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26 September 2013
There are only four companies that do it. Vouch for the credibility of a company through insuring bonds, that is. Financial Security Assurance (FSA) is one of them; the others are MBIA, Ambac Financial Group and Financial Guarantee Insurance Company.
Last year, FSA was taken over by the municipal lender Dexia. The acquisition, which moved FSA from public to private ownership, took four months to complete and was worth $2.6bn (£1.8bn).
FSA used New York firm Cravath Swaine & Moore in the US and Linklaters & Alliance in the UK. Linklaters worked closely with FSA's two regulatory lawyers in New York, who deal with the company's corporate work.
"We've always had a great deal of involvement between in-house and private practice," says assistant general counsel David Ridl. "The outside counsel manages the transaction to the point of closure and the in-house team manages the closure so that it meets the standards."
Altogether there are 16 lawyers working in-house, 15 based in New York and one, Ridl, in London. Ridl has worked for FSA since the London vacancy was created two years ago. It is his first in-house role after eight years handling project finance work at New York firm Sidley & Austin.
"I decided I wanted to work more closely with the business side and work with a service that was independent of the buildings I built or the hours I worked," he explains.
FSA certainly meets those criteria. The company guarantees principal and interest on municipal bonds and asset-backed securities. But what makes it unusual in the insurance market is that it underwrites with the expectation that there will be zero losses. And sure enough, it has yet to make a payout.
When it was set up in 1985, FSA focused on consumer and asset finance in the US. It helped raise money to finance projects such as hospitals, schools and roads and its main clients were US cities.
But it was not long before the company turned its attention to the international arena and set up an office in the UK. "This type of insurance wasn't a business that was known here," says Ridl. "But then people started to realise that it was another financing technique."
FSA has a triple-A rating from Fitch IBCA, Moody's Investors Services, Standard & Poor's Ratings Services and Japan Rating and Investment Information. This means that the bonds and other types of obligations it insures have a triple-A guarantee and can be sold at a more favourable interest rate.
The risk management team decides which companies are worthy of the FSA guarantee. "And most of them are ex-lawyers," says Ridl.
According to Ridl, the legal function is an integral part of the business. "The legal department is very important, and there's no clear distinction between what is legal analysis and what are business issues," he says. "The risk management team comprises the five most senior people in the company and includes the general counsel, the chairman and the chief underwriter."
The team scrutinises the risks of terrorism, construction techniques, environmental damages, changes in the law and changes in the population before it gives its stamp of approval.
There are two lawyers in New York who handle reinsurance work and much of the risk is offset through reinsuring the bonds. "If something goes wrong, it's a good way of moderating the risk," says Ridl.
He says that the PFI deals, where a government puts risk into the private sector, are the most interesting.
One of FSA's biggest deals was with the concessionaire Endeavour SCH. FSA guaranteed bonds to raise up to £137m to fund the construction and renovation of a hospital on a 69-acre National Health Service trust in Middlesbrough.
Endeavour got concessions from the Government to have control of the entire debt. It borrowed the money to build the hospital and is still responsible for maintaining all non-clinical aspects. "This means that the Government just pays for healthcare purchase and there's no extra cost to the public," says Ridl.
The project took two years to complete. FSA used Freshfields Bruckhaus Deringer, with legal fees totalling £1.1m.
The whole PFI area is beginning to develop on the back of European integration and the restructuring of Government spending. PFI has become a global business and local legal systems are being forced to adjust to the demand for more complicated transactions.
On the Continent, the legal issues are particularly complicated because they correspond to the civil code as opposed to UK or US law. "The standard of law in the UK and the US is high and most transactions work, but in Europe you have to question whether you can do a transaction that isn't specified in civil law," says Ridl. "We're working with local counsel to make sure that these transactions do work."
Local law firms must also learn to compete. FSA continues to use the magic circle, but most of the UK magic circle and US white shoe firms have merged with local firms, which are expected to match their international acquirers inch for inch.
"This is one of the advantages of the mergers of large international law firms. They guarantee a standard of experience that we're used to," says Ridl. "We need global resources and we need people with language skills, and this is what we get."
However, choosing a law firm for PFI work is not always easy. For every transaction there are several consortia bidding for the project and they all tend to use the same firms. This means that FSA is constantly battling with conflicts and often its first choice of law firm is conflicted out.
A number of firms are strengthening their asset-backing practices, including Weil Gotshal & Manges, Latham & Watkins and Cleary Gottlieb Steen & Hamilton. Ridl says that FSA wants to expand the number of law firms it uses and adds that his recent trip to The Lawyer Monte Carlo was undertaken partly with this aim in mind.
Ridl says FSA will continue to use UK and US firms. "Both have their advantages," he says. "Although they're comparable, UK firms generally encourage more partner involvement, whereas New York firms often tend to delegate downwards. But on the other hand, because of the litigious nature of the US, US contracts tend to be far more comprehensive in covering all aspects of risk."
FSA plans to hire a second lawyer for its London office. While Ridl concentrates on the PFI work, the new recruit will handle asset-backed work and credit derivatives.
There is also talk of bringing in someone from private practice to teach the legal department more about European law. But Ridl stresses that this would not be a role for a junior lawyer. "None of the roles here are for junior lawyers," he says. "The deal structures are incredibly complex and we need to understand the transactions and present them to management."
FSA is already doing work in the UK, Australia and Japan, and there are plans to expand into France, Spain, Germany, Portugal, Italy and The Netherlands. The company is currently deciding which firm to appoint for a road deal in Normandy in one of its first project financing deals in Europe, and there is potential for a similar deal in Portugal.
One conceivable downside is the controversial nature of PFIs, particularly now that European integration has led to governments being assigned limitations on public spending. "There's been some controversy and some people have asked whether PFI is value for money," says Ridl. "But we think it's a very competitive solution with a very competitive bidding process. It's a way to move the risks into a framework at the beginning of a long period of time. And the Government doesn't lose out if the project goes wrong."
With PFIs starting to take off in Europe, you can count on a surge in the demand for PFI legal advice on the Continent.
Assitant general counsel
Financial Security Assuranc
|Organisation||Financial Security Assurance|
|Head of legal||Bruce Stern|
|Reporting to||Robert Cochrane|
|Main location for lawyers||New York|
|Main law firms||Allen & Overy, Ashurst Morris Crisp, Clifford Chance, Cleary Gottlieb Steen & Hamilton, Cravath Swaine & Moore, Freshfields Bruckhaus Deringer and Linklaters & Alliance|