The New York Restructuring Legal Market: Thoughts From an Industry Leader

Lorraine McGowen is a partner in the New York office of Orrick, Herrington & Sutcliffe, where she formerly served as Co-Chair of the Restructuring Group.  She is a member of the firm's Board of Directors and Chair of firm-wide Diversity & Inclusion Initiatives.  She was also selected as a 2010-2013 New York Super Lawyer, Metro Edition, Bankruptcy & Creditor/Debtor Rights.

How is the restructuring/bankruptcy legal market of today different from that of 2008-2011? From 2008-2011, most bankruptcy cases were straight liquidations. Bondholders could do one of two things: immediately liquidate the assets and take their losses, or “pretend and extend.” A "pretend and extend" is when a creditor ignores the fact that the company can’t pay, pushes the losses to the next quarter and hopes that the market improves so that the creditor will not ultimately have to take the loss.  I anticipate that this year, due to regulatory increases in capital requirements, some of these banks will not be able to continue this practice.

In addition, today, we are seeing more restructuring than liquidation.  Instead of facing high-level, strategic decisions of when to liquidate and when to "pretend and extend," current issues more often revolve around creating a favorable capital structure. 

As a corollary, are you now seeing more out-of-court workouts? Yes.  In the free-fall bankruptcies of 2008-20011, there was not enough time to plan.  Lehman was a free-fall.  When timing permits, however, debtors prefer out-of-court workouts.  One important reason for this is that changes out-of-court—a lower interest rate, for example—require unanimous creditor approval.  What we are seeing now is more debtors negotiating with their significant creditors before using formal bankruptcy proceedings.  After devising a restructuring plan that reaches the bankruptcy threshold for creditor approval, the courts are then a means of implementing the pre-negotiated plan. I expect that this practice will continue.

Another reason to perform an out-of-court workout is to contain the costs of bankruptcy.  Bankruptcy is very expensive.  Litigators unaccustomed to working with financially distressed entities sometimes operate without a practical understanding of the need to contain costs.  As an insolvency attorney, I quarterback the litigation, using the courts as needed while exercising the restraint necessary to preserve the distribution pool.

You often advise corporate clients on the potential bankruptcy ramifications of their transactions.  In this context, what issues are of greatest concern? The overarching question is, if a company goes bankrupt, how long will payment of principal and interest be delayed?  Along similar lines, another area of focus is how much of a payment haircut can be compelled in a repayment plan.  

We also have to understand all the ways in which the company can go bankrupt.  For example, being bankruptcy remote entity doesn’t insulate the issuer from insolvency, and the bankruptcy of a parent will affect its subsidiaries.  Additionally, clients need to understand the array of available bankruptcy regimes and the varying effects these regimes can have upon the transactional counter-parties of the distressed company.  

The above segment is excerpted from an interview conducted by NWLSO Editor-in-Chief, Joanna McDonald.  McDonald received her undergraduate degree from the University of Pennsylvania and is a 2013 graduate of The University of Texas School of Law. After college, McDonald was a paralegal in the New York office of Deutsche Bank.  In law school, McDonald was a Submissions Board Member of the Texas International Law Journal, Permanent Class Agent of the Class of 2013, Head Choreographer of the Assault & Flattery Musical Theatre Troupe and a member of the National Black Law Students Association.  She plans to practice in New York, within the restructuring or corporate fields.   

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