As the tide of financial crisis sweeps the good times away, areas of law that were unglamorous just a few months ago are undergoing a renaissance
What started out as a financial crisis is developing into a global economic recession.
Banks are reluctant to lend, venture capitalists are waiting to see what happens, managed funds are being forced to deal with much-diminished positions, and people from New York to London and Kolkata watch helplessly as the value of their savings and investments tumble to record lows, then falls even further.
In late October stock markets took their steepest dives in decades, then made equally giddy recoveries. Predictions, from those foolish enough to remain in the prediction business, were mostly meaningless.
The one thing everyone seemed to agree on was that the improbably high rates of growth seen over the last couple of years had probably ended. The general expectation was for contraction in the US, while the UK confirmed it had entered into recession. Other European countries are likely to follow suit.
In Asia, the headlines were all about diminished growth. China lowered its growth forecast to around 9% – a rate many would have considered fantastic four or five years ago, but which is now seen as a harbinger of dark days ahead. India’s own growth prospects have been downgraded to about 7.5%.
“It’s not that India or China are going to escape this global contagion, but [if] India grows at 7% next year, that will be phenomenal,” says Waajid Siddiqui, a partner at Hogan & Hartson in Washington DC.
Cash is king
“The current turmoil in the market is different from the last two recessions I went through because it started with banks and a credit crunch – which means a cash crunch,” says Kayal Sachi, a partner at Allen & Overy.
“The immediate effect is in attracting investment,” says Siddiqui. “For the most part, we are in a global recession. The question is how long it will last and how deep it will be.”
“We are still doing deals but the nature of the deals has changed because currency is a problem,” says Sachi.
Many foreign investors are taking a wait-and-see approach in response to the cash squeeze. They demand greater security and better terms when considering new ventures, while old deals are put under the microscope and re-examined for potential adjustments.
Yet the stringent times also mean opportunity for individuals and institutions with capital to deploy, says Siddiqui. With valuations undreamed of six months ago, there are now buyers looking for assets available at fire-sale prices as companies like AIG desperately seek to raise capital.
This is not the primary market but it is one of considerable size, Siddiqui notes. “There is opportunity for growth, but you are going to have to weather the storm for six, 12 or 18 months.”
Whatever the ultimate shape of the current crisis, there is no getting away from the fact that its effects are not restricted to a single country or region.
“No economy is able to escape the current financial turmoil entirely,” warns Nipun Gupta, partner and head of the India group at Bird & Bird. “One challenge we anticipate may be the drawing back of foreign investment by international investors who need to deploy capital elsewhere.”
“Inevitably, the largest bankruptcies have major cross-border implications,” says Glenn Gerstell at Milbank Tweed Hadley & McCloy in Washington DC. “We certainly saw that in the Enron case, where we were counsel to the official creditors committee, and we are now starting to see that in the Lehman Brothers Chapter 11 case, where we have the same official role.”
Gerstell notes that “so far, the extraordinary turmoil in global financial markets has taken its toll more on Wall Street and other banking centres, and Indian corporates have been less affected.”
He considers that although India is somewhat “sheltered from the current and impending economic storm”, the lack of liquidity in the international bank market will inevitably hurt Indian companies.
Lawyers at Juris Corp, in Mumbai, say the nature of Indian legislation may keep insolvency work from exploding, particularly if corporations can drive a wedge between onshore and offshore lenders. However, negotiations are underway in many finished deals to top up collateral. The firm’s restructuring practice is gearing up to advise on bankruptcy and financial reengineering: “We anticipate significant creditor-driven corporate restructuring to happen, including hostile ones,” says the firm.
One’s fate is another’s fortune
Gautam Khaitan of OP Khaitan & Co says that lower stock prices are likely to attract investment into Indian equities. “Financial market big players that have been less afflicted by the ongoing developments are looking for opportunities to acquire businesses at low prices,” he says.
Indian companies may be better takeover targets than those in other countries. Lawyers at Khaitan & Co (not to be confused with OP Khaitan & Co) point out that relatively fewer Indian corporates have been hit by insolvencies or massive corporate restructurings. The firm, which worked as Indian counsel to Nomura in its acquisition of the back office operations of Lehman Brothers, says there are a number of factors cushioning the blow in India.
