Bankruptcy beyond borders

In financial restructurings, the US has an important asset. Its bankruptcy code allows companies a degree of protection and leverage in reorganisations not available in other countries. US lawyers, in turn, are positioned to win mandates for complex restructurings from companies that operate largely out of their jurisdiction.

Each year, the finance section of this report carries a heavy representation of innovative legal work on US bankruptcy cases. Lawyers often play a highly strategic and unusually central role, steering companies through the complex process.

This year, lawyers are recognised for extending the application of US bankruptcy laws to businesses further afield and to cities at home on a larger scale than ever before. Working without precedent has required particularly creative and persuasive approaches.

When Bahraini investment bank Arcapita found itself in financial distress, it explored out-of-court restructuring options as well as the possibility of a UK administration proceeding. None provided the solution the bank needed, so it turned to Gibson Dunn lawyers.

In just a few days, it developed a strategy to file for Chapter 11 bankruptcy protection in the US, alongside a Cayman Islands proceeding.

Arcapita is the first Gulf bank and the first sharia-compliant institution to confirm a Chapter 11 plan of reorganisation. Gibson Dunn lawyers were the strategists and consensus builders, steering the company through unprecedented legal, Islamic finance and communications complexities.

Part of the lawyers’ role was to educate creditor groups and other stakeholders about the feasibility and strength of a US filing. It involved a roadshow through the Middle East. “I don’t think others appreciated the power of the US Chapter 11 process,” says Michael Rosenthal, partner at Gibson Dunn.

The bank succeeded in winning approval for its plan and emerged from bankruptcy protection. Its success shows the US bankruptcy code can handle Islamic finance, but Mr Rosenthal says the deal has broader significance.

“It has ramifications for restructurings of all Middle Eastern companies with international connections, not just Islamic investment banks. If they can’t restructure out of court, it means they have Chapter 11 as an alternative,” he says.

“And more broadly, if you are a company with investments in a number of regions, it means Chapter 11 is there in your toolbox. Whether you file or only threaten to file, it gives you strong leverage.”

Jones Day advised the city of Detroit in the largest-ever municipal bankruptcy filing. The bankruptcy of one of the most populous US cities tested the limits of Chapter 9, the section of the bankruptcy code that applies to municipalities. “Virtually everything in the case was unprecedented,” says David Heiman, a partner at Jones Day, the lead restructuring counsel to the city. “We frequently found we would have to take a legal position, and it was difficult to pull in support because there was no precedent. In this case, we demonstrated that the bankruptcy laws enable cities in need to discount the recoveries for all the creditors.”

The plan, confirmed on November 7, reduces the city’s estimated $18bn debt burden by approximately $7bn. Central to its success was Judge Steven Rhodes’ decision to appoint a mediator to negotiate deals with various creditor groups, and the so-called “grand bargain”.

This saw the state, non-profit organisations and supporters of the Detroit Institute of Arts agree to purchase the Institute’s valuable art collection to keep it intact, while helping to fund pensions liabilities. “What was different from other large bankruptcy cases is there was little precedent, so we just had to be more creative. However, the real excitement and privilege of working on this case is its impact on the people of Detroit.” says Mr Heiman.

There are two other important drivers of innovation this year. The first is the wave of new financial regulation and its impact upon global banks. Linklaters advised Citi and Banco Santander on the launch of Trade MAPS, the first multibank securitisation of trade finance assets. It serves as a model for global banks that will need to move low-margin assets – including trade finance assets – from their balance sheets to comply with Basel III regulations or capital targets, as they are implemented over the course of the decade.

Stuart Litwin, a partner at Mayer Brown, advised Morgan Stanley as underwriter on the transaction.

He says: “I believe trade finance will eventually be the single biggest asset class in securitisation. We estimate that there are currently $4tn to $5tn of these assets on the books of the global banks.”

Changing energy needs and opportunities in North America have driven much of the creative project financing structures and innovation in the finance section of the report, comprising more than a quarter of submissions, many for large-scale oil and gas projects.

In renewable energy, businesses such as Mars are pursuing unusual investments to support sustainability goals. Rather than focusing solely on its own energy consumption, the food manufacturer has partnered with Sumitomo to develop a green energy plant that will allow it to generate and trade renewable energy credits.

Thomas Trimble, partner at Akin Gump, advised Mars on the financing structure and expects it to prompt other manufacturers to create their own green power projects.