Experience Counts In A Workout

Editor: Please describe your practice areas. How does your experience in leverage finance and restructuring serve to broaden the reach of the structured finance practice at Bracewell & Giuliani?

Flaschen: My practice is financial restructuring in both out-of-court situations and in Chapter 11 cases. Greg's practice is in commercial litigation with an emphasis on bankruptcy litigation. We were recently attracted to Bracewell & Giuliani for a number of reasons, including its very high caliber finance practice in New York, and we are pleased to be members of such a collegial team.

Editor: How many professionals are now engaged in this practice at the firm?

Flaschen: Between finance and restructuring, we now have close to 50 attorneys involved in financial restructuring transactions. It is a large, vibrant practice. We just added two more of my former partners at Bingham McCutchen LLP: Mark Joachim, who advises asset-based lenders, investment and commercial banks, and various equity funds, and Bob Carey, who focuses on corporate finance and securities, including indenture interpretation disputes.

Editor: How does your experience add depth to the firm's private funds practice?

Flaschen: Our restructuring representations typically involve groups of investors with distressed debt portfolios, with the majority of the members of the group being hedge funds or other private investment funds. We have a great many contacts with funds involved in distressed investing. This practice balances well with the firm's existing practice on behalf of private equity funds.

Editor: Please discuss your roles in restructuring cross-border bankruptcies. What measures do you suggest for simplifying the process where nationals of several countries are involved?

Flaschen: We have had the good fortune to be involved in a number of cross-border restructurings throughout Europe, Australia, and Latin America. The number one measure dealing with cross-border insolvencies is good communication, bridging the gap between your client's American-based investment expectations and the realities of the other country's process and culture. We can best serve our clients by being that bridge due to our international restructuring experience over the years.

Nye: We see clients with investments around the world. When these investments need to be restructured, there is often an attempt to access the U.S. court system, especially if there is likely to be litigation. There are good reasons to do so. Of course, in the UK if you litigate a case and lose, you may be paying the other side's attorney's fees. Also, the U.S. has such a well developed insolvency code compared to many other countries. Forty percent of what I have done in the international arena is to analyze whether there is jurisdiction and venue to access the U.S. courts.

Editor: What jurisdictions offer the greatest flexibility for arriving at a plan of arrangement and final discharge from bankruptcy?

Flaschen: Due to their legal systems, common law countries such as Australia, Canada, New Zealand and the UK, can provide more flexibility. It is more difficult in civil law countries, such as France, Germany, Mexico and Italy, because courts have less flexibility. Most of what we do is out of court so it is based more on the business sense, flexibility and willingness to come to agreement of the professionals and the people involved. That is true no matter what country is involved. It boils down to the people, their culture, and whether they trust you. It does help our clients a great deal that we are well-known attorneys in this arena, which helps with their credibility and bridging the gap with other parties.

Editor: Why is it beneficial for institutional investors, such as insurance companies, hedge funds and venture funds to engage your services?

Nye: The primary benefit is that we understand both our clients and the markets in which they operate. We know the achievable goals of our clients going into a restructuring. From my perspective as a bankruptcy trial lawyer, the value we add is that we know how to get things done in the bankruptcy court, even in highly contested matters. Bankruptcy courts are very different from other courts. Lawyers operate in a multiplayer field in bankruptcy court and bankruptcy judges have very different expectations about litigation in their courts. We represent large creditor groups in insolvency proceedings around the world. The keys to success in this area are: institutional knowledge, knowing how to get things done and, on those occasions when you have to try the case, being able to do that well.

Flaschen: Our reputations are well recognized in an area where there are relatively few firms and individuals who are identified as practicing at the first tier level. When you hire someone with a reputation at that tier, you are sending a particular message that helps in the negotiations and in the bankruptcy litigation.

Editor: Do you find that a pre-packaged plan allows for a quicker and more satisfactory discharge from bankruptcy? What elements are needed for this to work?

