All those on the shortlist for this year’s The Lawyer Awards best banking & finance team show a knack for creating groundbreaking deal opportunities
Finance lawyers are having to approach their practice with a healthy dose of imagination at the moment. As deals get bigger and more complex lawyers are becoming increasingly creative, twisting old structures and road-testing new ones.
While the deals submitted for the Finance Team of the Year category at The Lawyer Awards this year are enormously varied – from zombie companies to Islamic finance and power plants to Center Parcs – each sets a precedent for similar elaborate deals in the future.
Finance lawyers take note: flexibility, creativity and tenacity are the watchwords.
Berwin Leighton Paisner
When multibillion-dollar private equity funds TPG and Patron Capital wanted to jointly acquire Dutch real estate zombie Uni-Invest they approached Berwin Leighton Paisner (BLP) to advise on financing. The result was a blueprint for future commercial mortgage-backed securities (CMBS) restructurings.
The deal was structured in an innovative credit bid involving vendor financing by way of a novel exchange offer made to the Class A noteholders to take notes in a new securitisation in return for the extinguishment of their old notes original transaction. The team at BLP, led by partners Paul Severs and Lucy Oddy, was treading new ground.
“This type of transaction had never arisen in the market,” Severs says. “The deal document didn’t contemplate it, so we had to adopt innovative ways.”
The complex deal involved juggling buying a loan out of a defaulted securitisation, buying a mezzanine piece of debt from a group of lenders, buying shares through an enforcement on share security and establishing a brand new securitisation, placing notes with 60 investors. All this in a competitive environment – its commercial terms were on Bloomberg and other firms were piecing together competing proposals.
The transaction has set a precedent for future structures.
Severs says: “It’s the most challenging deal I’ve done in my 25-year career.”
Freshfields Bruckhaus Deringer
Meanwhile, it has been fun and games at Freshfields Bruckhaus -Deringer whose team has been -tinkering with financings for Center Parcs.
The UK-based company has four holiday villages in the UK and was looking for a way to finance the construction of its fifth. No single product would have been able to cover the amount required, so Freshfields set about advising RBS on how to plug the gaps.
The team worked to blend a £740m whole-business securitisation with a £280bn high-yield bond, allowing Center Parcs to refinance its existing CMBS debt structure. The new structure was backed by the four existing sites while raising a development finance loan to fund the fifth. As a result of the bespoke solution the development in Woburn will be completed in 2014.
“The biggest challenge was to make isolated products work with each other in a way that the product doesn’t lose its identity, so you can market high yield to high yield investors, and securities to securities investors,” says partner Simone Bono, who led on the deal alongside fellow partner Marcus Mackenzie. “Combining products is a theme we’ll see continuing.”
Latham & Watkins
When speciality chemicals company Perstorp decided to restructure its finances, Goldman Sachs and JP Morgan gave Latham & Watkins a call. The two financial giants were initial purchasers in a $1.09bn (equivalent) (£700m) multi-tranche bond issuance, as well as lenders under a super-senior revolving credit facility for the Swedish-based company owned by private equity sponsor PAI.
The transaction involved an extension of Perstorp’s mezzanine facility and a corresponding amendment to permit the refinancing of the rest of Perstorp’s capital structure. To do this Latham put in place a four-tier capital structure with two integrated inter-creditor agreements – super-senior revolving credit facility, senior secured notes, second lien notes and a mezzanine facility.
The idea was to replace everything but the mezzanine facility with US-style products. While this does not make too much difference in relation to senior secured debt, American second lien notes work differently to European ones.
“You get a kind of mis-match,” says partner Chris Kandel, who led the deal alongside London corporate co-chair Richard Trobman. “Either you can ignore it or you can adapt the structure to deal with it. We adapted the structure and came up with something innovative.”
There has never before been a European or US-European deal combining senior secured notes and second lien notes.
Kandel concludes: “It was a clever deal. There were some features where we had to adapt an American finance product to work over here in a capital structure that was unusually complex.”
Islamic finance is taking off in a big way. Not only were the Chelsea Barracks and the Shard funded through Sharia-compliant investments but the Government established its first Islamic Finance Task Force in March and the World Islamic Economic Forum will be arriving in London this October.
“If you’re involved in the Islamic finance world you’ll hear people talking endlessly about whether bonds are asset-based or asset-backed,” says Norton Rose partner Farmida Bi. “It’s at the heart of the conundrum.”
