8 May 2006
As the growing securitisation market has shown, the Central and Eastern European (CEE) market is becoming increasingly sophisticated as financial products and techniques commonly used in the UK and Western Europe rapidly gain currency in CEE. This trend is highlighting the need among law firms across the region for closer integration with their own international network.
The new dawn
The rapid changes to the legal systems of CEE countries during the late 1990s and the early part of this century are now beginning to pay dividends. Foreign investors see a great deal of opportunity in the region and are beginning to introduce products and structures from the West with increasing speed. There is an ever-decreasing time lag between a new product's launch in New York or London and its subsequent introduction to CEE markets.
This year has already seen some significant transactions, such as the PLN600m (£107.3m) true sale securitisation of a car loans portfolio for Dominet Bank, the first-ever true sale securitisation of a pool of performing bank assets in Poland, and the recent landmark deal by Red Arrow International Leasing, whose internationally offered and listed Eurobond, denominated in roubles, was the first-ever securitisation of Russian lease receivables, which created a new Russian structured finance product. Both of these deals demonstrate that banks and financial institutions are increasingly confident in the ability of CEE to work with complicated products.
So what are the reasons for this new dawn in sophisticated finance in the CEE?
- Western expectations. Many of the financial institutions in the CEE are now controlled by Western banks and financial institutions. They are simply managed in the same way as their sister organisations in Western Europe and the US, with the people who manage these institutions rapidly rolling-out the products and practices with which they are familiar. Just as, in today's market, Turkey looks to offload controlling stakes in its financial institutions to western banks, so Poland, Hungary and the Czech Republic took this approach over the last 10 years.
- Improved suitability of assets. Increased prosperity in CEE and the maturing of the market economy means that sophisticated products are now more appropriate and used more often. Improved cashflows from different types of assets in the region have meant that securitisation has become a more viable product to market to companies wishing to realise unlocked potential.
- Investor demand. Investors are increasingly comfortable with the idea of doing business in CEE, and the inclusion of CEE countries in the EU has helped cement what was an already growing ease with the region. Although there are still some reservations, particularly given the speed at which CEE countries aligned their own legislation with the EU, investor demand is now reaching levels where it is viable for financial institutions to begin the often expensive structuring process associated with complicated financial products.
- Out of the spotlight. The focus of securitisations on isolating the cash flows associated with assets is an attractive way for CEE to overcome any stigma attached to investment in emerging markets issuers that might previously have had difficulty attracting capital.
- New techniques. Off-balance sheet financing now offers businesses in CEE a far greater way to improve efficiency. Previously unavailable in the region, it is now being grasped with both hands.
Future developments in the region
As the region continues to mature, we should expect a greater deal flow of structured finance work from CEE. There is already an increase in such work from Poland, Russia and Hungary where, although no actual products have launched as yet, structures are now being put in place that are more than mere aspirations. Whereas Hungarian assets have been used in securitisations in the past, financial institutions in the region are beginning to sense that the market is now willing to accept more complicated financial products from CEE and are marketing themselves accordingly.
Big players in the region, such as Gazprom, which last year raised $1.87bn (£1.02bn) through two issuances of Loan Participation Notes secured on gas tariff receivables as part of the refinancing for its Blue Stream pipeline project, are continuing to develop innovative ways of accessing the capital markets. As the market responds positively to them, so others in CEE will follow their example.
Looking further afield, Turkey is attracting a lot of interest, particularly with regard to banks and financial institutions, as the recent interest in Denizbank and Finansbank, acquired by National Bank of Greece, has shown. A flurry of M&A activity in this year and the next could be a prelude to an increase in structured finance work in years to come, as investors will look to realise the value in the assets that they have acquired.
The challenges for lawyers in Turkey aiming to provide the level of sophisticated service expected by Western European investors will be similar to those faced in the CEE 10 years ago, when domestic lawyers in particular had difficulty in adapting to new legislation that took a Western European outlook in which they had, for the most part, no training. Firms with strong and real connections with leading offices in the EU will be better placed, just as they need to be in CEE today, and lawyers trained in the Western European jurisdictions from which any new EU-friendly legislation in Turkey may be drawn will have a substantial advantage in understanding its mechanics.
There is an accelerating pressure to understand the nuts and bolts of new products and techniques from Western markets and to tailor them for CEE issuers and markets, as well as responding to the legislative changes driven by factors outside the local context that are part and parcel of EU membership. All of this must be done amid a lagging level of sophistication in the region's judiciary and regulatory environments (albeit a diminishing one).
Local law firms that are too domestically orientated are struggling to achieve this, and a reliance on who you know in the region is far from enough. Equally, international firms need to be more than a brand name attributed to an inwardly-focused national practice. It is only through a substantial investment in training, and through real and seamless integration with the specialists outside the region who are on the cutting edge of the financial products themselves, that lawyers in CEE can expect to continue to provide the level of service required by business today and in the future.
Jason Mogg is Central and Eastern Europe managing partner and Matthew Powell is an assistant at Linklaters