The pain in Spain
22 March 2010 | By James Swift
28 July 2014
28 January 2014
28 July 2014
24 March 2014
19 February 2014
The recession may have come late to Spain, but as James Swift reports, it has not escaped unscathed and nor has its lawyers
For more than a decade Spain was one of Europe’s top economic performers, riding high on the success of its prodigious, debt-driven real estate sector. But when that market - which contributed 10 per cent of the country’s GDP collapsed, the country’s economy faltered. Now, with unemployment approaching 20 per cent, Spain is one of the only major industrialised countries not expected to come out of recession before 2011.
It was a similar story for the Spanish legal market. Driven by the success of the economy, the country’s top domestic firms grew into huge, megalithic organisations. Even as late as 2009 Spanish firms were reporting record turnovers, with Garrigues - Spain’s largest firm - posting e334.3m (£303.14m) for the financial year from September 2008 to August 2009, up by 12.6 per cent on the previous year.
“Spanish firms have grown incessantly and at a high rate,” says Gómez-Acebo & Pombo partner Fernando de las Cuevas Castresana. “If you look at Spanish
firms, then you can see constant growth in both turnover and number of lawyers.”
International firms also made the most of Spain’s luxuriant economy: for years there has been a steady flow of firms opening in the country’s capital as a Madrid office became a must-have for any global player.
“We have almost everyone here,” as one partner in the region puts it.
But last summer things began to change. The crisis hit and it hit hard.
“The legal market was doing well until June last year, and since then things have gone down substantially,” says Baker & McKenzie Madrid managing partner Luis Briones.
It’s mainly because companies have reduced their budgets.
“In the first stages of the crisis, because all markets have anticyclical activities, most firms could keep their fees up and maintain their positions in the market, but in the past months all law firms have had some sort of reduction of their turnover. We haven’t finished our financial year yet, but we’re not going to have an increase this year - the aim is just to maintain.
This has been followed by a decline in activity among firms. The rumours surrounding firms thought to be sizing up Madrid offices, such as White & Case, have stopped.
“The legal industry’s now going to see a decline of foreign law firms opening [in Madrid],” says Araoz & Rueda name partner Pedro Rueda. “The crisis is deterring foreigners from opening for the time being, but the market will reactivate in the future and I’m sure we’ll see more foreign law firms opening here, although mostly US firms, because the majority of British firms are here already.”
There is disagreement, however, as to whether the decline in market activity is a direct result of the economy or a natural consequence of a market that has reached maturity.
“The market’s becoming mature and I don’t know if Spain will still be able to house so many large firms,” says one partner who subscribes to the latter view. “It’s still quite an attractive market, but the number of players here is too large.”
Even while things have looked bleakest, however, Madrid has not been bereft of new entrants. In December 2009 Romanian firm Tuca Zbârcea & Asociatii established a representative office in the Spanish capital, although the most high-profile new entry of late was in April 2009 when Herbert Smith launched an office with three partners from Linklaters’ Madrid office (although since its inception Herbert Smith has grown from 17 to 28 lawyers in Madrid, most recently adding a finance partner from Allen & Overy). The market has high praise for the lawyers at the firm.
“Herbert Smith’s got good names in M&A, finance, litigation,” says Gonzalo Jiménez-Blanco, managing partner at Ashurst’s Madrid office. “However, they’re only just starting to operate in the market and I’ve not seen them so far in many transactions.”
This may have more to do with the general dearth of transactions than Herbert Smith’s activity level, but more than creating a scarcity of work for lawyers the downturn has instead meant a shift in the type of work on offer.
“The economic crisis is really hitting this country,” says Rueda, “so the balance of work in law firms has shifted to restructuring, litigation and refinancing. There’s very little M&A and very little, if any, private equity due to the incredible restrictions on financing. Banks don’t have any means to finance acquisitions or projects anymore.”
