Welcome back to the Big Law Business column. I’m Roy Strom, and today we look at how leveraged finance lawyers are working on cleaning up old deals rather than drafting up new ones. Sign up to receive this column in your Inbox on Thursday mornings.
Wall Street’s leveraged buyout machine kept Big Law firms busy printing up deal documents for more than a decade. But it’s been nearly two years since the gears got gummed up, and lawyers are still largely stuck in cleanup mode helping banks, companies and debt holders deal with what’s known as hung debt.
The work typically isn’t as lucrative as when the merger machine is healthy and law firms are racking up stats on league tables. But the cleanup is high stakes and complex, with billions on the line for clients.
Some firms have spotted the opportunity to provide a trio of services required to work out the kinks. Leveraged finance lawyers are bringing in colleagues from restructuring and litigation practices to advise when deals or borrowers run into trouble.
At Mayer Brown, a firm long known for its work with major banks, the heads of the firm’s leveraged finance, restructuring and litigation groups have worked together to market themselves as a cleanup crew of sorts.
“That amalgam of lawyers has taken a practice to tens of millions of dollars of revenue a year,” said Rich Spehr, head of the firm’s global litigation and dispute resolution group. “We market ourselves in a very particular niche in which we want to represent our premium bank clients in the most complex matters that involve all three areas of our expertise and depth.”
In boom times, leveraged finance work was a crucial profit center for plenty of the largest law firms, who worked with banks, private equity firms, and companies to arrange financing for major corporate acquisitions.
Typically, banks quickly sell those loans and get to work packaging up the next deal. But as interest rates rose at the sharpest clip in decades starting in 2022, many of the loans—packaged and priced months earlier—didn’t pay enough to attract buyers.
This so-called hung debt ballooned to a roughly $80 billion albatross, Bloomberg reported last week. The most high-profile such deal was Elon Musk’s contentious purchase of what was then Twitter Inc., which Bloomberg reported accounts for about $12.5 billion of the $18 billion banks are still straddled with.
Unable to offload the deals from their balance sheets, banks were largely forced to the sidelines last year. Private credit providers stepped in to fill some of the void—leaving many lawyers pondering who their future clientele will be.
When the loans fail to sell, or can’t be “syndicated” in Wall Street lingo, lawyers are called in to help problem solve, said Meredith Mackey, a partner at Fried Frank who previously worked as a vice president in Goldman Sachs’ loan negotiations group.
Negotiations take place with the possible buyers of the debt over what might make it more attractive, Mackey said. The deal can be enhanced with further collateral, better pricing (to an extent), or adjustments to other terms of the debt such as its maturity.
“In today’s market, there’s more opportunity for lawyers to add value,” Mackey said. “It’s with troubled companies and tough markets that you really have to examine the underpinnings of why our documents are constructed as they are, and what you can change to address a company’s problems or adjust to market conditions and still protect clients.”
Apart from negotiating over hung debt—which is often ultimately sold at discounts—leveraged finance lawyers get to work when transactions leave companies in distress and holders of their debt start getting pushed around.
The latest example is fallout from the merger of pay-TV provider Dish Network and satellite operator Echostar, which closed at the start of the year. EchoStar, advised by White & Case, has since announced a series of asset transfers and debt swaps that caused the price on some of its longer-term debt to plummet.
The holders of some of that debt have tapped law firms including Paul Weiss and Milbank, Bloomberg has reported, weighing legal options that include sending a default notice to the company.
An increase in such aggressive credit maneuvers, often called liability management transactions, was one of the reasons Scott Zemser returned to Mayer Brown from Allen & Overy in 2018, he said. Zemser leads Mayer Brown’s global leveraged finance group, which has expanded to 25 lawyers from just three when he arrived.
He wanted to form a team of restructuring and litigation experts who could counsel on the most complex matters. The firm has added partners from competitors including King & Spalding, Gibson Dunn & Crutcher and Sidley Austin.
Zemser, the litigator Spehr, and the global bankruptcy practice group leader, Brian Trust, together wield a team of about 100 lawyers globally who advise on troubled deals.
“We think for better or worse,” Zemser said, “there will be more of these situations going forward.”
Worth Your Time
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On Discrimination Suits: A Black female attorney says Troutman Pepper Hamilton Sanders LLP discriminated against her because of her race, then retaliated against and ultimately fired her for complaining about the bias, Patrick Dorrian reports.
That’s it for this week! Thanks for reading and please send me your thoughts, critiques, and tips.