For one, Indian companies are not as leveraged as those in other markets, which makes them less vulnerable. Second, an economic downturn may take some of the impact away from the limited availability of credit. Third, the plentiful availability of cheap assets may offset some of the slackening in growth.
“However, the lack of credit has meant that a few of the deals on which we have advised have been put on hold for want of credit,” say partners Haigreve Khaitan and Murali Neelakantan.
Indian corporations appear stronger than those in Europe and the US, propped by regulatory action by the Reserve Bank of India to bolster domestic financial and capital markets, says Anand Mehta at Thakker & Thakker, a Mumbai-based law firm.
“Unlike in the US and other Western economies, there does not appear to be any immediate threat of Indian companies or banks going insolvent because of their inherent strength,” Mehta adds.
All in all, says SP Bhatia at MV Kini & Co, the current crisis could prove a blessing in disguise as companies are forced to review and strengthen their financial positions. “Despite the global financial flux [and] economic crisis, foreign investors and Indian corporates have shown faith in the fundamentals of the Indian economy, investment opportunities and long-term benefits.”
All that’s old is new again
While it is still difficult to predict how the financial crisis will evolve, some things are clear. With markets tumbling like dominoes, legal work is sure to be plentiful, and to encompass multiple jurisdictions. It will also emphasize areas of law that were relatively neglected during the period of rampant borrowing and abundant growth.
Both defensive and aggressive responses to the financial crisis mean there is a lot of legal work in the offing. Lawyers will find new projects on both sides of the aisle as debtors and creditors seek their help.
Restructuring in particular is taking centre stage as funding deals are rethought and companies look for the one thing that was in ample supply just a few months ago: cash. “At a macro level, [the current situation] constitutes the largest global restructuring ever attempted,” says Siddiqui. In addition, investors are seeking more advice on subjects like insolvency, which in recent years were relegated to the backburner.
In response, law firms are upping their debt restructuring practices, relearning defensive anti-takeover strategies, advising on the refinancing of secured debt and negotiating debt settlements. Copies of bankruptcy laws are coming off the shelf. Lawyers are increasingly representing clients at debt recovery tribunals, such as the Board for Industrial and Financial Reconstruction.
“These are all legal aspects of various stages of a company getting into difficulties and a restructuring-related practice such as our own must have a strong capability in all of them,” says Trystan Tether, head of finance in London and co-head of the international finance group at Bird & Bird. “Our key focus at the moment is ensuring that potential clients are aware that we can assist with their financial difficulties, regardless of what stage matters have reached.”
One doesn’t have to look far for examples of the new work up for grabs, and of law firms adjusting their personnel deployment in order to meet changing client demands.
“Already, restructuring of Lehman Brothers in India is underway. We have a top-notch banking and restructuring team and are also adding associates in this practice,” says Akil Hirani, managing partner of Majmudar & Co in Mumbai. Majmudar is working with Hellman & Friedman to buy Lehman’s asset management business in India.
“We are already seeing a significant increase in restructuring work,” says Justin Bharucha at Bharucha & Partners. “Especially [private equity and venture capital] deals which have not closed are being revalued and several financing transactions are also being restructured.”
Another firm responding to demand in the area of restructuring is Titus & Co in Delhi, led by Diljeet Titus. “We have been developing our asset reconstruction team to deal with the restructuring of portfolios,” he says.
Foley & Lardner in Detroit has created a financial crisis response team to deal with the issues emerging from this “historic” financial environment. “We are focusing on advising Indian companies on how to best protect themselves given the financial crisis in the United States,” explains partner Daljit Doogal. “We are really heavily into loan document renegotiation and supplier counselling.”
The firm has a large bankruptcy and business reorganization practice, which has been busy of late. Doogal says there is a tremendous amount of restructuring happening in the US, such as in the automotive industry, where one bankruptcy can have large spin-off effects.
Out of the shadows
Even before the crisis, there was restructuring work despite the global attraction of India as an investment destination. Khaitan & Co worked on the restructuring of Spectrum Power last winter, before the onset of the current crisis, and with Essar Oil and Rama Newsprint. “We have been quietly working on restructuring deals for some time now. It is just that those deals were never in the spotlight since they represented the unpleasant side of the corporate world, which has its natural business cycles,” says a lawyer at the firm.
