US law firms criticized for restructuring work in Latin America
US-based law firms are handling a significant volume of restructuring work outside of Latin America, where companies have received little government support during the pandemic.
Data compiled by Debtwire shows that Cleary Gottlieb Steen & Hamilton is lead counsel in nine restructurings that began in 2021, the most of any law firm. Cleary is followed by Davis Polk & Wardwell and Brazilian boutique Padis Mattar Advogados, which each undertook four restructurings last year.
For Latin America cases pending or closed in 2021, Debtwire counts Brazilian boutique TWK Advogados as lead counsel out of 19, the most of any firm, followed by Cleary Gottlieb with 18 and White & Case with 15.
Richard Cooper, a restructuring partner at Cleary Gottlieb with extensive experience in Latin America, says 2021 was the busiest year he can remember for his group and the year before was also “extremely busy”.
“There’s a growing awareness among non-US businesses of some of the benefits of using Chapter 11 if you’re in the unfortunate position of having to restructure your debt,” Cooper told Law.com International.
White & Case, Cleary and Davis Polk have all been involved in airline restructurings in Latin America that followed the sharp drop in travel demand at the onset of the COVID-19 pandemic.
Some governments in the region, such as Chile’s, have largely closed borders, which has dampened business for airlines. At the same time, government aid to airlines has not arrived in countries like Mexico.
Richard Kebrdle, financial restructuring and insolvency partner at White & Case, expects a significant increase in new restructuring cases in Latin America in 2022.
A handful of Latin American jurisdictions have passed new laws and regulations that are being tested by filers. Brazil, for example, recently revised its bankruptcy law, and Argentina has an evolving foreign exchange regulatory regime that has complicated restructuring activities in that country.
Dozens of cases citing Brazilian law firms as lead attorneys have been filed in Brazil since the country enacted a number of significant bankruptcy law reforms in late 2020.
US companies also have the opportunity to become involved in these cases, although they should be careful to limit advice to US law. The Brazilian Bar Association allows non-Brazilian firms to advise on legal matters in their home country, but expressly prohibits foreign law firms from consulting on Brazilian law, even if they do so in collaboration with Brazilian members of the bar association.
But there are clear benefits for non-US businesses to file for Chapter 11. It gives them the option of getting a blanket stay, which means creditors with a US connection can’t sue. court to seize the debtor’s assets. A filer in the United States can also access a larger pool of capital, including from lenders willing to extend credit to struggling businesses. This allows companies to stay in business while they renegotiate.
The process in the United States is also more sophisticated and predictable, Cooper says, because American bankruptcy judges have more experience in restructuring than Latin American judges.
The main disadvantage is the cost: a deposit in the United States is expensive.
Nonetheless, the United States is often the best, and in some cases the only, jurisdiction in the region to reorganize cross-border business groups, says Timothy Graulich, a New York-based restructuring partner at Davis Polk.
“It may also be a superior court for domestic restructurings because of the power of US courts to issue global injunctions and the relative speed of US proceedings,” he said.
Latin American companies face inherent risks that often lead to the need for restructuring expertise, says Graulich. On the one hand, large corporations frequently borrow in US dollars but are dependent on local currency revenues, which undermines their ability to pay creditors when those local currencies lose value against the dollar.
And for creditors, filing in the United States provides better protection because senior creditors are paid before junior creditors and shareholders can recoup a company’s value. This is particularly important for creditors in Latin America, a region rife with large, often family-owned, private companies.
“A common theme that often drives these restructurings,” says Kebrdle of White & Cases, “is the markedly different expectations that local shareholders, directors and management have of international lenders and distressed investors, particularly creditors who are new to the region and familiar with US and European insolvency proceedings and priority regimes.