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24 March 2014 | By Jonathan Ames
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The sale of the ‘good’ assets of crisis-torn Hypo bank is a welcome stimulant for local firms, but the lack of young blood in the profession is a persistent problem
The Hypo Group Alpe-Adria bank in the southern Austrian state of Carinthia will mean next to nothing to all but those with the most detailed and, arguably, anal knowledge of European financial services. Yet what has been a small provincial institution for most of its 118-year history today features prominently in the minds and business plans of many in the corporate legal market.
Hypo is in a world of trouble. Indeed, if the more cynical were looking for a poster child for Europe’s recent banking crisis they could do worse than invoke this Klagenfurt-based business.
It expanded rapidly in the 1990s, opening across the Balkans. But, by the end of the first decade of this century, investigators had exposed a litany of alleged corruption and dodgy deals involving laundering funds for weapons during the Balkan wars, among other problems. The bank was nationalised in December 2009, going on to lose nearly €500m (£419m) in the subsequent six months alone.
Fast-forward to the present and Austrian lawyers estimate total losses at Hypo amount to some €90bn – no mean feat, points out Clemens Hasenauer, managing partner at law firm Cerha Hempel Spiegelfeld Hlawati (CHSH), considering that Austria’s total annual tax revenue amounts to €75bn. In the past few weeks the Vienna government bit the bullet and announced it had opted for a “good bank-bad bank” solution, with Hypo’s regional network up for sale along with the good side of its domestic operations.
The move is a blot on the copybook of Austrian banking, but welcome news for top local law firms, which are now queuing up to bag instructions.
“Hypo Group Alpe-Adria is a major problem for the country and various law firms are advising all sorts of interests around that bank,” comments Thomas Schirmer, joint managing partner at Binder Grösswang. “It’s a saga that will keep all the major Austrian law firms busy for the next year or so.”
According to lawyers, Austrian taxpayers are likely to have to take a hit of between €10m and €19m once the authorities put the final touches to the bad bank solution. International bondholders and other creditors will also be left smarting as they brace themselves for a haircut, while the Austrian government should at least be prepared for a possible downgrading of the country’s credit rating in the wake of the Hypo deal.
But Hypo is not the only Austrian bank in difficulty. Schirmer draws attention to two others that failed during the global financial crisis and were nationalised between 2009 and 2012.
Focusing on wobbly banks, however, would unfairly skew the impression of Austria’s economic health. Lawyers point out that as a “mature economy”, rocketing growth rates should not be expected.
Austria’s GDP was a modest 0.3 per cent up in Q4 2013 relative to the previous quarter. But as an illustration of how stable the country is, figures from Oesterreichische Nationalbank show growth rates averaged 0.48 per cent from 1996 until 2013, peaking at 1.6 per cent in Q3 1999, with a record 1.8 per cent contraction in Q4 2008.
Schoenherr M&A partner Christian Herbst points out that the Austrian economy is almost integrally aligned with the fortunes of its powerhouse neighbour and largest trading partner, Germany.
“The government prides itself on having the lowest unemployment rate in the EU,” says Herbst, “including for youth unemployment.”
Hasenauer claims the overall economic picture is one of Austria “doing quite well”. While the country suffered a modest downturn during the financial crisis, after 2012 economic activity substantially recovered, resulting in businesses being more confident in taking on investment risks, not least because financing is now more easily available.
Wolf Theiss managing partner Erik Steger summarises legal practice trends for Austria succinctly, highlighting regulatory and compliance, litigation, real estate and both corporate and debt restructuring. Interestingly, he also forecasts a rise in M&A deals and, indeed, there is considerable market and media speculation that a big deal is in the offing around Telekom Austria.
Generally, there is no denying that transactional work has significantly dipped in Austria, but then it has across Europe. Hasenauer points out that nonetheless most of CHSH’s revenues still come from deals, albeit those of somewhat smaller size than in the pre-crisis heyday.
Making up some of the difference are increasing corporate instructions in the compliance and business ethics fields, which started with the bigger players but has now filtered down the food chain to medium-sized enterprises. That has translated into advising on employment law issues as well as litigation arising from corporations increasingly monitoring activities in their own organisations as well as with those at contractual partners.
Schirmer also points to increasing activity around local start-up entrepreneurs, such as software developers.
“They may be small, but last year the government assisted with subsidies, not just focused on technology businesses but also on the chemical and biochemical sectors,” he says.
That central government aid saw €100m poured into a national growth fund, with Vienna recently announcing that a similar amount would be thrown into the pot for 2014.
Schirmer also highlights energy, particularity the electricity sector, as a growing field for long-term contracts, and cross-border issues around oil and gas.
“Foreign clients from Central and Eastern Europe [CEE] contract with gas service providers under Austrian law,” he explains, “because it is seen as neutral within the region. And then they use Austrian firms to resolve any issues around those contracts.”
Herbst forecasts that the fallout from the Hypo saga will be increased bank regulatory work for law firms. But it is not only bankers who will fall under the regulator’s gaze – disparate fields such as regulations covering power plants and grids as well as casino licences are high on the agenda.
He also focuses on increasing competition law activity.
“Cartels are being prosecuted by domestic Austrian authorities and those in the EU,” Herbst says. “Our competition lawyers are busy.”
