The one-stop shop? It’ll never catch on over here

When Latham & Watkins raided Skadden Arps slate Meagher & Flom in New York two weeks ago for a trio of senior debt specialists, its elevation to the New York finance elite was complete.

Latham has always been known for its high-yield practice – something that helped take it from Los Angeles to New York in the first place.
Gradually – very gradually – it inched its way into the top tier for high-yield, and is now ranked along with Cahill Gordon & Reindel and Cravath Swaine & Moore. Head of high-yield Kirk Davenport is at the top of his game, rivalling the likes of Bill Hartnett at Cahill and Kris Heinzelman at Cravath: not bad for an out-of-town firm that was almost entirely reliant on the now imploded Drexel Burnham Lambert for its New York launch.

But after 20 years in New York, Latham still did not have a senior debt practice to complement its high-yield offering. Latham sources say that Marc Hanrahan – the most senior of the Skadden trio, and formerly of another LA-based firm, O’Melveny & Myers – has been in their sights for some time.

As reported in The Lawyer last week, Hanrahan’s team advised on a series of deals in tandem with Latham’s high-yield team last year, including acting for Credit Suisse First Boston and Lehman Brothers on NRG Energy’s $1.4bn (£771.9m) exit financing, and Goldman Sachs on Calpine Corporation’s financing.

Indeed, the move by Hanrahan, Ronan Wicks and Marcus Dougherty pretty much sews up Goldman Sachs’ debt work for Latham in New York. (Sullivan & Cromwell still has a strong lock on corporate and general securities issues.) Goldman Sachs is not the biggest debt player in the US market – JPMorgan takes that crown – but it is a nice way of shoring up a client.

From the Skadden team’s side, the move is logical. If you are an acquisition finance lawyer sitting in an M&A machine, you are going to be conflicted more than is comfortable. Latham may be growing in corporate, but not enough to dry up the financing mandates. But the bigger story is why it wants bank and bond in the first place.

And so to the one-stop shop. It’s one of those riffs that just won’t go away. The banks want it, says Latham, because it is cheaper and more efficient to have one firm working on senior and high-yield – especially since the banks do the same themselves. “The world is migrating to a one-stop shop world,” argues Davenport. “All our clients are going to benefit. Almost all investment banks here use a combined commitment letter for senior and subordinated. It’s one set of conditions and two term sheets attached.”

Acting on both pieces is common in the US. Simpson Thacher & Bartlett, Cahill and Cravath all work on combined bank-bond mandates on a regular basis.

To take just two examples, Cravath advised JPMorgan on the TRW LBO, and Simpson Thacher – New York’s other great finance powerhouse – handled the bank and bond pieces on the refinancing of lawn care company Scotts Group for JPMorgan and Citigroup.

And yet, and yet… The one-stop shop has never taken off in the City, and UK lawyers positively recoil at the idea. Shearman & Sterling thought it was on course for a breakthrough when then partner Stephen Mostyn-Williams and his team acted on the Clondalkin deal in 1999 for Warburg Dillon Reed and Allied Irish Bank on the senior and for Lehman on the mezzanine bridge and bond takeout. But since then? Virtually nothing.

“People have pulled back temporarily in London on the one-stop shop,” acknowledges Davenport, “but that’s because there’s been an inability to find a firm that can do it all. We have the benefit in the US that intercreditor arrangements have been standardised. If we can agree to structure transactions that are acceptable, bankers can place product without a lot of discussion.”

The concept of a one-stop shop might go down pretty well with certain institutions, especially those that have brought together their debt businesses under one roof. In London UBS, Merrill Lynch and Morgan Stanley are understood to be relaxed about the concept.

Deutsche Bank, though, is understood to take a dim view.
Davenport claims: “The conflicts are no different for law firms than for investment banks. It’s highly inefficient to use multiple law firms.”

Intensely satisfying though it might be to hear a US lawyer argue for lower costs on a transaction, this US approach simply does not wash in a European context.

Rather, as far as City banking lawyers are concerned, if you want bank and bond capability, then it is all about general coverage and access to different deals, rather than acting on the one transaction.
The cultural resistance in Europe to the one-stop shop is, of course, rooted in the famously operatic relationship between senior and high-yield. There may be greater certainty around what the high-yield package is these days, but if anything, the market is moving towards separate representation at all levels of debt.

Take the mezzanine layer. At present, the senior lender’s lawyers will tend to advise on both senior and mezzanine, although different partners will usually represent the two layers. But what happens when a buyout goes wrong? More banking lawyers are arguing that the mezzanine holders should have separate representation at the outset.

As one banking partner declares: “Yes, a one-stop shop saves money and it’s a bit quicker, but the whole point about having documents is that they protect you in the first place. The interests of the mezz are completely different. You’ve got to be a f***ing moron to think otherwise.”

After all, in a distressed situation, interests can dramatically diverge. Take Le Meridien, where there was a saga of Norse proportions between the mezz and the senior lenders.

These issues are all rather passé in the US, but are getting much hotter here. After all, if law firms simply replicate the investment banks in acting for all parties – however consensual – then they will be nothing more than transaction managers rather than independent advisers.

When it comes to the one-stop shop, perhaps being client-led can be too much of a good thing.