The attempt by bondholders to kick Ernst & Young off the Barings liquidation has enormous implications. As The Lawyer went to press, the news came through that the action against the auditors was being adjourned for a week. It marks a high watermark for activist US funds.
This is not the first time that the Ernst & Young team, led by Alan Bloom and advised by Slaughter and May, has had to grapple with bondholders led by Cadwalader Wickersham & Taft partner Andrew Wilkinson. He acted for a group of noteholders who torpedoed the proposed Barings settlement in 1998, despite the agreement being part-brokered by the City Disputes Panel.
Stroppy bondholders are now becoming a fact of life on insolvencies and workouts. “They're all over the place,” says a restructuring specialist. “When you do a transaction, especially in telecoms, there are now three parties – the company, the banks and the bondholders.”
The difficulties for insolvency practitioners are that bonds are freely assignable, and as such the vulture funds can hover. And there are huge opportunities for the likes of Halcyon and Cerberus (and boy, do we like that hound of hell reference) in Europe. High-yield bonds are defaulting everywhere, particularly in telecoms. But it is not confined to telecoms – even industrial issuers like the unfortunate Cammell Laird were getting in on the high-yield act.
All of this represents a challenge to the way restructurings work. There is a huge culture clash between the US and the UK approach. Unsurprisingly, only US law firms have actively targeted this market in London – Cadwalader and Bingham Dana. The smart money is on either Paul Weiss Rifkind Wharton & Garrison or Sidley & Austin Brown & Wood to build up a City practice, since both are active in the US. In this context, Allen & Overy's (A&O) hire of David Frauman from Cadwalader's New York office last month is intriguing. It will be interesting to see how A&O will be able to combine his bondholder restructuring practice in the US with a senior lender client base here.
What's more, US bondholders, unregulated by any UK institution, are hardly likely to take much notice of the London Approach, or any other consensus-driven style of restructuring. It looks as if workout lawyers, who in the UK have tended to be non-contentious banking specialists, will have to brush up on litigation. (Memo to Herbert Smith: what are you waiting for?)
Whether Ernst & Young and Slaughter and May are on the Barings ticket in another week remains to be seen. In any event, Cadwalader has pulled off an extraordinary feat of guerilla warfare.