Creditors “respectful” of public health crisis in sovereign debt talks, says Quinn Emanuel partner
Quinn Emanuel Urquhart & Sullivan LLP partners Dennis Hranitzky and Susheel Kirpalani consider the impact of the current public health crisis on sovereign debt workouts in Latin America. By Jordan Fermanis
Led by Dennis Hranitzky, Quinn Emanuel’s recently established sovereign litigation practice is representing Exchange Bondholder Group, one of three creditor groups in negotiations with the Argentine government. The country is seeking to restructure around US$83 billion of foreign debt. It is not the first time Hranitzky has counselled creditors to the indebted state; at his former firm – Dechert – he co-led a team that represented Elliot Management-owned hedge fund NML Capital in its high-profile US$4 billion dispute over the country’s defaulted debt, which Argentina eventually agreed to settle after a protracted 15-year clash.
Argentina’s current sovereign debt talks are complicated by the covid-19 pandemic, which has delivered a severe economic shock to the country. With speculation rising that the state is heading towards yet another sovereign default – this could be its ninth – Latin Lawyer’s sister publication Global Restructuring Review spoke to Hranitzky and chair of Quinn Emanuel’s bankruptcy and restructuring group Susheel Kirpalani about the impact of covid-19 on sovereign debt workouts in Argentina and Ecuador and how their firm has adjusted to the pandemic.
Below is an excerpt of the interview, the full version of which is available here.
Are you seeing an uptick in sovereign debt litigation in the wake of covid-19?
Dennis Hranitzky: The short answer is yes, but the dynamics are a little different. Broadly speaking, when I joined Quinn Emanuel in January I said I had the sense that we were moving into a new wave of sovereign insolvencies. The shock represented by covid-19 has accelerated that process. There has been an upswing in the volume of calls coming in from our traditional client base, from creditors looking at a broader array of situations than they were looking at in December or January, in preparation for either restructuring negotiations or eventual litigation. There has certainly been an upswing in investor interest in understanding and getting involved. At the same time, there’s a recognition on the creditor side that these sovereigns are in distress and, unlike companies, they have a public interest in addressing the covid-19 crisis.
Ecuador is the best example I can think of in that respect. In Latin America, Ecuador has been hit hardest by covid-19 as a result of a decline in oil prices, because it has a petroleum-driven economy. There is a significant cash flow crunch for the country, just at a time when they were entering a more organic cash flow contraction. That has been exacerbated by the fact that Ecuador has also been one of the hardest hit in terms of the infection rate of all Latin American countries, meaning they need to commit resources to address that.
While our clients are obviously interested in maximising returns for investors, they are also respectful of the fact that countries like Ecuador have to address the incipient public health crisis that is presented by covid-19. That has slowed the process down a bit, at the same time interest has increased.
Recently, Ecuador has successfully negotiated a six-month coupon holiday to give themselves some room to address the crisis and some of our clients were involved in that process as well.
How is covid-19 affecting Argentina’s sovereign debt restructuring?
Dennis Hranitzky: The timing of that question is perfect. Our creditor group issued a press release at the same moment as we were dialling into this call (20 April). Late last week, Argentina announced the terms of its exchange offer proposal. There are three large creditor groups, Quinn Emanuel represents one of them. Our group holds about US$4 billion in principal debt in one indenture.
All three creditor groups announced this morning that we are rejecting the deal. But I’d say covid-19 has affected the Argentina process less than people might expect. On the creditor side, everyone was expecting Argentina, for political reasons, to make an opening offer that creditors wouldn’t accept. There is a long history of that. Covid-19 may have sped the process up. It also amplified the goodwill that my clients, and creditors in general are bringing to the process, especially as they try to show empathy and openness to a deal that addresses Argentina’s problems. That goodwill was there even before covid-19. But apart from the fact that rather than meeting in person to discuss restructuring proposals, we are all meeting via Zoom now, the crisis has affected the Argentina process less than one might expect.
So covid-19 represents an accelerating factor rather than a turning point?
Dennis Hranitzky: In the Argentina process, I’d say that is correct. But every situation is different. Covid-19 has changed the dynamics of the Ecuador process by dramatically accelerating it on the front end up to consummation of a successful standstill agreement. The standstill then slowed the process down to give Ecuador some breathing room.
How has Quinn Emanuel as a firm addressed the covid-19 pandemic and how has the pandemic changed the firm’s advice to clients?
Susheel Kirpalani: We were one of the first law firms in the US to close. We closed our offices in a prophylactic measure on 9 March, the day after International Women’s Day. Most law firms in New York closed the following week as per the orders of the state governor.
We tapped our information technology departments very quickly to ensure that all our partners, associates and our secretaries could access computer systems and records. During that first week, everyone tried to help each other out: some people volunteered to make visits to the office to grab things for colleagues, others helped out by testing computers.
At the same time, the firm started focusing on what the potential impact on clients might look like. We looked at the anticipated pressures on our clients’ own liquidity, which could have secondary effects on the firm’s liquidity, as clients are potentially unable to pay invoices on the same timescale as before the crisis hit.
We began a series of analyses and spoke with other law firm leaders to understand what they were doing to anticipate the potential economic impact on the business.
Beyond that, we began trying to anticipate what legal issues could be facing various clients. We tried to anticipate those issues prior to receiving the phone calls, so we established new work streams to prepare a covid-19 legal database, which is on our website. Virtually all law firms have come around to doing that.
Because we are a pure disputes firm, we focused on where we think potential litigation or arbitration could emanate from, as opposed to some of the regulatory or transactional issues that other firms are focusing on.
To keep people more connected, we have had a series of Zoom meetings and catch-ups. I’ve done them for the bankruptcy department, so we can see everyone’s face and talk about life and ask how people are managing in their homes.
On the broader office side, there are Zoom gatherings that take place for happy hour on Friday evenings, the same way they used to when we were working at our offices.
In terms of client outreach, managing partner John Quinn and other senior partners at the firm have been chairing roundtable discussions with various clients on anticipated bankruptcy and restructuring issues. Those have been quite well-attended by institutional investors.
Management has also been hosting interviews with thought leaders in the business world by video conference for however many people wish to attend. We have been retaining those for people who missed them so they can watch interviews with CEOs and CIOs of companies and institutional investment firms around the world.
Has the firm reconfigured its practice areas to meet a growing demand in bankruptcy and restructuring work?
Susheel Kirpalani: After the first week of the shutdown, various partners and associates asked if there was anything they could read to get them “up to speed” on bankruptcy, so they could pitch in if there was an uptick in bankruptcy-related work. All the lawyers at our firm are litigators, and my partner James Tecce prepared a couple of hour-long presentations with four others they titled: “Keep calm and learn bankruptcy”. We had over 200 people attending those by video conference, and it was about a 100-page presentation on the different areas of bankruptcy that litigators are likely to be called upon.
Obviously, you can’t turn a generalist into a bankruptcy lawyer overnight, but there are a lot of complementary services that do come into play. We focused on providing a basic understanding of jurisdiction, valuation, and who the players are in Chapter 11, as well as the investigative and discovery tools available in Chapter 11 and Chapter 15.
Have you already seen an uptick in work?
Susheel Kirpalani: The answer is yes, there has been an uptick. If you compare February to March, or March to the beginning of April, it is trending up. I think that is true across the board. But bankruptcy and the need for bankruptcy litigation services is often a last resort. The [US] federal government has put forward numerous programmes to try and stave off economic collapse, and many businesses are going through those first to see if they can avoid the need for bankruptcy.