2 -- No, 6! -- Predictions For 2016

In-house columnist Mark Herrmann looks back on the predictions he made for 2015, which turned out to be correct, and makes new predictions for 2016.

dartboard pen on target inside straightI was so good last year.

So good.

On the first Monday of 2015, I made three predictions for the coming year. I predicted stuff about the legal business generally, and about IP litigation, and about big bankruptcies, and, so far as I can tell, I was right! (If you’d like to borrow my crystal ball, just give a shout.)

I’m finding 2016 to be much more difficult. For reasons I can’t quite explain, my crystal ball has clouded.

I asked some friends for help, and my friends offered bupkis.

“Write headlines like you’d see in Mad magazine, Mark. That’ll be good for a couple of yuks:

“‘Some Judge Will Enter a Controversial and Obviously Incorrect Ruling in the Coming Year, Experts Say.’

Sponsored

“Or ‘Justices Antonin Scalia and Sonia Sotomayor Will Disagree, Say Courtwatchers.'”

Fat lot of good those suggestions do me. Don’t I take enough abuse in the comments?

Or, from another buddy whose thoughts I solicited:

“Predict these things, Mark:

“Rate pressure from clients;

Sponsored

“Push toward alternative billing arrangements;

“Firm mergers as struggling firms merge to survive, including the growth of more of the super-sized firms;

“Poaching of high earners at less profitable firms by more profitable firms;” etc.

2016 happy new yearWith friends like these . . . I guess I’m on my own. That’s a treacherous place to be. So, with the benefit of only a cloudy crystal ball, I’ll go out on a limb with these predictions for 2016:

First, I predicted in 2015 that bankruptcy work would be slow. I’m going further now: Big, traditional bankruptcies are a dying breed, and they won’t come back for quite a while, if ever.

Why? Because, historically, traditional creditors held the debt of distressed companies. The distressed companies filed for Chapter 11, hordes of lawyers representing the debtor, creditors’ committees, and everyone else in sight fought for years (on the traditional creditors’ dime) until the picked-over corpse debtor finally emerged after the restructuring.

No more.

Today, when a company becomes distressed, hedge funds calculate the value of the debt, and they buy it. While traditional creditors had no choice but to endure long, expensive restructuring proceedings, hedge funds won’t stand for that shenanigans — hedge funds want a return on investment now.

We’re thus seeing, and will see for the foreseeable future, fewer and fewer traditional bankruptcies, and more and more pre-negotiated or pre-packaged restructurings, which give hedge funds the quick returns they demand.

How does this affect law firms? First, the size of firms’ practices is changing: Traditional bankruptcy practices have shrunk over the last few years, and they’ll continue to shrink in the future. Second, the identities of the firms that handle insolvency work will evolve. Traditional big firms, who represent traditional big clients, made a ton of money doing traditional big bankruptcies. Conflicts of interest prevent many of those firms from representing hedge funds. In 2016 (and on into the future), somewhat less traditional firms, representing smaller and aggressive hedge funds, will be handling an increasing amount of insolvency work.

I’m just getting warmed up with my bankruptcy predictions. Anyone who reads the business pages knows that energy, mining, and commodities companies are currently under stress. (Coal is both under stress and in the midst of what analysts call a secular downturn — a downturn that won’t end any time soon.) The prices of commodities won’t increase until the Chinese economy reverts to its earlier levels of unprecedented growth, and that may take a while. Near-zero interest rates have saved zombie firms for a while, but interest rates are about to tick up. I predict a spike in distressed sales of energy, mining, and commodities companies over the next six months, causing firms that practice in that space to thrive.

(You might see a bankruptcy or two — probably pre-negotiated, for the reasons I just explained — of a mining or commodities firm, but you won’t see many long, drawn-out proceedings. Companies that own mines don’t generally benefit from restructuring as much as, say, retail companies do. A retail company can use Chapter 11 to close its under-performing stores and reduce its employee base. In contrast, when the price of platinum craters, all platinum mines will under-perform; there are no particular under-performing mines to close. And, for any mine, you’re likely to need a certain number of employees to extract the mineral from the ground; there’s not much benefit to reducing your employee base. Hence: Distressed sales of mining companies, and a pre-pack or two? You heard it here first. Long, drawn-out restructurings? No.)

Second, I’m predicting — heck, this isn’t “second”! That first prediction had about five sub-points built into it. I could stop typing right now and feel good about what I’ve cranked out.

But you’re in luck.

I’ll offer one more prediction (sort of like a curtain call); let’s call it prediction number six. I hear through the grapevine that capital markets work — handling initial public offerings and helping to issue high-yield debt — is painfully slow right now. I’m ready to predict that this will continue for at least the first half of 2016.

Why?

Funny you should ask. Investors hate uncertainty, and the world is now an uncertain place. Are companies valued too richly? How will national economies react to rising interest rates? Will terrorists strike again? Who will win the U.S. presidential election in November?

It’s going to take a while for investors to calm down, and your capital markets partners will be twiddling their thumbs until that happens — June, at least; maybe longer.

Predictions are tricky things; hopes are easier.

So, in addition to my two six predictions, I offer one hope:

I hope that your new year is a healthy and happy one.


Mark Herrmann is Vice President and Deputy General Counsel – Litigation and Employment at Aon, the world’s leading provider of risk management services, insurance and reinsurance brokerage, and human capital and management consulting. He is the author of The Curmudgeon’s Guide to Practicing Law and Inside Straight: Advice About Lawyering, In-House And Out, That Only The Internet Could Provide (affiliate links). You can reach him by email at inhouse@abovethelaw.com.