Sitting pretty in the City
18 October 1999
28 October 2013
23 June 2014
14 May 2014
30 September 2013
12 September 2014
Banking lawyers are dreaming of a quiet Christmas - just like the ones they used to know before the market went mad. "The first six months of this year were pretty ridiculous," declares a partner with a leading City firm. "There is one hell of a lot of deals being done all around the world," says another.
How quickly times have changed. A little more than a year ago, pessimism held sway and deals were not getting done. With the Russian economy seemingly close to collapse and the Far East in the doldrums, a global credit crunch appeared just around the corner.
But it never happened. Confidence grew, and with it came not just more deals, but bigger deals. Indeed, 1999 will be remembered as the year that saw the return of the jumbo banking deal, such as Air Liquide's £4.3bn credit facility from Banque Nationale de Paris and Credit Agricole Indosuez (see pages 28-29).
The jumbo deals have resulted in a resurgence of the banking market, says Clifford Chance partner Stuart Popham. "The Olivetti financing for the acquisition of Telecom Italia was probably the turning point. That went up to $32bn (£20bn). Over the last few years, people had been saying syndicated loans were coming to an end. What [Olivetti] proved was that, when you wanted the cash, you could put together a much, much bigger financing off the back of a syndicated loan than you could ever raise in the general capital markets - at least at that speed," he says.
For borrowers, explains Popham, the great attraction of a syndicated loan is that "you can have it underwritten and it is available for you to draw down. But, if the deal doesn't come off, you pay the upfront fees but you're not left with the money. If you go into the bond market and say to somebody: 'I want to do a takeover, it may happen, but in the meantime can I just have $2bn, please?', they tend to say: 'Hold on a moment, what if it doesn't happen? What are you going to do with the money?'"
Jumbo deals powered by syndicated loans also have clear attractions for banks. Because the deals are acquisition-related, they are tied into the broader investment banking business. Freshfields partner Sean Pierce says: "The great prize is that you can do the senior financing, where you get very healthy upfront fees. Secondly, you can get the business in the sense of corporate finance advice. And thirdly, you can get refinancing, which is usually some form of equity or quasi-equity issue. So there is a lot of business there for the full-service investment bank."
It is the US banks - in the shape of Goldman Sachs, Merrill Lynch and Morgan Stanley - which are showing the way. "The leading investment banks at the moment are the US investment banks," says Pierce. "They seem even in Europe to be in every issue."
He says: "One major US investment bank has got credit committee approval for 5bn euros (£3.1bn). One institution! It's inconceivable that this could have happened a while ago."
There is no shortage of funds at present, confirms Norton Rose partner Tim Polglase. "All the equity houses in the acquisition finance market have recently raised funds and have got money to spend. In addition, the Americans have entered the market, so there is a lot more money chasing deals."
They have been lured across the Atlantic, he suggests, by the potential of better returns: "I think the American equity houses still have the feeling that there is better value in Europe - certainly in the UK - than there is in America, which is a very, very competitive market."
The jumbo deals are also leading to a plentiful supply of disposals, as buyers unload the unwanted parts of their acquisitions. Indeed, in the corporate world, rationalisation is currently flavour of the month. "You're seeing a lot of spin-offs of businesses," says Pierce. "Basically, what the corporates are saying is: 'We're going to concentrate on what we know best.'"
Rationalisation is offering opportunities for those with an entrepreneurial spirit. Not surprisingly, US thinking is once again making an impact.
"We're seeing some US techniques coming in," says Pierce. "Lots of the funds coming in to provide the core equity to these deals are from the US. And some of the finance techniques, such as high-yield debt, were developed in the US."
Not content with merely giving advice, the US institutions regularly drive the deals. "Often, it's not the management that's instigating [the deal]," says Pierce. "It'll be the venture capital house or it'll be the investment bank who come in and say: 'Here's the deal' to the corporate who wants to spin it off. They may use the same management or bring in new management to do it. They may think management was the problem."
In the past, management buyouts rarely attracted attention from magic circle law firms and their clients. But leveraged buyouts are a different matter. Large LBOs amount to $1bn or even more. "That stuff has become much more interesting to the large financial institutions and the larger law firms," says Pierce.
An interesting feature of the US equity houses, muses Norton Rose's Polglase, is the strength of the relationships they have with the US banks. "Those relationships have successfully translated themselves across the Atlantic," he says. "If you look at, say Hillsdown, that deal was financed by Chase and Bankers Trust and Salomons, which are all institutional relationships of Hicks Muse [Tate & Furst], the equity house on the other side of the Atlantic." (see pages 28-29)
He professes himself unconcerned, however, about the danger that US institutions might choose to instruct lawyers from US law firms in London rather than domestic practices. "They might be American institutions," he acknowledges, "but they tend to have been here for some time and the people they have here know the lie of the land. They're not frightened of instructing American law firms, but they know, in terms of logistics, what their capabilities are."
Some of the US law firms in London have made a mark on the market, concedes a City banking lawyer. "That's not surprising, because a lot of the players here are American. But [the US firms in London] are still relatively small in number and relatively narrow in focus. So, if you're getting the big jumbo deal, I'm still not sure that it's the case that the London-based book-runner is going to say: 'Oh, I'll use the 20-man or even 100-man law firm.' That is not to say that they aren't doing some deals."
Nationality is not the crucial issue, argues Polglase. "I don't think clients particularly distinguish between English and American law firms. They're looking for people. Those American law firms that have highly regarded people are profiting. Those that haven't, aren't."
As for the threat to London - and, by extension, UK law firms - from Frankfurt, Clifford Chance's Popham believes that London's position as Europe's financial capital is secure for the time being. "I don't see any immediate transformation of the market," he says. "The real risk, I suppose, is that the euro becomes the currency of choice outside the immediate euro zone. That's many, many years off.
"If the UK does not go into the euro, that question may rise again. But, at the end of the day, what you're looking for is a market that is efficient. At the moment, if you were trying to syndicate a loan or sell a bond in Frankfurt you would not get very far. There just isn't the depth in the banking market."
Although the UK banking market will remain comprehensive, the number of home-grown institutions on offer may be about to shrink. Bank of Scotland's bid for NatWest could be the start of a period of consolidation.
And not before time, suggests one banking expert. Rationalisation is "somewhat overdue" he declares. "American banks have been consolidating for years. At the end of the day, do we really need the multiplicity of banks that are out there? If you halved the number of banks operating in London, would the consumer feel the effect of less competition?"
Some law firms may be anxious that consolidation could lead to the loss of a valued client. But the expert believes that consolidation will have little effect on client-lawyer relationships. Because of the ever-increasing danger of conflicts, all banks are obliged to maintain panels of law firms, he points out.
Consolidation will, however, make it even more difficult for law firms outside the magic circle to break into the big time. "There will be fewer banks," he says, "so less opportunity for law firms to get into the business if they haven't already got there."
So, will banking lawyers get the Christmas they want? If they do, they should not raise a glass to Santa, but to the millennium bug. "The banks in London and in New York and in European settlement zones are saying that they don't really want to be doing money transfers in any big way after around 15 December," says Popham. "There are even examples of margins being lifted for anybody who wants to roll over a loan between 15 December and 15 January to try to discourage people from doing that."
The banks are seriously concerned about the bug. But no one is admitting it. "It's probably one of those cases," laughs Popham, "where everybody cites that everybody else is worried about it."