Issuer and arraranger:never the twain shall meet

Advising on the issue and trade of debt such as medium term notes and bonds is an increasingly lucrative part of the business of UK law firms Allen & Overy, Clifford Chance and Linklaters & Paines.

In the US the different parties to these deals always each instruct their own law firm. But in Europe, things developed differently – one law firm has tended to act for different parties to the transaction. After all, there are fewer law firms in Europe that specialise in the work and, in any case, clients find it a cheaper way of working.

Then, at the end of 1995, the International Primary Markets Association (IPMA), the members of which are the investment houses which underwrite these deals, threw a spanner in the works by issuing a recommendation that the same law firm should not act for the issuer and the underwriter or arranger.

The law firms had to change their practice. Clifford Dammers, IPMA secretary general, says that Clifford Chance has not fallen into line in one transaction. This is disputed by Clifford Chance, which says it is not advising the issuer on the issue itself but merely on how it can incorporate in order to make the issue (see story, page three).

Whatever the circumstances in this case, Dammers believes that the principle should hold that different law firms should act for issuer and arranger.

What would happen, he says, if the man advising the issuer discovers a flaw in his London colleague's underwriting agreement. “What do you do? If you keep quiet you are not fully representing your client, if you tell your issuer, you are breaching the duty of absolute confidentiality that your London office owes to the underwriter.”

Dammers says the IPMA's only sanction is to encourage its members not to take part in a transaction where the lawyers may have a conflict.

“We just think it's a very bad practice and we don't want it happening,” he says.

But Dammers would like to go further than this. He does not approve of the same law firm acting for the underwriter of an issue and the trustee company, which is supposed to represent the interests of investors who bought the bonds.

But even Dammers admits that two leading trustee companies – Law Debenture Corporation and Bankers Trust – do not agree with him when it comes to the London market. Dammers also does not like the same firm acting for the ratings agency which assigns a credit rating to the bonds.

In a £68m bond issue by Housing Association Funding announced last month, in which Warner Cranston advised the issuer, finance house Freud Lemos, and Berwin Leighton advised the Housing Associations, Clifford Chance acted for the three other parties.

Clifford Chance partner Chris Oakley acted for the arranger and co-underwriter BZW; partner Ian Jackson advised the bond trustee, the Royal Exchange Trust Company; and fellow Clifford Chance partner Tony Bankes-Jones advised the agency Standard & Poor, which gave the issue a triple A rating.

Dammers believes that law firms doing this are “putting themselves in an impossible situation” because the different parties each have slightly different interests. But Clifford Chance says the parties are all working together to get the deal done. It is a question, says managing partner Geoffrey Howe, of where you draw the line. He points out that in the US things are done differently because the trustees tend to play a larger negotiating role, making it more likely that conflicts will emerge.

David Frank, Slaughter and May's head of capital markets, says: “In my particular sector we never act for the both the issuer and the underwriter or arranger. There would be a conflict.” But he defended Clifford Chance in acting for both trustee, dealer and ratings agency. “I don't think it is that unusual. Standard & Poor always tends to use Tony Bankes-Jones at Clifford Chance.”

He says that the test is that if “you find yourself negotiating with yourself, then there's a conflict”.

So far there have been no big scandals in the European bond and debt market. But pessimists would say that it can only be a matter of time before a big issue collapses, leaving investors with worthless paper. And when that happens, one of the things investors will want to know as they seek redress in the courts is which lawyer acted for which company.