Kirkland Exodus and the Rise of “Creditor-on-Creditor Violence”: A New Era in Restructuring?
The recent move of David Nemecek from Kirkland & Ellis to Simpson Thacher & Bartlett signals a potentially significant shift in the landscape of corporate restructuring. Nemecek’s departure, spurred by friction between Kirkland’s restructuring strategies and its major asset management clients, highlights a growing tension within the financial world – a willingness to engage in aggressive tactics that pit creditors against each other.
The Aggressive Tactics Pioneered at Kirkland
Nemecek specialized in restructurings where one group of claimants sought to take proceeds away from similarly situated investors. This approach, described as “creditor-on-creditor violence,” first surfaced prominently in November with a lawsuit brought by Kirkland client Optimum Communications against Apollo, Ares, and Oaktree. The suit alleged antitrust violations stemming from a cooperation pact among the debt holders.
While Kirkland ultimately resigned as transaction counsel to Optimum, the damage was done. Several asset managers voiced concerns to Kirkland management, particularly given the substantial fees they paid the firm for other services – some exceeding $100 million annually. This illustrates a critical point: even firms with diversified revenue streams are vulnerable when their restructuring practices directly antagonize key clients.
Simpson Thacher’s Bet: A “Client-Centric” Approach
Simpson Thacher’s recruitment of Nemecek is a clear attempt to capitalize on this evolving market. The firm intends to create a “client-centric” restructuring practice, encompassing both traditional Chapter 11 bankruptcy strategies and out-of-court refinancings. Nemecek will co-lead a new practice group, the Capital Structure Solutions Practice, leveraging Simpson’s established strength in private equity and M&A.
But, Simpson isn’t oblivious to the risks. The firm acknowledges the potential for conflicts and the possibility of provoking the same private capital groups that led to Nemecek’s exit from Kirkland. Alden Millard, Simpson’s chair, emphasized the firm’s experience advising both sponsors and borrowers, suggesting they are equipped to navigate these complexities.
The Macro Trend: Intensifying Distressed Debt Fights
Nemecek himself believes the intensity of distressed debt fights is unlikely to diminish. He anticipates continued diversification by asset managers across credit and equity, leading to law firms and banks finding themselves on opposing sides of increasingly complex disputes. As distressed companies seek concessions from creditors, these negotiations are expected to remain “emotional and complicated.”
This suggests a future where restructuring lawyers aren’t simply resolving bankruptcies, but actively navigating – and potentially exacerbating – conflicts between powerful financial players. The demand for specialists capable of handling these high-stakes, adversarial situations is likely to increase.
What Does This Signify for Private Equity?
Simpson Thacher’s long-standing relationship with major private equity firms like Blackstone and KKR will be tested. While the firm believes it can manage potential conflicts, the increased willingness to pursue aggressive restructuring tactics could force private equity groups to re-evaluate their legal strategies and potentially seek alternative counsel.
The case of Optimum Communications demonstrates that even seemingly cooperative debt structures can be challenged. This creates uncertainty for private equity firms heavily invested in leveraged loans and distressed debt.
FAQ
Q: What is “creditor-on-creditor violence”?
A: It refers to restructuring tactics where one group of creditors attempts to gain an advantage over other creditors, often through legal challenges or aggressive negotiation strategies.
Q: Why did David Nemecek leave Kirkland & Ellis?
A: His restructuring practices, which involved aggressive tactics against creditors, caused friction with Kirkland’s large asset management clients.
Q: What is Simpson Thacher hoping to achieve by hiring Nemecek?
A: They aim to bolster their corporate restructuring group and capitalize on the growing demand for specialists in complex, adversarial debt situations.
Q: Is this trend likely to continue?
A: Nemecek believes the intensity of distressed debt fights will likely increase as asset managers continue to diversify their investments.
Did you know? Simpson Thacher & Bartlett employs approximately 2,000 lawyers in 13 offices worldwide.
Pro Tip: When selecting legal counsel for restructuring, carefully consider their experience with complex creditor dynamics and potential conflicts of interest.
Interested in learning more about the evolving legal landscape? Explore our other articles on corporate law and financial restructuring.
