Grand Central transformation
21 September 2009
After the turn of the millennium, the countries of Central and Eastern Europe (CEE) formed an emerging market of such promise that all international firms wanted an office in the region. If not an office of their own then at least relationships with established firms based in the various countries.
In Hungary, the recession has changed everything, with magic circle firms pulling out over the past three years and regional or national firms filling the gaps left behind.
First it was Freshfields Bruckhaus Deringer in 2007 (leaving Oppenheim behind), then Linklaters in 2008 (replaced by its CEE spinoff Kinstellar) and Clifford Chance in June this year (bought out by new local firm Lakatos Köves and Partners) - all were waved off by rival firms based in Budapest as they tackled restructuring back at their UK bases.
The departures can be linked to a depressed Hungarian economy, which, despite an International Monetary Fund bailout in October 2008, is still struggling to cope under the weight of bad debt and a lack of liquidity.
That said, law firms by the banks of the Danube have gained new neighbours too, with Wolf Theiss opening in 2007, CEE-rival Schoenherr launching in 2008 and Bird & Bird opening an operation later that same year.
As we discover here, Hungary’s lawyers paint a picture of a very competitive market. However, there are plenty of furrowed brows over the lack of work in the pipeline in one of Europe’s clear recession casualties.
László Szécsényi, partner, Schoenherr
Once considered by many the flagship sector of CEE, the Hungarian real estate market has been seriously affected by the economic downturn. The legal market has witnessed a sudden decrease in the number of real estate transactions.
Although most of the projects that started before the financial crisis hit are underway and have the required financing assured, more recent projects are on standby or at least require a restructuring of their financial mechanisms.
According to the recent changes to the regulation on the land transfer tax - in addition to the asset deals - certain types of share deals will also be subject to land transfer tax until 1 January 2010. In exchange, the rate of the general land transfer tax will be reduced from 10 to 4 per cent, with a limit of HUF200m (£640,000). However, the law does not regulate all levels of changes of control, so practitioners are likely to face ambiguities when interpreting the law.
Real estate developers will also have to acquaint themselves with extensive amendments to the regulation on construction-related administrative procedures, including the new building permit procedure and changes of the construction standards.
Richard Lock, partner, Lakatos Köves and Partners
People have been shaken up by the recession. Restructuring at companies is either finance-driven because the banks are breathing down their necks, or because companies are looking very closely at every part of their business and seeking cost savings.
Clients are completing a lot of internal work, such as cross-border mergers. In some cases the restructuring involves the sale of an operation. An increase in multinational businesses selling to local buyers is a discernible trend.
It has been interesting how the old argument that ‘the language of money is English’ has not been true. Some of the buyers are local entities that missed out on the privatisations ten years ago because they were not well-established then, but now they can help a foreign owner divest their business.
The amounts of money are often not enormous but the parent company wants out and local management will opt to take a business on as an MBO. The private equity market is also seeing opportunities from this.
It will be interesting to see what these buyers do with the companies once they have bought them. The local buyers are talking to the private equity companies.
In some cases the buyers will sit on these entities for three or four years and then sell them back to the multi-nationals, which by then may have sorted out their financing and strategy issues. In other cases more regional groupings will form.
Some clients have acknowledged that they overreacted in the early months of the year and now the moth-balling of one part of the business or employee layoffs are being reversed.
László Kenyeres, partner, Wolf Theiss
Although privatisation of the energy sector was completed in the previous decade and the effects of the credit crunch have been felt throughout the world, 2008 and 2009 will certainly be remembered as a busy period in energy law.
Recent developments included the transition of both the electricity and gas sectors from the so-called dual market to the free market. The transition presented new tasks for energy law practices: regulatory and competition law questions emerged as market entities adapted their behaviour to the changing regulatory environment; legal disputes arose in relation to the transition; and new entrants began appearing on the new free market. Advising market entities on such issues requires extensive knowledge of a number of fields of law in addition to energy law.
However, the full scope of challenges lying ahead is much greater. A considerable portion of Hungary’s electricity-generating capacity is provided by ageing units constructed between 30 and 40 years ago, so retrofitting these units and constructing new ones to meet the increasing energy demand is becoming a priority.
A number of projects are already in progress, including the construction of a new lignite-fired generating unit at Mátrai Erömü and the construction of two gas-turbine generating units at Ajka. Such projects utilise state-of-the-art, environmentally friendlier technologies, thereby posing a new challenge for legal professionals. They create a contractual framework that reflects the novelties of the latest technological advancements, while at the same time covering all legal aspects of the project. Moreover, major challenges still lie ahead, for example the proposed enlargement of the Paks Nuclear Power Plant. The construction of the original nuclear power plant was arguably the greatest Hungarian industrial project of the 20th century, and the plant’s enlargement would be no less of a challenge.
In addition to conventional and nuclear power generation, renewable energy continues to gain prevalence in the electricity sector. Renewable energy sources in Hungary are chiefly represented by wind farms, often located near the western border of the country. Such wind farms provide clean electricity and help achieve Hungary’s carbon emission targets, while at the same time requiring creativity and a different mindset from energy law experts who are advising on the projects.
István Réczicza, partner, White & Case
As part of the response to the global economic crisis, the Hungarian government introduced an initiative dedicated to the launch of major projects that are funded primarily from state resources and partly with EU funds. But getting these projects off the ground has been a slow process, presumably due to bureaucratic burdens and conflicts of interests among the various players.
The major projects that have gotten off the ground - such as the construction of a new metro line in Budapest and other infrastructure and telecoms projects - are generating ancillary projects that, although smaller, are still considerable projects in their own right, such as the procurement of metro cars for the new metro line.
However, the public procurement of the new phase of the M3 motorway has been cancelled. The state decided to cancel this procurement just a few days before the submission of the last and final offers; the reason was to win more EU funds for this phase.
Significant steps have been made in the energy sector. Major energy companies such as E.ON and GDF SUEZ have initiated the construction of new power plants, which mainly utilise gas turbines. The most significant projects include the expansion of the Paks Nuclear Power Plant and the development of a lignite-fired power plant in Visonta, both of which are in the planning phase. The Hungarian Energy Office has recently published a tender for the construction of new wind turbine facility that has the potential to double the built-in wind capacity in Hungary. A strategic gas storage facility in Algy has recently commenced operations and smaller projects for the construction of commercial gas storage facilities are continuing.
In the near future, project finance lawyers will have to deal with unfavorable changes to the law. From 2010, off-budget treatment will no longer be available to PPP projects, due to a recent amendment of Act XXXVIII of 1992 on Public Finances. This change will inevitably have a critical effect on the Hungarian PPP market. Act CXXIX of 2003 on Public Procurements was also amended as of the end of 2008. Some of these amendments affect the status of the project companies that will be established to effect the public procurement contracts and may give project finance lawyers headaches.
These changes seem to contradict the limited or non-recourse nature of PPP projects, and other changes to the law may make certain corporate actions more difficult in respect to project companies, such as the transformation of special purchase vehicles.