The banking world has changed utterly in the past two months, leaving banking practices with the unenviable task of having to rapidly rethink strategies.
Allen & Overy (A&O), like many firms, is staking the near-term future of its banking practice on restructuring work, as the leveraged finance and lending markets provide ever-slimmer pickings for most lawyers.
But how wise a strategy is this given that magic circle rivals Freshfields Bruckhaus Deringer and Linklaters, which have already snapped up roles on the most high-profile restructuring deals of the moment, are also in the market for insolvency work?
Linklaters stole a march on its rivals when it was instructed by PricewaterhouseCoopers (PwC) on the insolvency of failed investment bank Lehman Brothers, while Freshfields is advising administrator Ernst & Young (E&Y) on its work for the UK arms of Icelandic banks Kaupthing and Landsbanki.
A&O banking co-managing partner Stephen Kensell admits that he was disappointed his firm did not get the PwC instruction, but he adds that missing out has enabled the practice to continue advising existing clients it would otherwise have been conflicted out of servicing.
Although A&O still lacks a showpiece credit crunch insolvency instruction, the practice group is committed to change. Given that banking, together with international capital markets, makes up 50 per cent of UK turnover, that change is vital.
Accepting that lending lawyers are not nearly as busy as they were, Kensell reckons that restructuring work may be sufficient to pick up the slack.
“A workout often involves large numbers of lawyers from multiple practice areas and offices,” he says. “The Marconi transaction involved at least eight A&O offices, with lawyers from restructuring, banking, corporate, capital markets, tax, insurance, real estate, pensions and other areas.”
Kensell, who co-manages the department with Andrew Trahair and global banking chairman Mike Duncan, says flexibility will be key to the practice’s strategy for the next year.
“It’s about making sure that you lever up the resources in the areas that’ll be busy, and an obvious one will be restructuring,” he says.
Others are less optimistic that massive lender teams can be kept busy in a downturn. One rival finance partner says: “This idea of reallocating people to restructuring is one I take ever so slightly with a pinch of salt.”
Split evenly between its Spitalfields and Canary Wharf offices, A&O’s banking umbrella covers six core product groups (see box, right). Of those, general lending and leveraged finance together make up the largest group in London with 31 partners. Project finance, asset finance and regulation lawyers also form a large group, with the rest of A&O’s London banking practice made up of 11 restructuring partners.
Despite the fact that the firm has not won any headline-grabbing restructuring instructions in recent weeks, even its rivals accept that A&O’s restructuring team is one of the biggest and best in the City. Recent deals saw partner Earl Griffith working on the £1.6bn debt restructuring of the Four Seasons Group, while Mark Sterling and Katrina Buckley advised E&Y on the Metronet insolvency.
The practice faces the challenge of adapting to the ebb and flow of the different workstreams beyond banking insolvencies. Kensell expects restructuring of large corporates to rise to the top of the agenda in the next year, coinciding with a slight loosening in bank lending, which will begin to feed general lending lawyers again. He, like others in the market, expects that soon some courageous private equity houses may follow with high-cash low-leverage transactions, while hedge funds could try to capitalise on changing tides.
If that were to happen, there are still some weaknesses in A&O’s banking practice. The firm is seen as having been chummy with the banks, so much so that, according to one rival, it has let its private equity sponsor side practice “drift” in recent years.
One former A&O banking partner agrees, arguing that having historically done a lot of work for sponsors, the firm has now “missed the boat”.
“[A&O] was considered to be over-lawyerly and insufficiently commercial, such that a lot of sponsors were tending to ask their banks not to use them,” he says.
Another former partner adds: “A leopard takes a while to change its spots. A&O has traditionally been a lender-side practice and it has often rightly been perceived as being a stickler and by-the-book on the lenders’ side.”
Indeed, after Tony Keal left to join Simpson Thacher & Bartlett, taking all the financing work for trophy private equity client Kohlberg Kravis Roberts with him, the finance practice was left with a scant list of private equity clients, Charterhouse being one of the few.
This is in stark contrast to the likes of Clifford Chance and Linklaters. As one rival finance partner says: “Part of the greatness of Linklaters in recent years was at A&O’s expense.”
Kensell does not deny that A&O’s sponsor-side practice has not been strong enough, but adds: “One thing I know is that sponsors always have their preferences: they like working with some people and sometimes they prefer certain people… But let’s focus on reality – in the busy period we’ve had work coming out of our ears. The work you’re doing speaks for itself – we’ve had more than our fair share of big-ticket deals – and what that’s telling you is that when the chips are down, people look to us.”
Despite the challenging market conditions, Kensell claims that “busyness numbers” across the banking department for the month of October are up on the same period last year, although the firm would not provide any details or breakdowns.
For now, focusing on restructuring could be enough to ensure A&O’s banking practice weathers the ;downturn ;relatively unscathed. The problem is that nobody knows how long or how deep the decline will be. When business returns to normal, will A&O’s banking practice prove over-reliant on banks?