• Restructuring Work Is on the Way –– With No Guilt

    Restructuring Work Is on the Way –– With No Guilt

    Restructuring practitioners are not a happy bunch these days. Attorneys are filling their time with commercial litigation work and financial advisors are working at discounted rates on menial workouts.

    To add insult to injury, these professionals are experiencing the guilty feeling of rooting for 2s-to-10s to flip (which, by the way, just happened, courtesy of our 16th century mercantilist policies, but that is a topic for another day).

    They should stop being conflicted: it is not necessary for the whole country to suffer for their skills to regain relevance. In fact, when that happens, they will suffer no cognitive dissonance but rather a sense of fulfillment, for they’ll put their expertise to use in managing the downfall of the baddest of the bad: the opioid industry.

    Indeed, the backlash at the opioid production-prescription-distribution complex is reaching a climax with the October 21st date set for the bellwether MDL trial fast approaching. But even a resolution or outcome satisfactory for the defendants in these consolidated municipal actions does not guarantee that they will all survive, since they will continue to be exposed to Attorneys General actions and a slew of other litigation summarized in the table below:

    The potential liabilities for the named defendants are mind-boggling, with the aggregate damages sought under the MDL alone reaching nearly $500 billion, or twice the size of the 1998 tobacco settlement. Even assuming that all four litigation buckets (Civil and Criminal Federal, Attorneys General, and MDL) can be resolved for $100 billion, those settlements will tip a number of defendants into the zone of insolvency. Insys’ $225 settlement on a single cause of action already caused it to file for Chapter 11, Purdue is widely reported by the press as considering a bankruptcy filing, Mallinckrodt has been busy reengineering itself by spinning off its generics business (which carries with it the opioid liabilities) and thus ringfencing its core business (renamed Sonorant). On the other end of the spectrum, J&J failure to settle the Oklahoma litigation (where it was portrayed as the industry’s worst actor) was probably grounded on the Garlock court’s recognition that a debtor’s claims resolution history (i.e., its prepetition litigation settlements) could be a useful – if not the best – data point in estimating a debtor’s acknowledged liability.

    Moreover, these firms are financially vulnerable even independently of the opioid litigation. Indeed, pharmaceutical companies borrowed heavily in recent years in order to fund their growth and pursue acquisitions, leaving some of them (e.g. Endo, Mallinckrodt pro-forma) with leverage (debt/EBITDA ratios) at levels of 5x or more.

    Bankruptcy provides a unique forum for resolution of mass tort liability. The centralization inherent in bankruptcy proceedings as well as the tools available for rationally addressing claims under the Bankruptcy Code provide an important mechanism for resolving mass tort claims.

    In fact, mass tort claims estimations often involve numerous experts testifying about the estimated liability of the debtor not only for cognizable personal injury or wrongful death claims, but also for the future claims of individuals whose injuries are not yet manifest despite their alleged prepetition exposure to the debtor’s products.

    However, Bankruptcy Code, § 157(b) allows the district court presiding over a bankruptcy case to centralize all related claims for resolution within the bankruptcy proceedings. This is a particularly important procedural tool given the necessity of a centralized resolution of mass tort claims — one that has been increasingly utilized to resolve such claims on a global basis.

    Come what may, an aggregate resolution in the $100 billion ballpark will keep restructuring advisors (legal as well as financial) busy on their core competencies for years to come and they won’t even need a recession for that to happen.

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    Carlos is a 30-year veteran international investment banker who pioneered a number of financial products, such as the trading and swapping of emerging markets sovereign loans in the wake of the 1982 Mexican debt crisis, the trading market for derivatives on emerging markets bonds and loans, the first non-dilutive CET1 transaction compliant with Basel III rules, and the first Chapter 11 filing for a Latin American issuer.

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