Law Times

Law Times • December 1, 2008 FOCUS In the land of the broke, cash is king BY IAN HARVEY For Law Times year resulting from the credit crunch crisis, law firms around the globe are hunkering down to see how the fallout is going to hit their billables. And the good news? Despite a W ith the roller-coaster market ride of late summer and fall this downturn on some areas of practice, the ripple effect from insolvencies and the resulting frenzy of mergers and acquisitions should generate billings in the bonus zone. There's one department of those firms which isn't sitting around watching stock tickers, however, and that's the insol- vency specialists. With the mon- ey supply tightening up, many companies are likely to go into a speed wobble from which they may not recover, sending them careening into creditor protec- tion, receivership and, for some, bankruptcy and dissolution. "It' I don't believe the real fun has even s already been a busy year but started," says Derrick C. Tay, senior partner at Ogilvy Renault LLP, who heads up the insolvency and restruc- turing team. "The reality is that there' that should never have been allowed to stay in business but did because they were buoyed by cheap money. Now the banks have to get back to fundamentals, knowing their clients, knowing who they lend money to, and who it makes sense to lend money to. Unfortunately, financial institutes have behaved like lemmings. Greed led to the lending and now there's a cycle of fear where they're not even lending to good companies which means they'll have trouble refinancing." Complicating things is that the money generated by the ini- tial subprime mortgages, which in turn generated the asset- backed commercial paper which then acted as collateral for other loans, never really existed; it was an illusion which sadly allowed unrealistic valuations of other assets and investments. When it all collapsed, that money, being s a huge number of businesses virtual and based on a multiple of inflated financial instruments, simply evaporated. The result is that there isn't enough real mon- ey in the system to replace the illusionary money and thus the need for governments around the world to bail out their banks and perhaps even automakers. Now banks and other finan- cial institutions, stripped of their "funny money," are scrambling to make their balance sheets meet regulatory requirements and the resulting tight supply of credit is already causing concern. Last month resort giant Intrawest was struggling to roll over $1.7 billion in debt because lenders are running in fear mode, while in Toronto, up to one-third of new condomini- ums for sale may be withdrawn from the market before they are built because the developers are too small to be considered good risks by lenders in what has become an unstable market. In Vancouver, development has already stalled on several high-profile projects because funds have dried up. The upshot, Tay says, is that a lot of good companies will get snared into the credit quagmire, either stiffed by their customers or paralyzed because they can't roll over their debt. As such, the real work will be to save those worth saving and dismantle and sell off the assets of those which have underperformed. That in turn will create work for his colleagues, other members of the profession who specialize in mergers and acquisitions, but its not going to be simple. For one, lenders will likely be gun shy about putting up funds for leveraged buyouts. And that means those sitting on cash will be king when the op- portunities for acquisition at what could be some fire sale prices come on to the market. That's an eventuality that David Cohen, client team leader at Gowl- ings' financial services department, is looking forward to. He's already getting calls from clients and pro- spective clients worried about whether their customers, and in some cases suppliers, are teetering. "They want to know how Presented by Enroll Today! 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It sets the table for some strate- gic buying, he says, in which com- panies may consider buying their customers, for example, if they have the cash reserves, if only to secure their own survival and then later sell it off after the storm passes. Others may consider buying their vendors if they can't source those services or products else- where at the same price and qual- ity, while others might consolidate market share by buying out their competition instead of taking the risk it might emerge from receiv- ership stronger than before. The problem, he says, is that the easy stuff is already gone. "The low-hanging fruit is 'It's already been a busy year but I don't believe the real fun has even started,' says Derrick Tay. already on the ground rotting," says Cohen, noting things have moved so quickly in this crisis that many companies have missed the window of opportunity to save themselves by selling out. Again, he said, echoing Tay, the question is, when the dust settles, who is going to have the money to come to the table and make deals? For large firms like Borden Ladner and Gervais LLP, the approaching storm will trigger billables to virtually all partners, says partner Michael MacNaugh- ton of the firm's insolvency and restructuring group. "And looking forward, insol- vency is really just M&A under a different name," he says. From 2005 through 2006, things were "slow" on the in- solvency side, he admits, but Trust [ started picking up last summer and picked up again in the fall, but he agrees with Tay that the real flood hasn't hit yet. And when it does, he says, all departments will get busy. "There will be tax matters, con- tracts and negotiations, labour law, litigation skills all will be needed along of course with M&A exper- tise," says MacNaughton noting recent amendments that are about to kick in with the Business Insol- vency Act and the Canadian Com- panies' Creditors Arrangement Act will likely come into play as well. Still, says Cohen, there's still some hope it will be short-term pain for longer-term gain. "This economy has been pret- ty resilient, it took a smack in the face after 9/11, it's taken hits from Afghanistan and Iraq in terms of costs and emotions. The key will be how quickly consumer confi- dence is restored after the trauma of watching their savings — and their inheritances — melt down before their eyes," says Cohen. It's also a first hard lesson in economic cycles for many of the GenXers now in their 30s who will likely not remember the impact of the last major recession in the early 90s because they were in their teens and as such it could be a valuable learning experience. LT PAGE 11 Every time you refer a client to our firm, you're putting your reputation on the line. It's all about trust well placed. Untitled-1 1www.lawtimesnews.com ntitled-2 1 11/25/08 8:26:24 AM 11/25/08 8:46:47 AM

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• Pension Report
• The Dirt
• Focus On The Business Of Law