Despite a generally healthy economic environment, Austrian businesses have not been immune to the sort of distress afflicting economies more widely. Last summer, the country’s second-biggest construction company, Alpine Bau, went bust, reportedly carrying liabilities of some €2.6bn.
“That generated a lot of work for law firms, including ours,” comments Herbst. Schoenherr acted for the purchaser of the viable remaining business.
The Empire strikes back
Ever since the fall of the Berlin Wall and the demise of the Soviet bloc a powerful constituency of Vienna-based law firms have wistfully harked back to the days of the Austro-Hungarian empire. ‘CEE is our backyard’ is their approach, ‘and we’ll be damned if we’re going to hand it over to English and US globals without a fight’.
So in they steamed, cutting ribbons on offices and putting lawyer boots on the ground. And for a decade or so from the mid-1990s the pickings were rich. Privatisation and corporate work was common in countries where commercial legal practice had effectively evaporated under communist rule.
Then came the 2007/08 financial crisis and subsequent eurozone meltdown. Suddenly, those CEE offices were not quite so shiny and a notable number of lawyers were left kicking their heels.
Schoenherr, Wolf Theiss and CHSH all to various extents expanded into the CEE region; Binder Grösswang resisted the temptation to dust off passports and retained a domestic approach supplemented by a network of informal associations. No points for guessing which of those firms is leading in the smug stakes.
“We’re especially happy that we don’t have offices in eastern Europe,” says Schirmer. “Not least because I’d be worried about what’s happening in Ukraine.”
Even without a physical presence in the region, Schirmer maintains the firm is acting for a range of clients aiming to terminate Austrian-law-governed contracts in Ukraine owing to the instability.
But, more generally across the region, Schirmer – who describes Binder Grösswang as “a domestic firm with a very international client base” – maintains that growth in the CEE region has slowed dramatically.
“They have problems around getting credit finance and no significant growth is expected in the next few years,” he says. “Many Austrian clients – especially the banks – are trying to get out of East Europe, as are real estate investors.”
He claims that not being on the ground in the wider region also gives Binder Grösswang more leverage in bidding for global law firm referrals.
“We are an interesting partner for many of them,” he says, “whereas the globals view the others as competitors in the region.”
Schoenherr’s Herbst concedes that Austrian law firm expansion into the CEE has plateaued. Indeed, he acknowledges what the wider sector knows well, that “there has been some consolidation during the financial crisis” with the regional offices of the big Austrian players having been streamlined. But, to be fair, some global firms have completely moved out from parts of the region.
Wolf Theiss’s Steger also puts his hand up, saying that “unfortunately, we had to reduce our team in the first two years of the crisis”.
But he claims the firm has recovered, added a Warsaw office and increased headcount in other offices.
Still, the overall approach is much more conservative than it was a decade ago.
“Growth is significantly smaller than in the years before the financial crisis,” says Steger. “We believe Central and South East Europe will recover. As usual for emerging markets, there will be a small delay after [the rest of] Europe recovers.”
He points to infrastructure, energy, financial services and restructuring as remaining healthy practice areas in the CEE region.
A couple of years ago the Balkans were also eyed up by Austrian firms. Indeed, Schoenherr was once so enthusiastic about Serbia and the rest of former Yugoslavia that it hosted one of its junkets for Europe’s legal press in a luxury resort on Montenegro’s Adriatic coast.
It would not be so keen to go to that expense today, says a partner at a competing local firm.
“The time isn’t as good now for expansion there,” is that lawyer’s view. “The train has left the station as far as the Balkan legal market is concerned for Austrian firms. If there are opportunities it would be around a young team with a specific type of client base splitting away from a major local firm. That could happen, but I don’t see any major Austrian firms engaging in a greenfield operation in the Balkans. If you wanted to do that you should have done it before 2008.”
Even co-operation agreements between the Austrians and Balkan firms have fallen out of favour. CHSH had a formal alliance with Belgrade firm JPM Jankovic Popovic Mitic. But both sides agreed to cut the link after ruling out a merger a few years ago.
So, Austria may have a strong economy but its law firms are having to pick their way through the post-crisis landscape with care.
Bright things not tempted by the lawyer’s life
Despite a relatively healthy legal market, senior lawyers are concerned at what they see as a dangerous ennui among the younger generation of professionals. Put simply, students are nowhere near as keen on qualifying as lawyers as they were 15 years ago.
Thomas Schirmer, joint managing partner at Binder Grösswang, says the phenomenon is not confined to Austria, extending across German-speaking Europe.
“It’s difficult to find top-quality young lawyers,” he explains. The attraction of becoming a lawyer – with all the pressure that entails – is not as high as it was. “Students and graduates have attractive financial offers from corporates, but with more spare time,” Schirmer adds.
The situation is in sharp contrast to the position of even a decade ago when, according to Schirmer, “everyone wanted to become a lawyer because they thought they could earn a lot of money if they worked hard. But now they are dissuaded by the long hours and the pressured working environment.”
Tightened partnership equity at Austrian law firms is also a problem, with younger lawyers disappointed by what they envisage will be an impossible route to the top table.
“Many now do not want to sit in the office until midnight if they don’t see partnership possibilities,” says Schirmer.
If nothing else, that attitude translates to a competitive market among top law firms for the cream of young or exiting lawyers.
Key figures: Austria
Life expectancy at birth: 81
Sources: International Monetary Fund, Austrian Bureau of Statistics, Tradingeconomics.com