The domino effect
3 November 2008
Denmark’s banking industry is collapsing at alarming rate. The situation calls for some creative lawyering, says Tom Phillips
Denmark has been known as one of the most stable economies in Europe, but over the past 10 months an economic storm has broken over the country’s financial markets.
Unprecedented upheaval from the subprime collapse has required intense lawyering from Danish firms, which have been at the forefront of reconstructing the nation’s banks.
The crisis first hit back in January after BankTrelleborg became unable to reach the regulator’s solvency requirement, resulting in a merger with Sydbank.
Roskilde Bank, a larger institution, became the second casualty in March, and since then there have been an almost daily collapses of businesses and banks in the country. These include low-cost airline Sterling, electrical retailer Merlin, real estate businesses CenterPlan and Griffin, the country’s two major department stores, a hotel chain… the list goes on.
The worldwide liquidity crisis appears to be the main cause of the banks’ problems. But, says Henrik Møgelmose, a partner in the capital markets group at Kromann Reumert, the real estate collapse and the amount of Iceland-owned investments in the country are also to blame for the chain of insolvencies since the start of the year.
Kromann, which has 570 lawyers, has worked on all but a few of the banking crises that have erupted since January – including Roskilde, Forstædernes and Lokalbanken.
“The Roskilde collapse was largely down to involvement in the real estate market,” says Møgelmose. “The insolvency market is booming right now. There hasn’t been a day gone by over the past six weeks without a company becoming insolvent. Our insolvency practice is extremely busy and we’re hiring externally and internally.”
Randi Bach Poulsen, managing partner and chief executive officer at 235-lawyer Bech-Bruun, first became involved in the Danish bank situation with BankTrelleborg. Insolvencies could strike nearly every industry in Denmark, keeping Poulsen and her insolvency practice billing an extreme number of hours each week and the practice growing five times in size since early September.
“I don’t think anyone could have foreseen what’s happened,” says Poulsen. “From 1 September, Denmark – like the rest of Europe – has been affected by the economic downturn. We’ve seen substantial companies go bust nearly every week since then.”
The way ahead?
Like many lawyers in Denmark, Poulsen has shared the concerns raised over the past three years about the large amount of Icelandic money invested in Danish businesses. But what happens next is a mystery.
“We’re all reading what the economic commentators are saying, but some say this will be over as quickly as it started, while others say this is a long-term depression. We just hope it won’t escalate. The domino effect makes the string of bankruptcies difficult to stop.”
Ian Tokley, a partner in Kromann Reumert’s banking and finance group, says some lawyers are as busy as they were during the acquisition finance boom of 2005. “You’ll see lawyers rushing around at midnight because the work is urgent and involves intensive due diligence – these are partner-heavy projects,” he says.
However, Tokley admits that compared with three years ago the deals are different. Where previously there would have been perhaps five entities bidding and three lenders, bank restructuring has no auction process and often just two law firms involved.
Tokley and his team often sit opposite Gorrissen Federspiel Kierkegaard (GFK) on the bank deals. At the forefront of this is GFK’s head of banking and finance, Michael Steen Jensen, who represents the Danish Central Bank (DCB).
The DCB and GFK have been busy securing many of the banks in trouble since the start of the year in so-called “weekend jobs”, which see troubled banks knocking on GFK’s door on a Friday wanting to raise liquidity over the weekend in order to start on Monday morning revitalised, without disturbing the market or their share price.
Jensen, who admits he cannot remember the last Friday he had off, said the situation has called for an unprecedented use of new rules and “aggressive” thinking.
“The major problem is to avoid illegal state aid,” he says. “Every weekend during one of these jobs we have to hold meetings with the EU Commission, the Danish Financial Services Authority, government ministers, the Danish Central Bank and the bank in question. It’s complicated work.”
Jensen says the problem lies with the fact that Denmark has around 150 banks – an extraordinary number compared with, for example, Sweden’s 14. Consolidation has already begun, which should help, together with a recently announced rescue package that sees the solvent banks sharing the securitisation of unstable banks with the DCB – and which the government hopes will bring an end to the crisis.
“If a bank goes bankrupt, even if they’re small, it’s a disaster for the market so they have to be saved,” says Jensen. “There are still banks having severe problems and we’re extremely busy.”
For lawyers like Jensen, the situation has demanded some creative lawyering the likes of which many have not seen before – including the use of rules put in place in the 1990s that are being used for the first time.
“These are interesting times and this is fascinating work,” says Jensen. “We’re structuring deals in ways we’ve never seen before. You cannot get a better job than this.”