“This has impacted on the work we’ve been doing for the past three years and the forecast for the next 12 months isn’t clear,” agrees Jiménez-Blanco. “We have, almost all of us, changed to restructuring, litigation and insolvency.
“The big firms in Spain are suffering more than the others because they have more people in specialised teams that have been moved to new areas of activity. Mid-sized firms like us, which have fewer people and multitalented lawyers can change their teams to the new areas more easily and so are suffering less.”
But most lawyers agree that Spain looks to be on the precipice of recovery, at least, in terms of deals. And although the market has experienced something of a false start already this year, with a number of proposed IPOs falling through at the last minute, that has not deterred partners from predicting a more positive 2010.
“Banks are lending more, but still not enough,” says de las Cuevas Castresana. “Prices are converging, but there’s still divergence between buyers and sellers. Convergence will happen in 2010, but I’m not sure when.”
But those firms that have been able to get stuck in to the recession-related mandates have found that there is already engaging work to be had.
“There is restructuring, which goes beyond just debt restructuring,” says Herbert Smith partner Álvaro Sáinz. “There are quite a few corporate restructurings and defensive spin-offs. There’s also a lot of conflict between shareholders, and agreements that in the past you never would have looked at are being renegotiated. So there’s a lot of corporate and banking activity going on, but based around the crisis.”
Saving the savings banks
By far the most significant restructurings are those of the country’s savings banks (or caja de ahorro), which are regionally controlled financial institutions that grant loans, take savings and also take an active role in local communities’ financing projects etc.
The savings banks have grown significantly in the past and now account for almost half of Spain’s overall lending, but the banks suffered heavily against the country’s real estate crisis, continuing to sell mortgages even after commercial banks began limiting their exposure. And since the failings of the savings banks could seriously impede the recovery of Spain’s financial sector, their rescue has become a priority.
The Bank of Spain took control of one fragile savings bank, Caja Castilla La Mancha, in March and Miguel Ángel Fernández Ordóñez, the governor of the Bank of Spain, said he wanted to see a third of the 45 savings banks absorbed into stronger institutions.
Although the legal work involved in merging and restructuring these banks is complex (not least when it involves merging entities from two of Spain’s 17 separate administrative regions) and is welcomed by lawyers, not all are convinced that, as a viable means of recovery, it is enough.
“We’re doing too little too late from a national point of view,” says Briones at Bakers, “but from a legal point of view, dealing with the reorganisation of the savings banks is creating work.”
Indeed, most of the key firms in Spain have landed roles on restructurings, with domestic firms such as Garrigues, Uría Menéndez and Cuatrecasas (with the latter having assembled a fire-fighting team to deal exclusively with the ailing banks) particularly well placed to pick up mandates. International firms such as Clifford Chance and Freshfields Bruckhaus Deringer, meanwhile, have also managed to secure savings-bank mandates.
However, there has not been the surge of work expected, as the restructurings have been hampered by problems, such as the reluctance of the regional politicians to relinquish control of their cajas and the Spanish government’s fund for orderly bank restructuring, known as ’Frob’ (Fondo de Reestructuración Ordenada Bancaria), which according to partners in Madrid has been sluggish.
“The savings banks work is going very slowly because the Frob fund hasn’t created any financing,” says Rueda. “And the financing is very expensive, 7.75 per cent annually. On top of that Brussels has imposed a deadline on it and everyone has the impression that the Frob will be a disaster.”
The restructuring of the savings banks is not the only aspect of Spain’s recovery that has suffered inefficiencies. Many lawyers question whether the country’s government has the strength to get Spain back on track.
Their fears are epitomised by the government’s uncertain handling of the proposed reforms of Spain’s rigid employment laws. The proposed changes, which include raising the age of retirement and slashing redundancy packages, have provoked an uproar from the country’s unions, causing the government to think twice, but most believe that changes have to be made.
“My worry is the government won’t be strong enough to adopt the [labour reform] measures,” says Briones. “We need clear, practical measures to reduce the deficit, but I don’t know if they can do it.”