Restructuring teams in law firms are growing rapidly. A key part of this expansion has been luring experienced lawyers from rival firms and offering them the opportunity to build up their own practice. US firms typically come with the financial and institutional wherewithals to support ambitious growth in Europe. For some seasoned partners, this combination proves tempting. Philip Hertz and Melissa Coakley joined Sidley Austin this July after decades at Clifford Chance.
The duo worked on some major restructuring cases in their old shop. Most recently, they advised Harbour Energy on its restructuring plans in England and Scotland for Waldorf, turnaround executives on the recapitalisation of Eagle Football Group, lenders to the Prax Group on its liquidation and sale of assets. Now, they are tasked with leveraging that experience to build up a new force to be reckoned with in the restructuring world. When Hertz started as a trainee solicitor, there were no computers in the office. More recently, he and his colleagues had to sweep the offices for bugs (hidden microphone, not the insect). Over the time, Hertz and Coakley have seen a variety of scenarios play out in the restructuring market: from Spanish homologation to English CVA to distressed M&As to increasingly litigious LMEs.
They discussed with 9fin about their work at Sidley, their views of the current market, and what they read over the summer holiday.
1. What prompted you to join Sidley?
Philip Hertz: Momentum, the challenge of a new opportunity and its platform. The combination of the three is the real game-changer. There's a genuine appetite by the firm to invest in London and its European restructuring practice. The list of teams and leaders that have joined the office in the last couple years is really impressive. All of these are very relevant to restructurings and special situations, so one could say our restructuring practice fits naturally into, and is a continuation of, the broader build out. The final aspect is the platform. This is a global elite firm, with huge presence in the US, and strong presences both in the Middle East and Asia, huge capabilities across a number of sectors, a number of industries and practices, and it just gives us the ideal platform to really service our clients.
Melissa Coakley: For me, two additional factors were really key. The first is the quality of the finance team in London. They have everything across LevFin, structured debt, capital markets, high yield, real estate finance, to a very high standard with really senior Tier 1 experts in those fields. That's something that is going to help us really take our representation of our existing clients to a new level. The other thing is really the strength in the broader restructuring team. The US is a real powerhouse. They did some of the largest and most complex Chapter 11s last year in the US. They've got an amazing debtor side practice. And also, in terms of what's going on in Asia, they're not just doing Hong Kong and Singapore restructurings but work across the region. Their work reaches into global matters. There's plenty of scope for us to work seamlessly with those teams.
2. What is Sidley’s strategy to get a leading position in the competitive restructuring market in Europe?
Hertz: The real differentiator that we have is the breadth of the wider firm. And particularly the complementary areas like tech, life sciences, sports, M&A, and private capital. There's just so much going on in the platform. Many multinational businesses really need that axis of London and New York, a broad US experience that they can then, really draw on real sector experts to partner across jurisdictions. I think that's the base that you draw from. You then spread it into the work that you do within Europe. And we've already got very established offices in Germany, Belgium, Switzerland. We've got really deep relationships with preferred local experts in every jurisdiction, including actually, as we're finding out, some key Sidley alumni, which is really good. So, the connectivity is there. What we already have means that we can serve European clients to a higher level than many other firms given that breadth of experience. But we are also definitely looking at international growth in Europe, but only where it really kind of makes sense. Not growth for growth's sake, effectively.
3. Is there a risk that some firms become bloated — a solid restructuring team but without enough mandates?
Hertz: I often talk about how you get the same names popping up on the watch list, and everyone's talking about those names. It's like watching five-year old children play football — everyone is following the ball one side of the pitch when the real work pops up somewhere else. And what you'll actually find is that whilst there may be fewer kind of high-profile matters that exist, there are a load of matters that are going on beneath the surface that you just can't talk about. I've been doing this now 35 years. There's never been a time when I have not been busy and now we seem busier than ever.