The current increase in restructuring and insolvency work is set to continue. “This practice area is growing after a short gap of about three years and will need significant legal involvement in the present global scenario,” says Anand Desai, managing partner of DSK Legal.
Regardless of how well-protected corporations in any one country might be, the combination of high leverage, falling stock prices and slower growth all but guarantee an abundant stream of restructuring work in the near future.
White & Case, an international firm with a well-established India practice, expects that the wave of corporate restructurings already evident elsewhere is likely to make its way to India soon enough, and that international lawyers will be involved in restructuring financing and other transactions.
Companies are also likely to restructure their operations via mergers, joint ventures and demergers. At Nishith Desai Associates, lawyers expect increasing investment in debt instruments. The firm, which was involved in the first acquisition by an India-listed company of a US-listed company, focuses on mergers and acquisitions, tax planning and multiple areas of corporate law.
Brushing up on going broke
India has multiple pieces of legislation that lawyers will have to dust off as they undertake the surge of recession-related work. Among them are the Sick Industrial Companies Act, legislation dealing with relief undertakings, and Reserve Bank of India regulations on corporate debt restructuring.
If the previous years belonged to investors, the next one will almost certainly belong to creditors.
“Cross-border insolvency issues will also increase and a rise in the demand for advice on such issues is anticipated,” says Adeleine Tan, at WongPartnership. The firm has offices in Singapore, where investors are already seeking advice on arbitrations relating to their Indian investments. It has recruited Indian lawyers to deal with transactions and disputes arising out of cross-border restructuring.
Law firms will probably be involved in devolving bonds (which are unlikely to be converted into shares at current prices), dealing with payments to suppliers and lenders and looking for ways to fund businesses starved of cash.
Gerstell, at Milbank, says his firm has been advising Indian clients on their exposure to some financial institutions, “but our insolvency work with Indian clients might pick up if the crisis continues. We would expect that some Indian companies may be creditors in some large international insolvencies, or perhaps some of the Indian companies that borrowed heavily to finance acquisitions or capital expenditures will find that they are overleveraged or that refinancing options aren’t available.”
“An additional area of impact we have seen is even before loan renegotiations and liquidation begin to appear,” says Tether. “This relates to the review and roll out of programmes intended to reduce the number of employees as a means of reducing costs to keep the business sustainable.”
Along with restructuring and insolvency work, dispute resolution and banking practices are likely to rise to the forefront over the next few years.
The shortage of cash abroad may lead to more inter-bank lending within India, says Gautam Khaitan. At the same time, a decrease in domestic reserve requirement quotas “would attract more negotiations and re-negotiations on project loans, wherein legal consultancy would be sought … More work is expected for bankruptcy lawyers as they will be representing failing institutions and creditors groups.”
“One cannot rule out that financial institutions will see a higher demand for debt restructuring and settlement of dues on a staggered basis,” says Saurabh Nathany of Hemant Sahai Associates in Mumbai. “We anticipate companies approaching us for restructuring and debt relief proceedings.
“We see significant opportunities in the space of asset reconstruction, securitization and acquisitions of NPA [non-performing asset] portfolios both on the debtors and creditors side,” he continues.
At Thakker & Thakker, Mehta expects a significant amount of work on financial reengineering. Already, some clients involved in real estate have sought to renegotiate loan arrangements while banks are considering seeking additional security in cases where shares of listed companies are given as collateral.
The road ahead
Mehta goes on to summarize the likely outlook: “Corporate restructuring work would accelerate in the medium to long term, as business houses would need to consolidate and compete in an economy embroiled in increasing borrowing and material costs … Foreign companies operating in India, whose parents are restructuring abroad, would replicate their global models for India.”
FoxMandal Little, one of India’s largest and oldest full-service firms, has five partners in Delhi who specialize in corporate restructuring and two litigators who handle insolvency proceedings. Rajan Gupta, a partner at the firm, believes the new Companies Bill and proposed reforms in other laws relating to recovery and enforcement of securities will likely create “vast” opportunities: “Corporate restructuring and insolvency will develop into a separate discipline of expertise,” he says.
Bharucha adds a reassuring prediction: “Insolvency-related work may increase over time, but if the liquidity crisis can be addressed, sound fundamentals should ensure that the number of Indian insolvencies is limited.”