This was the problem faced by her team as they instructed Islamic-only bank Gatehouse UK on setting up a real estate-based sukuk – the first of its kind in the UK.
Bi’s team tackled this problem by finding a novel middle way. The sukuk has an innovative structure involving an ijara (lease) with a sale and purchase undertaking that gives noteholders recourse to Gatehouse Bank in addition to security over the sukuk asset, in effect acting as an Islamic covered bond.
“It works like a covered bond,” she says, “but not in the first instance. It’s special because it’s a capital markets deal coming out of the UK, by a UK issuer with UK property.”
The structure could be used by all sorts of issuers on a range of deals. Expect to see more of these sorts of bonds in the near future.
The European CMBS market was a major casualty of the credit crunch. In 2006 $42bn of CMBS originated in Europe but since 2007 the market has fallen flat.
“At a time where other parts of securitisation are improving CMBS was gone completely,” says partner Charles Roberts at Paul Hastings.
Roberts, alongside Conor Downey, led a Paul Hastings team representing longstanding client Deutsche Bank as arranger and lead manager of the refinancing of senior debt for a German 50,000-apartment multi-family property portfolio owned by Vitus. This was the largest public European CMBS since 2007 – more than twice the size of the only other two deals in the same period.
The Paul Hastings team came up with an innovative mechanism to overcome the problems posed by art.122a of the Capital Requirements Drive, which requires banks to retain at least 5 per cent of their securitisations. It has been unclear how this would -affect agency securitisations where it is uneconomic for arrangers to -retain any bonds.
Paul Hastings’ new structure, which enables equity investors to retain 5 per cent of the bonds, obtained approval from the regulators. As a result, agency securitisation is expected to become a major feature of the European securitisation market in coming years.
“There were one or two deals a year in the past few years but this year we’ve already had one huge one,” says Roberts. “There are as many as five more in the pipeline, and we’re working on three right now. We think this was the breakthrough deal that signalled the re-emergence of a significant product for clients and for lawyers.”
A team at Reed Smith advised the Co-operative Group on refinancing its debt in July 2012.
The new arrangements provide for term and revolving credit facilities of up to £950m, with pre-agreed capacity to increase to £1bn. It has allowed the Co-op to continue developing its trading operation, which controls more than 4,800 shops and has an annual turnover of more than £13bn.
As the deal approached completion in February 2012 the FSA put a spanner in the works, redesignating the Co-op group as a financial institution. The financing package was restructured to avoid materially prejudicial capital weighting, risk-weighted asset allocation and the increased costs impact in the context of the facilities being made available.
“That was an additional headache for the banking group,” says partner Philip Slater, who led on the deal for his longstanding client. “We were tasked almost at the last minute with going back to the drawing board.”
The transaction was finally completed in July 2012.
The financing was achieved with a streamlined group of only five lawyers, and one trainee.
“I like to think the people at the Co-op come to me because I manage a small and dedicated team who they know will be there – I like to know that the team knows what’s going on so we can quickly and efficiently deal with problems,” Slater concludes.
Slaughter and May
When the UK’s largest coal-fired power plant, Drax, decided to transform into a predominantly biomass-fulled power station it turned to Slaughter and May’s debt financing team. As a new client it entrusted the firm to raise at least £650m of capital investment for the enormous project.
Slaughters set about raising the amount through a combination of equity by Drax, and term/working capital debt raised in the UK business. The team faced a particular challenge in bringing together a hotch-potch group of lenders into the debt financing. As well as a traditional group of lending banks including Barclays, Lloyds and RBS, it brought in innovative lenders including Prudential/M&G and the UK government-owned Green Investment Bank.
“The challenge was to make sure we had the right structure, so new lenders with different priorities to traditional banks could sit next to the traditional banks in the structure,” says partner Guy O’Keefe, who led the team. Ultimately, Drax secured £790m of funding.
All this took place against a backdrop of regulatory upheaval.
“We had to make sure we could match anything legislators could come up with,” O’Keefe explains.
This was demonstrated by Drax’s successful £190m equity raise in late October 2012, within weeks of the UK government’s autumn endorsement of biomass.
O’Keefe says: “This deal shows that post-crisis, funders and lenders are open to innovation. It’s good news for financing projects in the UK.