By Jamie Mason
The Deal features J. Gregory Barrow
And Traxi, a New York-based corporate finance and restructuring adviser, isn’t the only firm trying to catch up. Law firm White & Case LLP and new investment bank Moelis & Co. are both trying to marshal more forces to deal with at least another year of rising bankruptcy filings.
It’s hard to blame Traxi or others for waiting. For several years, prognosticators predicted the kind of spike in bankruptcy filings that only really developed in last year’s fourth quarter. “We kept things relatively stable and are now hiring and gearing up to some extent,” says Traxi managing director Chad Shandler, who nevertheless led all crisis managers with 26 active assignments for the first quarter ended March 31 in The Deal’s bankruptcy league tables.
And while Traxi (in fourth place among crisis management firms, with 32 active cases) and others may be a little late in holding casting calls, the bankruptcy show is likely to run for a while. According to www.bankruptcyinsider.com, there have been 1,010 corporate bankruptcy filings in the U.S. this year through May 21, a 28% increase over 788 for the same 2007 period and 32% more than 763 in 2006.
“This is the beginning of what will be a strong up cycle,” says Michael Lastowski, a partner in Duane Morris LLP’s Wilmington, Del., office (his 31 active assignments tie him for 36th place among lawyers). “We have a good 18 months ahead of us where filings will increase and stay at a high level.”
Many firms, of course, already have loaded rosters. Kurtzman Carson Consultants LLC (96 active cases, fifth among non-investment banking firms) has expanded its staff by more than 60% in the past 18 months to prepare for the filings wave, says president and founder Jonathan Carson (tied for third place among non-investment banking professionals, with 91 assignments). So large was KCC’s expansion that it moved its headquarters in Los Angeles from a 19,000-square-foot building to one with 45,000 square feet. Carson says the firm, which does mostly claims and notice work, has more than 150 employees; at the end of 2006, it had 92.
General Capital Partners LLC (17 active cases, third among investment banks) brought in new talent, says GCP’s founder and managing director, Gregory Barrow (14 active assignments, first place among investment bankers). “We increased our staff by about a third because we did anticipate that filings would start increasing,” he says.
FTI Consulting Inc. (first place among crisis management firms, with 113 active cases, up 24% from 91 active cases for the first quarter of 2007) maintained its standing by adding 672 employees over the past year to meet increased demand.
Like FTI, White & Case has remained a front-runner (first place among law firms, with 702 active cases, up 31% from its 534 active cases for 2007′s first quarter) and increased its ranks, in part by cross-training staff from other disciplines, says co-head of restructuring in New York Evan Hollander. “We’ve been bulking up mainly in the U.S. in anticipation of an increase in filings,” he says. “We have not seen the full impact yet. There’s more to come.”
Investment bank Moelis isn’t just adding a restructuring practice. It’s also going after some big guns to do it, hiring Thane Carlston and William Derrough, who previously worked atJefferies & Co. (Derrough and Carlston left in April, says Moelis managing director Navid Mahmoodzadegan, and will begin at Moelis in July.) The two will be co-heads of the firm’s new restructuring group.
Moelis has been operating since last July but is only now starting a restructuring practice. Why? The firm expects more restructurings and bankruptcies, and independent advisory boutiques are profiting from conflicts at larger financial firms. The firm was able to “attract a world-class team,” Mahmoodzadegan says, of employees with restructuring experience who have been active in prior cycles. “We’ve already hired 10 people to launch the restructuring team and plan to add more people over time as the business grows,” he says.
At Jefferies, Michael J. Henkin and Steven R. Strom were promoted from managing directors to lead Jefferies’ (13 active cases, seventh place among investment banks) recapitalization and restructuring advisory group, replacing Derrough and Carlston.
What makes bankruptcy professionals believe this current run will sustain itself? In previous cycles, only a handful of industries were decimated by bankruptcies. This time, an array of sectors may face difficulties because of a dearth of capital and rescue financing. In the 2000 and 2001 wave, the energy, automotive and airline industries were hardest hit, says KCC’s Carson. Those sectors are in bad shape again, but, he says, they’ve been joined by retail, restaurants and healthcare.
Others go further. Duane Morris’ Lastowski adds transportation and publishing to the list. Shandler agrees on transportation. “With less disposable income, people don’t have the funds to travel,” he says. “Flying somewhere or driving somewhere are both expensive. People will have to start cutting back.”
He believes the cycle will increase steadily over the next six months and last for at least 24 to 36 months. While filings will continue to grow, the economy should begin to recover sooner than that, he says.
Watch out for bankruptcies among continuing-care retirement centers, too, says Shandler, who has been involved in the Hoop Holdings LLC (filed March 26) and the Lillian Vernon Corp. (filed Feb. 20) cases. Especially vulnerable: new facilities that aren’t yet filled. When people can’t sell their homes, they lack the funds to move to care centers, he says.
GCP’s Barrow hedges, noting that it will be hard to know whether the bankruptcy wave will last one year or three. He predicts at least two.
Nor is that the whole story. With tighter credit markets, companies will face “hard lending” in the next two years, with nontraditional lenders and tough terms, Barrow says. He’s beginning to see construction companies that had homebuilders as customers filing for bankruptcy. Some 80% of his work as recently as a year ago came from the real estate industry.
“The up cycle will last for a good couple of years,” offers FTI’s Michael Eisenband, senior managing director, leader of creditor services, who ranks fourth among crisis management professionals, with 16 active assignments. “This is only the tip of the iceberg.” Eisenband is involved in theAmerican LaFrance LLC (filed Jan. 28) and Leiner Health Products Inc. (filed March 10) cases.
Given all the real estate- and homebuilder-related bankruptcies, no one knows the landscape better than landlords lawyer James Carr (140 active assignments, sixth place) ofKelley Drye & Warren LLP (91 active cases, tied for 23rd place). He believes the momentum in filings will continue through the first quarter of 2009 before slowing. Carr, who represented landlords in theSharper Image Corp. (filed Feb. 19) and Wellman Inc. (filed Feb. 22) bankruptcies, saw his new caseload increase from four new assignments in the first quarter of 2007 to 15 in the first quarter of 2008.
White & Case’s Hollander also sees the rising tide lasting into 2009. “New filings will taper off before the workload will, because it takes a bit of time to resolve matters once [a company] files for bankruptcy,” he says.
White & Case has benefited from the U.S. economic slump. Predominantly a firm that handles non-U.S. insolvencies, 16% of its new cases in the first quarter were in the U.S. For the same period last year, only 6% were. “There’s a global credit crunch,” he says. “There will be an increase in filings in a variety of places throughout the world.”
Carson notes that four recessions have been followed by spikes in default rates higher than the current 5%. Those defaults then often become bankruptcies. “In the 1990s, the default rate spiked to more than 10%, while in 2001 the default rate spiked to nearly 13%,” he says. “We have a ways to go in defaults. We’re very much in the beginning.”
While it’s true that the duration of the current bankruptcy wave is “the $64,000 question,” Carson says, remember one thing: It wasn’t long ago that the legal and advisory communities were handicapping when the sky would fall. And that took longer than everyone anticipated to occur.
As firms such as Traxi and Moelis recruit, they may want to note just how wrong predictions can be. After all, streaks can be short as easily as they can be long.