During the past few months, nine corporate law firms in Texas – including Munsch Hardt, Sidley, Katten Muchin and Shearman & Sterling – have added lawyers to their bankruptcy practices.
Nearly two-dozen other firms are aggressively recruiting experienced restructuring partners and associates with the goal of bolstering their bankruptcy expertise during the next few months.
The reason is simple: Legal and financial advisors believe a surge of business bankruptcies is heading toward Texas and there is big money to be made representing clients in deep economic distress.
Competition for restructuring lawyers with deep experience is intense among the law firms because each corporate bankruptcy could mean millions of dollars – or sometimes tens of millions of dollars – in revenues.
Even in smaller business bankruptcy cases, lawyers charge between $350 and $700 an hour and generate six-digit revenues.
The top billing rate in large corporate restructurings in Texas has now hit $1,750 an hour. More importantly, the biggest and most complex bankruptcies require the expertise of dozens of legal advisors from a multitude of disciplines – all of whom charge $900 or more an hour.
“It may not seem logical, but business bankruptcies can be highly profitable for law firms positioned to take advantage of the financial distress and restructuring of their corporate clients,” law firm consultant Kent Zimmermann said in an interview earlier this year.
“Let there be no doubt, there are big, big dollars to be made in bankruptcy,” Zimmermann said.
Texas Lawbook research found that law firms generated more than $2 billion in revenues by representing Texas businesses in bankruptcies between 2015 and 2017 when the most recent wave of corporate restructurings hit the state.
The current Exco Resources bankruptcy in Houston provides an example of the money that law firms can make. To date, Exco has paid more than $60 million to its legal and financial advisors. Six law firms have been paid $1 million or more for their roles in the restructuring. The biggest winner is Kirkland & Ellis, which represents Exco and has been paid more than $20 million so far.
Despite new Texas Lawbook data showing that business bankruptcy filings in Texas declined significantly during the first half of 2019 from the previous two years, law firm leaders are convinced the corporate restructuring practice is about to heat up again.
Legal and financial insiders who specialize in corporate restructuring and financial distress say they see specific signs – record amounts of debt and leverage, lower oil prices, vacant commercial real estate space and increased pressures on healthcare companies and retailers – that are a precursor to a blitz of business bankruptcy filings.
The Texas Lawbook surveyed the 40-plus corporate law firms operating in Texas that have lawyers specializing in bankruptcy and restructuring. Twenty-eight firms responded.
There are 304 lawyers at those 40 firms in Dallas, Houston, Austin and San Antonio who practice bankruptcy law full time. The firms report that another 350 lawyers from other practices – from litigation and tax to M&A and corporate finance – have spent a significant amount of time working with clients on matters related to bankruptcy or restructuring.
“When a client is in bankruptcy, major issues often arise that require we bring in lawyers from other practices,” says Norton Rose Fulbright partner Lou Strubeck, who leads the firm’s restructuring section.
Twenty-two of the 28 corporate law firms with bankruptcy practices in Texas are aggressively seeking to hire attorneys with bankruptcy or restructuring expertise, according to The Texas Lawbook survey.
“Our view is that we are in the calm before the storm for the bankruptcy and restructuring practice,” says Yvette Ostolaza, managing partner of Sidley’s Dallas office.
Sidley hired Weil Gotshal bankruptcy partner Charles Persons earlier this year, and the move is already paying dividends. Midland-based Legacy Reserves chose Sidley as debtor’s counsel when it filed to restructure in June.
“We are definitely beefing up, and we have other hires in the works,” Ostolaza says.
Sidley is certainly not alone. Late last year, Dorsey & Whitney snagged former Munsch Hardt and Norton Rose Fulbright corporate finance partner Matt DeArman. Last week, Munsch Hardt responded by hiring a bankruptcy star: Christopher Johnson, a former partner at McKool Smith and past chair of the Houston Bar Association’s bankruptcy section.
In June, Shearman & Sterling convinced Ian Roberts, a special counsel in the bankruptcy practice at Baker Botts, to join its new Dallas office. Katten Muchin poached Charles Gibbs from Akin Gump in April. That same month, Quinn Emanuel grabbed Jackson Walker bankruptcy partner Patricia Tomasco for its Houston office.
“The economy and the restructuring practice are cyclical,” Strubeck says. “And we are certainly due, actually overdue, for a down cycle.”
“This seems to be the prevailing thought among industry professionals, and lately there has been a good deal of movement of professionals to other law and advisory firms, so they are betting on increased activity,” he says.
Two law firms – Hunton Andrews Kurth and Foley Gardere – have 20 or more bankruptcy lawyers based in Texas. Four other law firms – Haynes and Boone, Norton Rose Fulbright, Vinson & Elkins and Jackson Walker – have a dozen or more.
Texas Lawbook research shows, however, that a significant portion of the high-dollar legal advisory work is going to lawyers based outside of Texas.
Besides Exco, Chicago-founded Kirkland is also lead debtor’s counsel for Westmoreland Coal Co., which filed for restructuring with $1 billion in debt in October 2018, and Vanguard Natural Resources, which filed in April 2019 with $1.19 billion in debt. All three cases are in the Southern District of Texas.
Earlier this month, Halcón Resources hired Weil Gotshal to lead its bankruptcy. Fort Worth-based Emerge Energy, which filed for Chapter 11 protection in April, has Latham & Watkins as its lead legal advisor.
In all five cases, a majority of the lawyers listed as working on the restructurings for their clients are based in Chicago, New York, Los Angeles or Washington, D.C.
The bankruptcy practices at Hunton Andrews Kurth and Latham have also been busy. Those firms were hired by Dallas-based Monitronics International, which filed for Chapter 11 last month with $2 billion in debt, and Weatherford International, which reported $10 billion in liabilities.
Experts say distressed companies have gotten smarter about how they use Chapter 11. They say bankruptcy cases such as Energy Future Holdings, which paid its legal and financial advisors in excess of $600 million, and American Airlines, which paid its lawyers and bankers more than $250 million, are gone.
“More and more, we see Chapter 11 being used as a tool to implement complex deals on an expedited basis, which often times shortens the duration of the case itself,” says Brian Schartz, a partner in the Houston office of Kirkland.