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Insolvency heats up as economy cools

Insolvency heats up as economy cools

Insolvency lawyers have kept a low profile for much of the last decade while their M&A counterparts have basked in the limelight. A few exceptional outlier events - the collapses of HIH and…

Insolvency lawyers have kept a low profile for much of the last decade while their M&A counterparts have basked in the limelight. A few exceptional outlier events - the collapses of HIH and One.Tel in 2001 - provided a steady stream of work for some of the top-tier insolvency teams. But for the most part, insolvency groups have been relatively quiet in the face of a seemingly invincible economy.

Enter the downturn and insolvency practice groups have risen up the ranks - and fast - to become law firms' star performers. A report released last week by Blake Dawson and PricewaterhouseCoopers (PWC), Distressed Investing in Australia, noted that between 2007 and 2008 the number of companies entering voluntary administration in Australia rose by 10 per cent, and the number of insolvency appointments rose by 6 per cent. Further, leading banks saw a rise of 174 per cent in bad debt charges.

Clayton Utz partner Karen O'Flynn says the team began experiencing increased workflows 18 months ago. "I think we saw the beginnings of an increase flow of work as early as August 2007, back when we were talking about a global liquidity crisis rather than global economic crisis ... and it has risen even more intensively in the last three to four months," she says

Blake Dawson partner Ray Mainsbridge has experienced a similar trend in his group, and he believes workflows are still on the way up. "I don't think it has quite reached full momentum," he says. "I think that's partly because the global financial crisis hasn't been fully felt in the real economy as opposed to the financial markets. I think that will manifest itself as the year progresses."

Different time, different solutions

According to those lawyers which Lawyers Weekly spoke to, there is a significant difference in the nature of the work being done by insolvency lawyers now, compared with the work being done during the last downturn in the early 1990's.

"In the early 1990's ... there was much more emphasis on the formal appointment of receivers and liquidators as being the solution to the distressed borrower," O'Flynn explains. "This time around, the emphasis has very much been on restructuring - all the parties working together to try and find a solution to the problem."

She believes that the experiences of the last downturn have helped drive this shift in mindset. "I think everyone is a bit more sophisticated this time around. Employees of banks have long memories and they appreciate that a formal insolvency is, ordinarily, absolutely the last resort," she says.

Corrs Chambers Westgarth partner Dominic Emmet concurs: "I think the banks - those at the higher end at least - are spotting problems earlier. If they can spot the problems on the horizon then they can attempt to fix them before they get out of hand."

Mainsbridge also points to legislative changes which have allowed for greater flexibility in finding innovative solutions for companies in financial distress.

"I think in the last downturn - under the legislative regimes that operated in those times - insolvency practitioners and their lawyers didn't have a lot of options, and ... once things got bad, the reflex action was to simply make an appointment of a receiver or liquidator," he says.

"Clients now expect us to provide more creative and innovative, practice solutions which involve exploring options for workouts, restructuring and standstills, which can avoid the need for a formal insolvency appointment if possible."

Distressed debt on the rise

An area of work for insolvency groups which appears about to take off is distressed debt investment. Already a highly sophisticated market in North America, Europe and increasingly, Asia, distressed debt trading has yet to find its feet in Australia. This is mainly because - with 15 years of continuous economic growth - there hasn't been a need.

Emmett believes that the delay in the market taking off in Australia is attributable to a disparity in the price expectations of Australian institutional holders of distressed assets and overseas funds looking to buy them.

"The price at which the existing holders of debt [want] to sell is a lot higher than the price at which people are willing to buy - that's the bottom line, probably because it has taken a little longer for the recession to hit Australia," he says.

O'Flynn thinks that another contributing factor is overseas investors' unfamiliarity with the Australian insolvency regime. "I think one of the impediments is that international funds purchasing distressed debt in this country have had no exposure to the Australian insolvency regime and there needs to be a period where they educate themselves and become comfortable that they understand the risks and rewards of doing so in this country," she says.

However, several factors are coming together suggesting that the market for distressed debt investment in Australia is about to get a significant boost.

The joint Blake Dawson/PWC report points out that Australia's comprehensive legal and accounting framework and well-regulated, stable business operating environment give the Australian market an edge over its Asian counterparts. In addition, the increasingly fragile state of Australia's financial market may mean Australian institutions have no choice but to re-evaluate their price expectations.

As the Blake Dawson/PWC report points out, there are a number of global funds that are cashed up and hungry for opportunities in a new, exciting market, and it's only a matter of time before Australian financial institutions come to the table.

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