Coakley: It's right that we are looking to build out the team with the best talent on the market. But we're doing that on the basis of the work that we already have, and the work that we know that we're going to be doing. So, we've been really lucky in that we have had a lot of CVs from across the market. So I'm excited about the people that are going to join. They're going to be a world-class team. And we'll be able to really handle the full spectrum of stress, distress and everything adjacent to that.
Hertz: And it’s nice that we've had so many unsolicited reach-outs from associates and counsels. ‘We've heard you joined Sidley. That sounds really amazing. Can we come and talk to you about it?’ It's great to have people like that. And that's who we want.
4. What has been keeping you busy since you started at Sidley?
Hertz: I would love to be able to tell you but our clients will not thank us. The work has been mixed - multi-jurisdictional, complex matters with a broad mix of transaction types and clients.
5. You serve as leaders of international and European restructuring teams respectively at Sidley. How does the distressed and restructuring markets in Europe compare to the rest of the globe?
Hertz: There are clear differences between markets, but we are seeing many of the same underlying pressures globally. In fact, these situations are increasingly interconnected. Capital is increasingly global and the issues that arise universal. The same sponsors, credit funds and institutional investors are active on both sides of the Atlantic, so a situation that looks European one day can quickly develop US financing, litigation and other dimensions. That makes cross-border experience, especially in relation to the NYLON corridor, more important, particularly where there are competing legal regimes and creditor groups across multiple countries.
Coakley: Restructurings in Europe and the UK are evolving faster than at any time I can remember, in court and out of court. Sophisticated business and their stakeholders are plugged into that – and it means the range of options has never been wider. For clients the key therefore is to think about Europe and the US together rather than sequentially. The best solution may require a combination of what both regimes have to offer and that’s where we can really differentiate ourselves – we are not advising based on what we have read in a book or asked Claude to put in a pitch deck, we have worked on many cross border deals over the years probably involving every country in Europe – Philip spearheaded the use of the English scheme by European companies – we can use that depth of experience to help clients create really bespoke and cost effective solutions.
6. With the expansion of aggressive LMEs, how is creditor precaution evolving?
Hertz: Every time someone talks about LMEs, I think of what King Solomon once wrote , “There's nothing new under the sun”. We've been looking for gaps in documents and leverage since when I was a trainee, which was some 35 years ago. Now they call it LMEs. But there is certainly more focus on multistage transactions now, and the need to look ahead in anything getting papered now within a refinancing or restructuring context for what may be coming later – with a greater focus on trying to close off loopholes or anticipate value diversion or loss of control/consent rights. And because we've been advising on a 360 degrees basis, we've seen these transactions from all angles. A lot of our clients are getting more and more wary about killing the patient with fees.
Whichever side of the aisle we are acting, our job is to help stakeholders find commercial and creative solutions that actually work to fix a particular problem without killing the patient with legal fees. I think stakeholders are increasingly wise to that in the light of some recent European LME transactions which perhaps haven’t quite got it right.
Coakley: And also, don’t forget there are LMEs and there are LMEs. There are LMEs that are used with a high degree of consent within the structure. And then there are also the much more aggressive, non-pro-rata LMEs. And obviously in Europe, there have been a few of those recently, but far fewer than there are in the US. But I think, given we have just had that wave of quite aggressive European LMEs, it's a pretty fascinating time right now, given all the challenges that are going on.
There is much to learn from the cases that have been executed well and those that have not. Much of the deal technology — such as the distressed disposal — isn’t new and needs to be used properly and carefully to get the right result – just as the deals are getting more multi-faceted, those that find themselves on the opposing side are also rising to the challenge and looking at aggressive counter-measures. Courts are also showing that they will see through transactions that don’t have an objectively defensible commercial purpose – that is not to say that creative solutions can’t be found to defeat real barriers to restructuring viable businesses, just that they need to be even more carefully constructed using the right mix of technical skill and pragmatism.
Hertz: In the UK, most of the judges were QCs or KCs at one time. They were advising on the restructuring transaction themselves, probably in the context of schemes and structuring plans. That's the mindset they come from. So when you try something really aggressive, it might work or it might not work. But the judges will see what is being attempted through a particular lens.
