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Bankruptcy lawyers say they are finally starting to see the sharp upswing in filings that, given the troubled economy, they’ve been expecting. Sixty companies with liabilities greater than $100 million have filed for Chapter 11 bankruptcy in the first half of 2008, according to New York University finance professor Edward Altman. In all of 2007, he said, there were only 38 filings from such companies. The spike in major business failures is expected to keep bankruptcy attorneys busy, especially since Chapter 11 filings these days have been made more complex, partially because of investment by hedge funds. Lawyers say they’re preparing for the rush. “The ice is breaking, you can hear it,” said Larry Engel, a bankruptcy partner in Morrison & Foerster’s San Francisco office. “We’ve added partners as well as associates in strategic places.” Those strategic places include London and New York. (New York and Delaware are key U.S. locations for major bankruptcy filings.) Filings will increase in California, too, he said, but the majority will take place in those key venues. The work, though, will be spread out among the many offices of major law firms. Peter Gilhuly, a bankruptcy partner in Latham & Watkins’ Los Angeles office who has been getting near-daily e-mails of new filings in Delaware, said the increase in filings is beginning to fill pipelines. “I expect us to be very busy,” he said. That’s definitely the message he’s getting in chats with firm management: “They said, ‘You’re going to carry us for a bit.’” WHAT TOOK SO LONG? The impending increase in filings is hitting later than lawyers expected. “Many people already thought the influx of cases would have hit,” said Richard Havel, the head of Sidley Austin’s Los Angeles bankruptcy group. The filings were delayed for various reasons, lawyers said. There’s more willingness to buy ailing companies, and those companies are more often seeking alternatives to bankruptcy, partly because of stricter bankruptcy rules enacted in 2005. “There’s a really much larger sophistication among all the parties in what bankruptcy means to a lender, to a sponsor, and I think there are more rational decisions being made, which is, you only file a bankruptcy if it makes sense to you,” Gilhuly said. Despite this, with increasing debt coming due, many companies are finding themselves with no alternatives. “Bankruptcies and defaults have finally started to increase in 2008,” Altman wrote in an e-mail on Tuesday. Altman and a colleague released a report on Friday that found, among other things, that the value of outstanding high-yield or junk bonds that have defaulted in the first half of 2008 is higher than those that defaulted in 2006 and 2007 combined. The riskier high-yield bonds, lawyers said, are the low-quality canaries in the economic coal mine. “You can measure, presumably, the way in which the economy is going by looking at the low end first,” said Stephen Cowan, a real estate and bankruptcy partner at DLA Piper in San Francisco. Reuters reported Tuesday that corporate bond investors were prepared for the worst, with a record-breaking volume of distressed debt predicted for 2009. In his report, Altman predicted that the bond default rate in 2008 — the number of bonds that were outstanding at the beginning of the year that will have defaulted — will be 4.5 percent, up from 0.5 percent in 2007. “Defaults are certainly [rising] and will continue to do so in the next 12 to 18 months, at least,” Altman wrote. “If we have a severe recession, however, the default rate could very easily go into double digits.” NOT YOUR FATHER’S BANKRUPTCY Engel said he’s been working through busy cycles since 1972, but that this one will be unique. “The hedge funds have totally changed the game,” he said. Hedge funds and other investors are more aggressive than such traditional lenders as banks, and are more willing to acquire the companies that default on them, he said. “Now more than ever in the past, creditors are becoming owners of the company that they’re creditors of,” he said. As a result, bankruptcies are becoming more complicated and require more collaboration with other lawyers. In anticipation, Engel said, Morrison & Foerster created multidisciplinary teams for various types of bankruptcies 18 months ago, at the end of a major planning session. “Whatever the asset category you’re talking about, we have somebody that does the front end of those deals, and understands them in that business, working with the bankruptcy people who understand the distressed part of the transaction,” he said. Other firms, such as Latham, are seeing similar collaboration among various practices and among the bankruptcy lawyers themselves, Gilhuly said. “I need to be able to have other people take big chunks and work on it.” And both said that, as the economic trouble spreads, the increase in filings won’t be limited to specific market sectors. “I cannot think of any industry that is untouched by the general malaise,” Gilhuly said.

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