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When three private equity groups arranged to buy HD Supply Inc. early this past summer, the deal looked like simply another in a long chain of blockbusters. Then subprime loan defaults shot up, banks tightened their lending policies and the credit markets ran dry. With the real estate market already in a tumble, the long-term prospects of HD Supply, a division of the Home Depot Inc. that caters to building contractors, were uncertain. The deal, like dozens of others signed before the credit market shut down, was stuck in limbo. For lawyers at Debevoise & Plimpton who represented the consortium of buyers, the work they would have done after the close � and time they would have billed � was suddenly in doubt. Even scarier for Debevoise & Plimpton, and for all firms with big private equity practices, was the fact that no new deals were popping up to take the place of those that were stuck. Those fears are shared by lawyers who work on mortgage-backed securities, a market that has completely shut down. The fears are well justified for both groups and for any lawyer whose business is linked to the availability of easy credit. In June there were nearly $100 billion worth of private-label mortgage securitization issuances. The next month, they were half that. “There’s always an element of cyclicality,” said Paul Weiss Rifkind Wharton & Garrison structured finance partner Jordan Yarett, “but the implosion of credit is somewhat shocking.” On the private equity side, dealmaking volume for the first half of 2007 was twice what it had been over the same period the year before. Then August came, and the markets took a long vacation. Announced private equity deals for the month totaled just $5 billion, down from $45 billion the year before. Of the two practice areas, the structured finance lawyers are in a tougher spot. “These [practices] are incredibly profitable for law firms because they only require one or two partners on top, and a dozen or more attorneys underneath just churning these things out,” said a partner at another AmLaw 100 firm who does securitizations. “It’s almost like a massive tort litigation case: document-intensive, and not a lot of negotiation.” But when the pipe is empty, these practices suffer for the same reason that they are profitable: It takes lots of bodies to roll these offerings out the door, and that leaves lots of lawyers with potentially little to do in a drought. Firms like Cadwalader Wickersham & Taft, which handled $106 billion worth of mortgage-backed securitizations as underwriter’s counsel in the first half of 2007, as much as the firm did in all of 2006, are insulated to some degree with countercyclical practices, like bankruptcy. (Cadwalader Wickersham did not return calls seeking comment for this story.) But smaller niche firms are more vulnerable. About half of McKee Nelson’s 200 lawyers, and almost 40 percent of Thacher Proffitt & Wood’s 350 attorneys, work in structured finance. Still, their managers are loath to admit that a problem exists. “It’s understood by management that there are periods like this,” said Stephen Kudenholdt, who heads Thacher Proffitt’s structured finance practice. “Volumes are not going to go up 20 percent every year.” While the volume of standard securitizations is down, he said, other work, including restructuring the securitizations, is up. The group still plans to bring in 20 first-year associates this fall and doesn’t plan to make any recruiting or hiring changes, he said. McKee Nelson’s managing partner, William Nelson, also said that his firm is still busy securitizing other, nonmortgage loans. It just closed, for example, an $803 million auto loan securitization at the end of August. “We’re pretty busy,” he said. “We don’t at this point have any lawyers walking around with nothing to do.” That may be true at those firms, but some people are in for a tough year. According to an internal memo obtained by the blog Above the Law, Kilpatrick Stockton announced raises for all associates � all, that is, except those who work in capital markets. Private equity lawyers are arguably in better shape. Work on more than $300 billion worth of deals booked before August will keep them busy for at least the next few months, they say, and other areas remain strong, such as fund formation and middle-market buyout deals (those worth less than $1 billion). Alan Klein, a partner at Simpson Thacher & Bartlett, notes that his clients are buying pieces of companies rather than the whole hog. “These private equities guys have to invest their money,” he said. If structured finance and private equity lawyers are struggling to meet their billable hours targets, though, litigators might be giving up their weekends for the next few months. The Securities and Exchange Commission has launched at least a dozen investigations around the subprime crisis and filed suit against one fund manager, Sentinel Management Group Inc., which is accused of lying to its clients about its investments. Investors have filed lawsuits against the companies that have collapsed in the wake of the subprime crisis, including the Bear Stearns hedge funds and mortgage lenders. Even credit rating agencies may get swept up in the litigation, according to Columbia University Law School professor John Coffee, an expert in securities regulation and litigation. Outfits like Standard & Poor’s and Moody’s Investors Service certified many of the bonds at issue as investment grade, even though they had a default rate that was 10 times higher than that of comparable corporate bonds. To the extent that litigation and bankruptcy practices act as a safety net, it is not a hedge shared by U.K. firms. Many are concentrated on deals and financings, to the exclusion of other practices. Linklaters’s practice is more than 75 percent corporate and finance. London-based Ashurst thrived on the multibillion-dollar buyouts that have dominated the European deal scene but are now off the agenda. During the slowdown, deal lawyers have been reduced to economic forecasting and speculation. For example, King & Spalding private equity partner Raymond Baltz Jr. said that for activity to pick up again, everyone involved must adjust their expectations. Private equity investors have to lower their target rates of return, sellers have to accept lower prices and banks can’t limit their lending too much. That, essentially, was the recipe for success in the HD Supply sale that finally went through in August. The buyers and lenders stayed at the table and, after two weeks of around-the-clock negotiations at Debevoise & Plimpton’s office, finally agreed on new terms that included a lower sale price and a $1 billion debt guarantee by Home Depot. “Here’s your headline,” said Ropes & Gray partner R. Newcomb Stillwell, who represented bidder Bain Capital LLC. “Lawyers and bankers behave rationally.” This article originally appeared in The American Lawyer , a publication of ALM. �

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