I feel like we're swinging back to the position where actually old-fashioned negotiation skills are becoming important. Advisors who can actually really get parties in the room to come to a transaction that actually, maybe everybody's slightly unhappy with it, but actually works, rather than something that leads to endless court appearances and open court warfare.
7. Is there more litigation going on and do you expect more to come?
Hertz: Absolutely. It’s all very situation specific. If someone's trying something that's initially extremely aggressive, it's probably inevitably going to lead to litigation. It may not be because, actually, the counterparties particularly are bothered from a financial sense, but there's this precedent issue involved they don't want that to be taken as precedent for the next one and the next one. So, they go into court, even though, from a value proposition perspective, it's not really worth it.
More restructuring disputes are becoming contentious, particularly where stakeholders have differing views on value or the appropriate restructuring outcome. In some ways we are seeing the old adage play out that “hard cases make bad law” and some instances where an initial overly aggressive stance has been taken to a restructuring have lead – naturally – to an increased litigation risk.
The other thing we're seeing a lot of, I've never seen this really before the last five years, is fraud.
There was one matter, Melissa and I were involved in, where we actually ended up having to sweep the offices on a Friday evening for bugs, which I've never, ever, ever encountered before. So, all that's leading to litigation. It is also inevitable in my view that there will be winners and losers coming out of the AI and data centre financing boom, which will be ripe for increased dispute activity.
Coakley: The key point is that disputes are increasingly being considered alongside the restructuring itself, rather than as something that only arises afterwards. We often involve our litigators day one to assist us with building and executing a transaction strategy – and importantly protecting our clients against adverse outcomes particularly where we act for corporates and directors. Our litigators are finely tuned to the need to take difficult calls at speed within restructurings and working with us to help our clients take those decisions in the safest way.
8. Which sectors are facing brewing distress? Is there an industry that advisors aren’t giving enough attention to?
Hertz: I think the area that we've seen a lot of work in is infrastructure. Everyone's been talking about water for such a long time, and there's loads of cases out there. We've seen a lot of fibre distress, there's still some to go and EV infrastructure. Financial services are also experiencing something of a renaissance. I would be cautious about saying advisors are overlooking a single sector, but there is a risk that attention focuses too heavily on the most visible large-cap situations while smaller and more complex businesses are already experiencing stress.
Coakley: We are looking at a broad range of sectors impacted by high energy prices and inflationary pressures – especially those facing in to consumers such as leisure, health, construction, retail, food/consumables, entertainment/sport. Chemicals and parts of the broader industrial economy in Europe remain areas worth watching. These are businesses that can have fundamentally sound underlying operations but still face significant pressure. It is clearly market specific – our US colleagues are incredibly busy on a range of healthcare, energy, financial services matters, and in Asia our colleagues remain busy on real estate situations, as well as transport. Here we are advising across telecoms, infra, healthcare, financial services, transport and pharmaceuticals both in the UK and multinationally.
9. What’s a favourite book that you’ve read and would recommend to others?
Hertz: I read recently on holiday London Falling by Patrick Radden Keefe. And it's about a guy called Zach Brettler, a 19-year-old, who happened to fall off a balcony in an expensive riverside apartment in 2019. It uncovers the London underworld and is quite scary and fascinating at the same time. The other one I read, which I loved, was 1929, by Andrew Ross Sorkin. And if you want something amusing, I like the Dublin Trilogy, by Caimh McConnell. I've recommended it to friends and they’ve laughed out loud reading it.
Coakley: I read two books on holiday this year. One was by Indra Nooyi, she was the chair and CEO of PepsiCo. She wrote a book called My Life in Full, which was all about her career, that was really fascinating. She's such a trailblazer, but also she changed the whole strategic direction of the company. And then, the other book I read was called The Dutch House by Ann Patchett which I really enjoyed. But my favourite book that I recommend to people is The Border Trilogy by Cormack McCarthy. It's full of pathos, really heartbreaking. It's actually quite a heavy-going read in places, but it's really wonderful.
