Dip in Bankruptcies Forces Firms to Trim Ranks

Generally, the number of Chapter 11 filings has been dropping every year since the height of the financial crisis. For the 12 months ending in June 2013, the number of business Chapter 11s in the Southern District of NY was 455 ' a 71% drop compared with the filings in the year ending June 2009, according to statistics from the Administrative Office of the U.S. Courts. Most recently, in the second quarter of 2013, the Southern District of NY saw 67 Chapter 11 filings, about a 70% drop from the same period last year.

In Delaware, the number of Chapter 11 filings for the year ending June 2013 was 759, down from 1,635 in the same term four years ago. Nationwide, the number of all bankruptcies, both corporate and personal, has been on the decline.

“If you ask any honest restructuring professional, they will tell you business is slower than it was a couple years ago because there are fewer companies that are being restructured,” said Stephen Lerner, chair of Squire Sanders' restructuring and insolvency practice. In addition, there are fewer cases with debt at more than $1 billion.

Attorneys point to a number of factors for the decline, including an improving economy, low interest rates and more investors willing to put funds into distressed companies outside of bankruptcy.

“Companies in debt three or four years ago could not have refinanced because interest rates were too high,” Rapisardi said. Businesses today can refinance with debt, bonds and loans with attractive interest rates, he said.

“It's so cheap for companies to borrow money. They can always borrow more to pay old debt” or to continue operating, noted Edward Neiger, a managing partner at bankruptcy firm ASK LLP.

And in the past 10 years, there has been a “rise of the professional investor,” including hedge funds and private equity firms interested in distressed companies, said Damian Schaible, a partner at Davis Polk & Wardwell and chair of the New York City Bar's bankruptcy committee. Schaible said he has seen debt-burdened companies better able to access capital and lending markets and avoid bankruptcy.

Meanwhile, changes to the Bankruptcy Code in 2005 accelerated Chapter 11 cases, in particular by shortening deadlines to file a reorganization plan and to assume or reject commercial real estate leases, Rapisardi said.

Law Firm Business

Law firms bulked up their practices in 2008 and 2009 when filings soared, and litigators and corporate attorneys became part of the bankruptcy teams. Now, the drop in bankruptcy work “has forced a contraction in the industry in terms of firms cutting back on the size of bankruptcy practices and reallocating those resources to their other practice groups,” Rapisardi said.

The slowdown in filings has affected job prospects, lawyers said. “If you're an attorney who has experience in bankruptcy and you're looking for a job, it will probably be harder for you than if you're an attorney who has litigation experience” or other expertise, Neiger said.

Bankruptcy lawyers said they saw a direct link between the slowdown in large cases and Weil Gotshal & Manges' move this year to lay off 60 associates and 110 non-lawyer employees and to trim compensation of some partners.

Weil benefited from working on the largest cases during the recession, including Lehman Brothers and Washington Mutual.

'Not Here to Stay'

“This bankruptcy recession is not here to stay. It will eventually have another cycle,” Rapisardi said, noting previous slowdowns in the 1990s and 2000s. Right before the recession, the number of Chapter 11 filings in the Southern District and nationwide was lower than today, according to court statistics comparing the year ending June 2013 with the year ending June 2007.

But others disagree. One expert said he believes the number of filings next year will remain flat. He said the 2005 changes to the bankruptcy code will result in fewer Chapter 11 reorganizations over the long run, unless the code changes.

Christine Simmons is a reporter for the New York Law Journal, an ALM affiliate of this newsletter, in which this article also ran.

A slowdown in Chapter 11 bankruptcy filings has led law firms to trim their ranks and steer bankruptcy attorneys into other areas.

“Firms across the board have been trimming their restructuring practices because there's been a pronounced slowdown in the field,” said John Rapisardi, a partner in O'Melveny & Myers and cochair of the firm's restructuring practice.While some attorneys say the “bankruptcy recession” will end when interest rates rise, others believe the change is long-lasting.

Filings Down

Generally, the number of Chapter 11 filings has been dropping every year since the height of the financial crisis. For the 12 months ending in June 2013, the number of business Chapter 11s in the Southern District of NY was 455 ' a 71% drop compared with the filings in the year ending June 2009, according to statistics from the Administrative Office of the U.S. Courts. Most recently, in the second quarter of 2013, the Southern District of NY saw 67 Chapter 11 filings, about a 70% drop from the same period last year.

In Delaware, the number of Chapter 11 filings for the year ending June 2013 was 759, down from 1,635 in the same term four years ago. Nationwide, the number of all bankruptcies, both corporate and personal, has been on the decline.

“If you ask any honest restructuring professional, they will tell you business is slower than it was a couple years ago because there are fewer companies that are being restructured,” said Stephen Lerner, chair of Squire Sanders' restructuring and insolvency practice. In addition, there are fewer cases with debt at more than $1 billion.

Attorneys point to a number of factors for the decline, including an improving economy, low interest rates and more investors willing to put funds into distressed companies outside of bankruptcy.

“Companies in debt three or four years ago could not have refinanced because interest rates were too high,” Rapisardi said. Businesses today can refinance with debt, bonds and loans with attractive interest rates, he said.

“It's so cheap for companies to borrow money. They can always borrow more to pay old debt” or to continue operating, noted Edward Neiger, a managing partner at bankruptcy firm ASK LLP.

And in the past 10 years, there has been a “rise of the professional investor,” including hedge funds and private equity firms interested in distressed companies, said Damian Schaible, a partner at Davis Polk & Wardwell and chair of the New York City Bar's bankruptcy committee. Schaible said he has seen debt-burdened companies better able to access capital and lending markets and avoid bankruptcy.

Meanwhile, changes to the Bankruptcy Code in 2005 accelerated Chapter 11 cases, in particular by shortening deadlines to file a reorganization plan and to assume or reject commercial real estate leases, Rapisardi said.

Law Firm Business

Law firms bulked up their practices in 2008 and 2009 when filings soared, and litigators and corporate attorneys became part of the bankruptcy teams. Now, the drop in bankruptcy work “has forced a contraction in the industry in terms of firms cutting back on the size of bankruptcy practices and reallocating those resources to their other practice groups,” Rapisardi said.

The slowdown in filings has affected job prospects, lawyers said. “If you're an attorney who has experience in bankruptcy and you're looking for a job, it will probably be harder for you than if you're an attorney who has litigation experience” or other expertise, Neiger said.

Bankruptcy lawyers said they saw a direct link between the slowdown in large cases and Weil Gotshal & Manges' move this year to lay off 60 associates and 110 non-lawyer employees and to trim compensation of some partners.

Weil benefited from working on the largest cases during the recession, including Lehman Brothers and Washington Mutual.

'Not Here to Stay'

“This bankruptcy recession is not here to stay. It will eventually have another cycle,” Rapisardi said, noting previous slowdowns in the 1990s and 2000s. Right before the recession, the number of Chapter 11 filings in the Southern District and nationwide was lower than today, according to court statistics comparing the year ending June 2013 with the year ending June 2007.

But others disagree. One expert said he believes the number of filings next year will remain flat. He said the 2005 changes to the bankruptcy code will result in fewer Chapter 11 reorganizations over the long run, unless the code changes.

Christine Simmons is a reporter for the New York Law Journal, an ALM affiliate of this newsletter, in which this article also ran.