15 March 2010 | By James Swift
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In 2009 Poland weathered the recession better than any other EU country, but how did the legal market fare? By James Swift
Poland did wonders for its international profile when it became the only country in the EU to grow its GDP in 2009. Admittedly it was a slight growth (1.2 per cent), but bearing in mind last year’s economic conditions and the fact that countries such as Spain and Greece are still mired in recession, any growth is an achievement.
The Poles, however, have taken a humble approach to the news.
“We’re the only country in Europe to register positive growth, but people here just joke that the Polish still can’t do anything right, not even a recession”, says Witold Daniłowicz, managing partner of White & Case’s Warsaw office.
The surprise that the country managed to fend off a recession has attracted a lot of positive publicity, and never has the country’s stock been higher with investors.
It is unclear what was behind Poland’s resilience. The country’s performance has been attributed by some economists to careful strategy by the government combined with good luck. But one factor that helped Poland stay afloat while all around it floundered, and which fits into neither the luck nor strategy categories easily, was the country’s business topography.
“One reason [Poland has escaped recession] is that the crisis we’ve suffered had a lot to do with cashflow, but in Poland most businesses are small or mid-sized and so are able to finance themselves from their own cashflow,” explains Daniłowicz.
In light of Poland’s impressive performance, it seems prescient that, while firms such as Linklaters and White & Case retrenched across Europe during the downturn, they stayed put in Poland despite it being a market already heavily populated with US and UK firms.
Law laid low
But did the positive growth enjoyed by the country’s businesses during the downturn make for a pain-free recession for law firms too? Not according to Krzysztof Wiater, managing partner at DLA Piper’s Warsaw office.
“I think the crisis has been very challenging for many firms, and the year ahead is when they’ll have to take some serious decisions about whether and where to invest, [as well as] reviewing the situations of even partners,” Wiater contends.
This view is shared by many in the market, who agree that the growth in GDP did little to shield the legal market, particularly the large international law firms, from the effects of the downturn.
“Although the Polish economy seems to be growing in terms of GDP, it doesn’t automatically translate into activity for lawyers,” says Clifford Chance Warsaw managing partner Grzegorz Namiotkiewicz. “GDP is fuelled by internal consumption, so it doesn’t necessarily mean more work for us. Poland’s a big country. In a downturn exports slow down and there’s little transactional work, especially for big firms. The government says it has some magic recipe for the downturn, but I don’t think so. […] Big firms rely on transactional work and it’s not flowing as well as we’d like.”
Moreover, despite its growth in GDP, Poland suffered by proxy the unease that stifled market activity.
“Poland wasn’t completely insulated from the downturn,” says Allen & Overy Warsaw partner Arkadiusz Pedzich. “The credit crunch also affected the Polish corporates. Some of the sectors have been affected quite heavily, like the shipping and steel industries.”
Not a zloty
The biggest crisis Poland faced during the downturn, however, was its volatile currency, which fluctuated wildly against the euro. So many businesses lost out that the government even considered legislating to wipe out the losses incurred by businesses.
“The problems in Poland weren’t just caused by the general downturn, but by fluctuation of the zloty against the euro, where there was a huge amount of movement in relation to hedging agreements,” says Pedzich. “There was even some talk about changing legislation to make these transactions null and void, but fortunately this is no longer talked about, as it would have been very detrimental for Poland as a place to do business.”
While unfortunate, the fallout from these ruinous deals has kept many lawyers busy.
“A major issue last year, which created a lot of work for lawyers, was the delay in dealing with ’toxic options’, meaning the hedging transactions on foreign exchange markets,” says Michał Barłowski, senior partner at Wardynski & Partners. “The government had intended to amend legislation to deal with the problem but didn’t because of serious legal arguments for not doing so.
o businesses had to deal with the foreign exchange losses in different ways. Most negotiated bank refinancing or sued banks, claiming misrepresentation or lack of information on the risks that applied; others […] had to file for bankruptcy.
