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With commercial bankruptcy laws in Europe evolving into a system akin to the process in the United States, lawyers are stepping up their pursuit of lucrative restructuring work. Laws in the United Kingdom, Germany and other key European economies are changing to avoid wholesale collapses of businesses when corporate balance sheets go awry. Instead of total liquidations orchestrated by lending banks, the insolvency process in some European countries now concentrates on rebuilding ailing companies, often with an infusion of capital from private American investors. The result, practitioners say, means that an array of investors is getting involved in resuscitating distressed businesses, and more participants mean additional opportunities for lawyers. “It’s more of a rescue culture,” said John Houghton, head of Latham & Watkins’ restructuring practice in London. “There’s a far greater presence of U.S. players.” Attorneys handling insolvency matters in Europe caution that restructuring practices there are not experiencing a full-blown boom, but they say that the opportunities are broader than before for firms interested in representing so-called distressed-debt investors, which include private bondholders, equity investors, note holders and debt traders. Some experts further note that distressed opportunities tend to be cyclical, with markets peaking and dropping within a five- to seven-year period. U.K. LAW TAKES EFFECT The current European market is tied, in part, to a law that took effect last year in the United Kingdom. Called the Enterprise Act, its purpose was to help boost the country’s economy by keeping distressed businesses viable. The law, to some extent, has taken power over insolvent businesses from their lending banks, and instead has shifted it to investors, company directors or, in cases involving large companies, to a team of restructuring professionals. Although lawyers say that the Enterprise Act itself did not create enormous upheaval in insolvency practices, it has worked as one step in a series of changes in the last five years — changes that have brought some European countries substantially closer to the U.S. system that favors keeping troubled businesses afloat. Europe is apparently learning by necessity. A rash of bankruptcies hit Germany in 2002, creating a rise by more than 16 percent of defunct business. France’s insolvencies climbed by almost 11 percent and those in Britain jumped more than 7 percent. In addition to the Enterprise Act, the European Regulation on Insolvency Proceedings, which became effective in 2002, provided the first set of uniform rules to resolve conflicts in cross-border insolvencies. And in France, a law is under way to provide debtors with more time to avoid liquidation and to give creditors incentives to renegotiate payment schedules. It provides troubled companies an automatic stay against unsecured creditors pursuing repayment from flagging businesses and a temporary stay for secured creditors. EUROPEAN ‘SEA CHANGE’ Germany passed its own insolvency law in 1999 that was modeled after the U.S. Chapter 11 code. Unlike the U.K.’s law, it allows for a debtor-in-possession, which enables an ailing company to continue receiving financing during its restructuring. “What we’re looking at is a sea change across Europe of attitudes and access to capital for distressed situations,” said Christopher Mallon, the head of Weil, Gotshal & Manges’ restructuring practice in London. New York-based Weil currently represents Italian food giant Parmalat Finanziaria SpA, which is restructuring after revealing last year a $5 billion hole in the accounts of its Cayman Islands financial unit. Historically, a handful of banks traditionally represented by London’s “Magic Circle” law firms controlled failing companies’ assets and left little, if nothing, for other creditors affected by the failure. But with the recent explosion of secondary investment markets, which includes hedge funds bulging with American dollars, more players are involved in restructuring a company. And that’s where the lawyers come in. “The more that the U.K. market behaves like other markets, like America’s, as it relates to distressed investing, the more opportunities you see,” said John W. Butler Jr., co-leader of the worldwide corporate restructuring practice at New York-based Skadden, Arps, Slate, Meagher & Flom. Skadden, which has operated a London office for about 20 years, in the past has represented distressed companies or acquirers of those companies. But, as with other American firms long entrenched in European investment practice — including New York’s Cadwalader, Wickersham & Taft, Bingham McCutchen and Chicago’s Mayer, Brown, Rowe & Maw — it has spread its services to the secondary finance market. “These are not mom-and-pop shops,” Butler said, adding “there is a lot of competition” for distressed-debt investor clients. Indeed, Akin Gump Strauss Hauer & Feld announced an expansion last year of its London office to meet growing client demand in financial restructuring. It relocated three partners to London and added three other attorneys from the London area to boost its presence. Potential and current clients for restructuring practices abroad include a number of private-equity investor groups and turnaround management companies that have fanned out across Europe in the last few years. Alix Partners, Alvarez & Marsal, Apollo and the Carlyle Group have become buzzwords in European financial circles. “A few years ago, nobody knew who they were,” said Mallon of Weil Gotshal. A report conducted by Skadden and Jeffries & Co., a mid-cap investment bank, estimated that the U.S. secondary loan market volume by 2003 had reached about $50 billion. It also identified Europe as currently developing a distressed-debt market, while Russia and Asian countries are in the early stages of such market development. The U.S. market, the report notes, has already developed an efficient market for such investments. Apparently, it is the burgeoning European restructuring market and a leveling off of the U.S. market that has piqued investors’ interest. The results of a poll released earlier this month by the Turnaround Management Association indicated a slowdown in domestic restructuring work. The trade group is comprised of restructuring consultants, investors and attorneys. Its report indicated that 60 percent of the association’s 6,800 members said they were experiencing a “cyclical contraction” in domestic restructuring work. ‘CHASING DEALS’ Holly Felder Etlin, incoming president of the Turnaround Management Association, said that a combination of fewer monster-sized cases such as Enron and WorldCom in the United States and more accommodating laws in Europe have spurred investors to look overseas. Etlin, a principal with XRoads Solutions Group, a New York restructuring firm, said that although restructuring of large European companies has occurred “for some time,” midsize businesses are starting to reorganize as well. Skadden Arps’ Butler maintains that the prospect of capital from U.S. investors looking to put their dollars overseas has prompted European countries to modify their laws to accommodate their interests. “There is so much money out there chasing deals. It’s part of the increasing pressure for the laws to change,” he said. Distressed-debt investors have very specific needs, Butler explained. They are looking for market predictability, access to the ailing companies and speed. And countries that want their investment dollars are adapting to serve those needs, he said. The deals themselves, however, can be complicated. Investors, and the attorneys representing them, often need to provide constant supervision over the restructuring process and to understand the culture of the local environment and its constraints. In addition, the deals can involve several foreign investors, some of which stay in the restructuring game and others of which bow out during the course of negotiations. The revolving door of players can make negotiating tough. “It takes a lot of people who are sophisticated in the marketplace,” Butler said. “You’ve got to be diplomatic.”

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