Finance lawyers are scrambling to position themselves globally after renewed turmoil in credit markets led to the collapse of two hedge funds in Europe and the fire-sale of Wall Street giant Bear Stearns.
First to secure lead roles were Skadden Arps Slate Meagher & Flom and Linklaters as Carlyle Capital Corporation announced its liquidation after defaulting on debts of $16bn (£7.8bn).
The fund, backed by private equity giant Carlyle, collapsed after sharp falls in the value of its mortgage securities portfolio, sending shockwaves through the hedge fund community.
City law firms - many of which have been courting hedge funds in recent years - predict further instructions as banks prepare to withdraw their support from funds that have seen the value of their assets plummet. Recent weeks have also seen the London-based hedge fund Peloton Partners liquidate a £1bn fund after pressure from creditor banks.
City-based restructuring partner Chris Mallon (pictured) is leading the team for Skadden on Carlyle Capital. The company reported last week that it had failed to reach agreement with its lenders, which include Deutsche Bank and JP Morgan Chase.
Linklaters is advising the Dutch-listed vehicle in the Netherlands, fielding a team in Amsterdam headed up by managing associate Wim Hazeleger. Offshore firm Carey Olsen has also landed a role on the transaction.
Mallon, who joined Skadden last year from New York rival Weil Gotshal & Manges, told Legal Week: “The likelihood is that all of us who advise on restructuring will be seeing a lot of matters like this in the future. In the long term, there will be years of litigation to come out of this.”
Bingham McCutchen City chief James Roome commented: “There are clear signs of stress among hedge funds that have geared up to buy credit product.”
However, senior finance lawyers are divided over the impact for legal advisers of continued turbulence among hedge fund clients.
Charles Shiramba, an insolvency partner at McDermott Will & Emery, said: “Insolvency law in the UK is not geared up to dealing with hedge funds the size of Carlyle going bust. I think the law will struggle to cope.”
Linklaters banking partner Bruce Bell argued that the real opportunity for lawyers would come in putting together rescue deals. He commented: “[These collapses are not] a substantial amount of work for lawyers because a lot of these funds are not real companies. It only gets really interesting when we get involved in providing rescue finance and saving the funds.”
Meanwhile, lawyers in the US were focused on the forced sale of Bear Stearns to JP Morgan, which was announced on Sunday (16 March) amid sustained pressure on the bank’s liquidity.
The sale saw Bear Stearns sold for just $236m (£117m), a fraction of its pre-credit crunch valuation. Significantly, JP Morgan announced a $6bn (£2.9bn) charge to cover litigation expected to stem from the collapse as well as severance costs. The deal will be closely watched by the US plaintiff Bar as it represents one of the largest collapses in shareholder value in corporate history, with Bear Stearns being valued last year as high as $140bn (£69.5bn).
US class action specialist Stember Feinstein Doyle & Payne had already announced prior to the takeover that it was investigating possible legal action against Bear Stearns relating to its fall in share price.
By Monday (17 March) plaintiff firm Coughlin Stoia Geller Rudman & Robbins was reported to have filed a shareholder suit and New York’s Bernstein Litowitz Berger & Grossmann said it was also planning to file an action.
Stember partner Ellen Doyle told Legal Week: “There will be a lot of claims. Everybody was surprised how quickly it all turned.”
The acquisition itself has already generated roles for Skadden for Bear Stearns, Sullivan & Cromwell for the bank’s board of directors and Cravath Swaine & Moore for Bear Stearns’ financial adviser, Lazard.
In a surprise role, Wachtell Lipton Rosen & Katz has secured the prized lead M&A mandate from JP Morgan, despite the bank’s traditional close links to New York duo Simpson Thacher & Bartlett and Davis Polk & Wardwell.
The rescue - already described as ‘the US’ Northern Rock’ - has been backed by the US Federal Reserve, which will lend $30bn (£14.9bn).
The collapse of the US’ fifth-largest investment bank could potentially have major implications for other legal advisers as Bear Stearns has been a highly lucrative client to some of the US’ top law firms for much of its 85-year history. Most closely linked with the bank is Cadwalader Wickersham & Taft corporate heavyweight Dennis Block.
Other regular counsel include Sidley Austin, Orrick Herrington & Sutcliffe, Thacher Proffitt & Wood and Dechert, reflecting Bear Stearns’ heavy exposure to asset-back securities.
Cadwalader, Thacher and Dechert have announced redundancies over the last three months citing the severe drop-off in mortgage-backed securities work.
Additional reporting in New York by Anthony Lin. See comment and US briefing, pages 8 and 10.