“So it can be expected that in 2010 some of the rescheduled debt will have to be refinanced, because at the time of refinancing companies had little choice other than to accept that which was on offer, and in addition it’s clear today that they’re not performing as well as they expected.”
Don’t bank on it
Compounding the scarcity of transactional deals, the country’s banks show the same reticence towards lending as their counterparts worldwide, and this reluctance is depleting the opportunities for international transactions that the large firms need to sustain their models.
“In terms of the banking community, the banks are in pretty good shape compared with some international financial institutions,” says Pedzich. “But the problem is that most of them have been privatised and are now quite risk-averse in terms of extending finance, because Poland’s banks are mostly controlled by foreign banks like Citigroup, ING Bank, Fortis Bank and RBS, so it’s only natural that the activity follows their [parent banks’] strategies.”
The effect has been that many of the international firms that could stay aloof from local mid-market transactions in the past, subsisting comfortably only on high-end work, have had to expand their remits.
“We worked on many cross-border deals in 2006 and 2007, but when boom times stopped the music stopped playing,” says Clifford Chance’s Namiotkiewicz. “We try to compensate with domestic work, but that’s also difficult.”
The difficulty comes from competing with Poland’s domestic firms, of which the top two or three have the largest domestic practices of any operating in the country and which traditionally dominate the anticyclical practice areas such as litigation and domestic work.
“Polish law firms are stronger and stronger compared with where they were five years ago,” says Dariusz Tokarczuk, a partner in Gide Loyrette Nouel’s Warsaw office. “First of all there were a number of senior associates and even partners who left international firms for various reasons and decided to create or join existing law firms, and they [the Polish law firms] are able to offer lower rates with comparable quality.”
But despite the lingering effects of the downturn on businesses, law firms are optimistic about 2010 and are already reporting an increase in corporate activity.
“We can see that there’s growing M&A activity, which is a good sign,” says Pedzich. “And some private equity houses have started to be quite active in looking for opportunities to buy.”
The biggest opportunities, however, are the privatisations that are being lined up, chiefly in the energy sector, as the Polish government tries to chip away at 2009’s 7 per cent budget deficit.
“What we can see in the market is the privatisation trend,” says Weil Gotshal & Manges corporate partner Paweł Zdort. “The government’s selling everything they have in order to save the budget. A number of privatisations have happened already and more will happen, and there will be many capital markets transactions and a flow of ECM [equity capital market] transactions coming from the state.”
One of the largest deals on the horizon is the privatisation of Polish insurer PZU, which is expected to raise e1bn (£910m) when it makes its debut on the Warsaw Stock Exchange later this year.
The IPO is the result of an arbitration between the Polish government and Dutch minority stakeholder Eureko, after the government initially disputed an agreement to float the company. Both Weil and Dewey & LeBoeuf are acting on the deal (as is the norm in Poland, where the US firms tend to lead in capital markets work), which looks set to rejuvenate the Polish capital markets landscape.
But according to Zdort, there are even larger deals in the pipeline for 2010 such as the second flotation of energy company PGE and the IPO of utility company Tauron, which could raise as much as e2bn apiece.
Infrastructure is also going to be key, particularly motorways, as preparations for the 2012 European Football Championship continue.
“We’re seeing a big focus on infrastructure,” says Namiotkiewicz. “We’re building motorways and airports; part of it’s related to the football, but it’s also partly that Poles get funding from the EU for these projects.”
Another potentially lucrative source of work are the mooted nuclear power plants, which although at an early stage in terms of planning, promise to provide the legal profession with a huge project, since aside from the financing and building relating to the plants themselves, Poland - which has never had nuclear energy before - must develop the regulations necessary for housing the plants.
“It’s extremely important for Poland,” says Pedzich, “because they don’t have any nuclear plants and no regulations in place. Everything will have to be done.”