.3m) in January alone. But Sprayregen defends the figures. "We live in a fishbowl," he says. "The numbers are in neon lights and they're big, but they're no bigger than fees in M&A transactions. And in bankruptcies, professionals can really 'move the needle'. Failure goes with capitalism. If you have a company that encourages risk and reward, it's inevitable there'll be some failures. But you can't be shy about the fact that failure is horribly expensive."
While the differences between the US and European bankruptcy regimes are undoubtedly a factor, Kirkland's low restructuring profile in London might also be attributed to the firm's conservative approach to expansion. Kirkland launched its London office in 1997, but it was not until 2002, with the hire of former Cadwalader partner Norley, that the firm secured restructuring capability outside the US for the first time. The move came almost two years after Weil started its restructuring campaign in earnest with the hire of Chris Mallon from Freshfields Bruckhaus Deringer. Norley's hire also came three years after Bingham lured James Roome away from Cadwalader and five years after Cadwalader indicated its intentions by poaching restructuring star Andrew Wilkinson from Clifford Chance.
Sprayregen argues that Kirkland prides itself on its strategic caution. The Chicago giant opened its Washington DC office in the 1930s but did not unveil its next office until 1990, when it finally hit New York. It took another seven years to launch a London office, and last year, following the hire of Clifford Chance private equity star Volker Kullman, it kick-started its first Continental European practice in Munich.
Sprayregen admits the firm's geographical expansion, based on its four core areas - private equity, restructuring, litigation and IP - has been "slow and steady", but he insists that the strategy has worked.
Restructuring rivals, though, express concern that the firm has left its move too late. One source comments: "The market's sewn up. I don't see what might be left for them." Sprayregen, though, believes otherwise.