Rise of the Financial Advisors: An Empirical Study of the Division of Professional Fees in Large Bankruptcies

Abstract

In a study of the division of professional fees in 74 large, public company bankruptcy cases concluded from 1998 through 2003, we find that 79% of court-awarded fees are awarded for services rendered directly to the debtor in possession. Only 20% are awarded for services rendered to creditors committees, only one half of one percent are awarded for services rendered to equity committees, and less than one percent are awarded for services rendered by court appointed professionals.

Fifty-three percent of the fees were awarded to attorneys, 42% to financial advisors, 5% to accountants, and a fraction of 1% to all other professions combined. Of the 53% that went to attorneys, more than two thirds went to bankruptcy attorneys and less than one third went to "special" or "ordinary course" counsel performing nonbankruptcy work.

We estimated regression models for the fees of each of five types of professionals: (1) attorneys, (2) DIP bankruptcy attorneys, (3) DIP special attorneys, (4) financial advisors, and (5) DIP financial advisors. Debtor size, case duration, and the number of attorney firms working were the principal determinants of attorneys fees. But those factors were only weak determinants of financial advisors' fees. The strongest determinants of financial advisors' fees were court (the Delaware and New York courts awarded more to financial advisors) and the trend over time. Over the period of our study, the fees of financial advisors increased at the rate of 25% per year. Courts did not award higher fees to financial advisors in cases where the debtor sold its business or a controlling interest in its business.

By comparing the results of our study with the results of LoPucki and Whitford's study of reorganizations in early 1980s, we find a sharp increase in the employment of financial advisors by creditors' committees and a sharp decline in the employment of professionals by equity committees.

We found that several factors thought to cause DIP bankruptcy attorneys fees to be higher in fact did not. They include whether the DIP lead attorneys were a New York firm, whether the DIP lead attorneys were from a city distant from the courts, and the hourly rates charged by the attorneys.

Keywords: bankruptcy, reorganization, professional fees, attorneys fees, financial advisors, investment bankers, direct costs, special counsel

JEL Classification: G33, G34, K20, K22