Big Law’s Bankruptcy Boom Turned Bankruptcy as Filings Dwindle
Welcome to the Big Law Business Section on the evolution of the legal market written by me, Roy Strom. Today, we look at the impact of a restructuring boom and bust on Big Law. Register to get this column delivered to your inbox on Thursday mornings.
Big Law’s bankruptcy practices have just completed one of their worst years in decades.
Until January, there had been no major state-owned company bankruptcies for more than three months, according to the UCLA-LoPucki Bankruptcy Research Database. This is remarkable, as businesses in 2020 averaged more than one filing per week.
Last year, only eight public companies with more than $300 million in assets filed for bankruptcy, according to the database, which began tracking bankruptcies in 1979. The database includes bankruptcies of companies with assets exceeding $100 million in 1980 dollars.
The last year there were so few filings was 1987.
I wrote a year ago about the large number of winners in 2020 emerging from a Covid-induced bankruptcy boom. Kirkland & Ellis earned more than $200 million in billed legal fees while preparing for more than 20 major restructurings it worked on in 2020.
But last year, Kirkland won about a tenth of those charges on two of those cases. Other big companies, including Latham & Watkins and Weil Gotshal, have experienced similar booms and busts. Those companies declined to comment.
Bankruptcy practices were the only drag on demand for lawyers’ time in 2021, according to Thomson Reuters data, which showed a nearly 8% drop in billed hours from 2020. The group was in down 5.4% compared to a more normal 2019.
I wrote in October about the glut of deposits turning into a trickle. I said at the time that how companies treated bankruptcy practitioners during a recession could predict how they would react when (if!?) levels of mergers and acquisitions slowed from their current breakneck pace.
The downturn is putting an uneven level of stress on law firm leaders, Kent Zimmermann, a consultant for the Zeughhauser Group firms, told me.
Companies with major bankruptcy practices know that work has a feast or famine streak and are happy to maintain their restructuring groups as countercyclical hedges, he said. Many of these companies agree with their current product line: transaction work is their engine of profit, and it’s roaring right now.
But most companies don’t have market-leading restructuring groups. These are the ones Zimmermann sees struggling the most during a downturn, in part because practice is never a clear winner. They don’t collect as much during the bankruptcy boom.
“It’s like they’ve been waiting years to go swimming and when they do, they’re often relegated to the shallow end,” he said. “It’s frustrating for some companies and they wonder what they should do with this practice.”
It is difficult to know when the market will turn to groups undergoing restructuring.
The Citi Private Bank law firm’s year-end review said there was “mixed sentiment” for bankruptcy groups in 2022, citing high levels of government stimulus that blunted an increase in fillings.
The downturn lasted longer than some restructuring experts had expected. Kirkland bankruptcy group founder James Sprayregen expected a wave of filings in the second half of last year, he told Bloomberg end of 2020. He never came.
I’m no expert, but I was wrong too.
Around this time last year, I said there was no slowdown in sight, pointing to record levels of debt at so-called “zombie” companies that are not bringing in enough cash. to pay interest. The zombies have spent the last year healing. Bloomberg reported in December that the number of such companies in the Russell 3000 index had fallen 13% since the start of the year.
It’s unclear what will revive the bankruptcy filings, or when. So I won’t make any predictions this year.
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It’s all for this week ! Thanks for reading and please send me your thoughts, criticisms and advice.