Capital markets experts braced for cuts

As the global economic crisis triggers a drop in capital markets work, legal practices will suffer, reports Mike Yuille.

The crisis in global financial markets is now squeezing City law firms, where a 50 per cent fall in capital markets-related work in the past two months has forced firms to redeploy lawyers.

But despite some job cuts in foreign offices, there appear to be no redundancies yet among the 500-odd capital markets lawyers in London.

Yet while firms remain publicly confident about retaining staff in the short term, some acknowledge that gross revenues will be hit. Many say they are keeping staffing levels – particularly in overseas offices – under review.

Allen & Overy and Link-laters, the City firms handling the biggest volume of capital markets work, are expected to be hardest hit, although others – including Clifford Chance and Freshfields – will also be affected.

“I would be surprised if this year is as successful as last,” says John Rink, Allen & Overy's managing partner.

Tony Williams, managing partner at Clifford Chance, says: “Given the strength of the first half, I don't think anybody anticipates the second half being as strong.”

And on the subject of jobs, Williams says: “We are looking far more carefully at recruitment plans and the redeployment of staff.”

He adds: “It's also important not to have a knee-jerk reaction to the situation. We're certainly not adopting a slash and burn approach.”

The dramatic drop in activity has occurred since August, as a host of investment banks began reporting third quarter losses due to collapsing markets in South East Asia and Russia; they also suffered huge exposure to high-risk hedge funds such as Long Term Capital Management.

Hundreds of City traders' jobs have already been axed, including 400 at investment bank Merrill Lynch, with more likely to follow.

The worst-hit sectors are the fixed income markets for corporate and sovereign bonds, while the riskiest (and most profitable) high-yield markets, particularly in the emerging markets sector, have all but evaporated, according to City analysts.

This has had a severe knock-on effect on most capital-raising exercises, notably international public offerings, and some mergers and acquisitions work.

The effect in the City is insidious, affecting confidence in other areas of business from domestic lending to commercial property. Profit warnings and company failures are rising.

Only 12 companies joined the Official List in the third quarter compared with 30 in the second quarter – “the quietest quarter for new issues in a decade,” according to KPMG.

And 86 UK quoted companies reported profit warnings in the third quarter of this year, up from 75 in quarter two, according to an Ernst & Young study.

The most international law firms, notably the top five “magic circle”, are relatively cash-rich after a boom year in 1997, and so have some financial cushioning. They are also sufficiently broad in their skills base and geographical spread to take advantage of contracyclical business.

But the famine in capital markets work is expected to last well into 1999. This raises serious questions over how long firms may be willing to hold out before pruning departments to keep costs down.

Most lawyers are talking up the market, but one senior derivatives lawyer, who wants to remain anonymous, says: “Undoubtedly, we are all going to be hit after a while.”

The long-term effect of the downturn cannot yet be known, but some think it will hasten the consolidation of lawyers into a small number of very large firms.

Consolidation among investment banks is set to speed up, as the strong swallow those weakened by the turmoil. Deutsche Bank, for instance, is now looking at Bankers Trust, which has just taken a $300m battering in Russia.

Jeffrey Golden, partner in Allen & Overy's international capital markets department, echoes this view: “If consolidation among the banks continues, you may see further consolidation in legal practice, with a relatively small tier of global law firms servicing a similarly small tier of banks.”