Flaschen: It is a double edged sword. Pre-packaged plans if negotiated relatively quickly certainly allow for a quicker exit from Chapter 11. The other side of the sword is that it can take months or a year to negotiate the pre-packaged plan itself. In addition, if the company is in need of operational restructuring, not just balance sheet restructuring, the pre-packaged plan will only deal with the latter issue and not the former. That is why a number of companies that have pre-packaged plans end up filing again several years later. For the right companies pre-packaged plans are terrific but you need to make sure it is the right situation.

Editor: What measures are required to secure assets which may be scattered across several continents?

Nye: It depends on the foreign jurisdiction as well as the assets involved. In those countries that have developed legal systems, a creditor can conduct parallel proceedings and enlist the aid of foreign courts. The UK is one such jurisdiction. In other countries, a more creative approach is often necessary. The aircraft and shipping industries provide good examples. In those industries, a creditor may be able to exercise self-help. Sometimes that means going to court and in other cases it means simply hiring the right people to repossess your collateral.

Editor: What special attention do you suggest your clients pay to including certain covenants in loan or other agreements, even before there is a threat of bankruptcy, such as post-petition interest clauses, etc.?

Flaschen: We find that with the liquidity that there is in the marketplace today, it is harder to negotiate protective covenants as opposed to being forced to live with the covenants that the investment bank has put into the deal. There are tweaks that you can put in, such as the ability to collect post-petition interest. Overall there is less ability to negotiate those. One exception is in the field of leveraged finance where there is often a negotiation involving the inter-creditor agreement between the first lien holders and the second lien holders. There is always a battle as to the extent to which second lien holders can have rights restricting first lien holders. That is negotiated in a case-by-case situation and is one of Mark Joachim's particular specialties.

Inter-creditor agreements in the creditor context typically afford few rights to the second lien holder. Some of our most active situations are Chapter 11 cases where we represent committees of second lien holders. It is important to be able to voice their concerns and exercise their legal abilities within the context of inter-creditor agreements which can be quite restrictive.

Editor: Why should lenders and others be concerned about fraudulent conveyance of assets and preference periods? Does the same rule apply in jurisdictions outside the U.S.?

Flaschen: They should be concerned to the extent that they are dealing with a troubled company and seeking to obtain additional collateral or payments shortly before a company is likely to go into Chapter 11. Our view is that it is better to get the collateral and the payments, and then if the company still files for Chapter 11, you deal with it then.

Internationally there are variations of fraudulent transfer and preferential avoidance laws. Each jurisdiction looks at it differently. That is the importance of good local advice and of U.S. counsel who understands the differences and can explain them to the U.S. clients in U.S. terms.

Nye: We have seen attempts by creditor groups to stand in the shoes of debtors and bring derivative fraudulent conveyance and preference actions. This is the arena where we see some creative expansions of fraudulent conveyance and preference law. I am litigating cases now that I consider to be bizarre extensions of the law. Lenders need to pay close attention to the possibility that fraudulent conveyance and preference claims may be expanded beyond their intended reach in a given case.

Editor: How does it benefit a creditor to have a work-out team on site at a failing company before a bankruptcy is declared?

Flaschen: We get involved before there is a bankruptcy. We deal with large public company restructurings where it is in the company's interest to seek to negotiate a consensual resolution with its lien holders or bond holders, even if they need to go into Chapter 11 afterwards. There are pre-negotiated bankruptcies where you do not have a plan or vote prior to the filing, but you do have a consensus as to how you ought to be treated which makes the Chapter 11 operate more smoothly. The alternative to that is a free-fall bankruptcy where there are no agreements - those are the most contentious ones. Our preference is to work with a company before a filing to see if we can help smooth the process and make it less contentious.

Editor: What words of wisdom would you like to impart to private equity, hedge funds and venture funds when going into uncharted waters?

Flaschen: Appreciate that the workout world and the bankruptcy world have their own particular rules, customs and procedures, almost all unwritten. Accomplishing the fund's objectives needs to be done in the context of a different system than what they are used to. Having experienced and top level counsel can be helpful because they can help you achieve your investment objectives while doing it in a manner that the other parties in the situation are comfortable with.

Published May 1, 2007.