Darrow, whose clients include Lehman Brothers and Goldman Sachs, moved over from Orrick, Herrington with associates Stephen Rutenberg and Sean Carmine and loan trade specialist Annemarie Reilly Papazoglou. Sidley plans to hire a couple of lawyers in London and has a bigger goal in mind. "What we want to build is a debt trading powerhouse that closes under both protocols in Europe and London," Darrow said.
The anticipated growth is not predicated on European activity alone. "Much of what is being sourced in Europe is now being sold to U.S. hedge funds, which explains part of the increased activity in the market," Darrow said. "The move toward U.S. hedge funds buying in Europe is being slowed by their need to understand tax, accounting and banking regulations for each European country as well as by the disconnect between the Loan Market Association (LMA) and TheLoan Sales & Trading Association (LSTA) documents." Typically, European lenders sell using LMA documents, while U.S. investors generally buy in on LSTA documents.
There is also plenty in the U.S. to keep lawyers specializing in distressed loans busy, despite a growing belief in some quarters that standardization is reducing the requirement for lawyers. "There is a viewpoint in this market that loan trading documentation is becoming more commoditized. I am not concerned by this," Darrow said. "From my many years of experience representing trading desks, I have found that as one asset class is done repetitiously and becomes fairly routine, our clients push into new assets or a new kind of loan category, since it is their business to design interesting new products."
Trade claims, for instance, are now trading in significant volume. Another interesting scenario is the fallout from the mega cases, or exploding supernovas, as Darrow terms them, and the debt that keeps trading long after the case is settled. "[Consider] Adelphia Communications or Enron Corp. These companies are exiting Chapter 11 using a liquidation model whereby they are taking much of their litigation and putting it into litigation trusts," Darrow said. "With Enron there are several multi-billion dollar litigations that are probably going to be prosecuted for years to come making the Enron claims interesting for new and different reasons. It creates activity for that paper and you could end up trading Enron bank debt for the next two years."
Rutenberg said there is still significant room for growth for law firms even with the market at its current size or trading volume not expanding. "We believe there is significant room for a more efficient and more responsive law firm," he said. "The end result is being able close trades faster. We believe a good 70% of trades should close at T+20, which is not where the market is yet." Darrow agreed. "The market is becoming more complex, providing an opportunity and increased value for our legal services," he said. "We have a viewpoint as to where the market is moving and the kind of legal services that will be required."