With one of the City’s most revered finance practices, Allen & Overy (A&O) was on call for many of its banking clients post-Lehman. Co-head of banking Philip Bowden looks back on how the crisis was a turning point for the firm’s lawyers.
It’s hard to believe that it’s been almost a decade since the financial crisis. It has enormously altered the markets that we work in and I remember the events playing out as clearly as if it was last week.
After months of smaller catastrophes, in September 2008 we watched on in horror as Lehman Brothers filed for bankruptcy and then chaos broke out as market liquidity froze. Clients were understandably worried and we were extremely stretched, working hard to deal with their queries. The atmosphere in many of our offices was tense; there were rumours that other banks might follow Lehman Brothers so we were pretty nervous about what the future would hold.
As an immediate response, we organised lots of client calls. We didn’t set this up as a syndicated approach to providing advice – which is how the approach evolved for the later Euro debt crisis – but we had a number of calls open to clients on issues of general interest, and we mobilised coordination of advice right across the firm. In particular there was a lot of activity in connection with derivatives, where we saw an absolutely frenetic period of people closing out and enforcing collateral. The credit default swaps (CDS) were a big deal too, Lehman Brothers was a huge CDS name and the auction was the biggest by far.
At some point fairly early on we began to realise the magnitude of the situation. The huge volume of questions we were receiving from clients across so many different products and areas made us see how far-reaching the impact of the crisis was. One of our partners commented to a group of lawyers: “This is the most challenging thing that will ever happen in your whole career, it is the event of your career and a huge intellectual challenge.” I think that’s right.
Since then we’ve seen a number of big changes in our markets. Perhaps the most obvious is the explosion of regulation, which lawyers across the firm are now battling with on a daily basis. Regulation affects absolutely everything that we do now – across the whole spectrum of products we advise on. Some teams who focused solely on transactions before are now regulatory experts.
The regulatory process is different too – now we quite often find our clients in situations where they’re frantically working towards achieving a compliant state, but it still isn’t clear what a compliant state actually looks like. It’s not unusual to find ourselves very close to go-live dates trying to actually shape the policy, having to react to de facto changes resulting from industry Q&A and other examples of rulemaking on the hoof that continue to come through.
From a transaction perspective, for investment grade syndicated loans the most significant change is that there’s a greater reluctance of banks to take risk on each other. You can see this in letter of credit and bank guarantee facilities where the old – practically universal – mechanism using a single issuing bank “fronting” for the remainder of the syndicate is now a rarity. This creates problems for borrowers who need these big ticket instruments and now must persuade beneficiaries either to accept multiple instruments, or else instruments with multiple banks liable on their face, or with a single bank named as paying agent but not liable for the whole amount. That said, the market’s still very liquid and has the capacity to support truly huge loans, and there’s no sign of that stopping anytime soon.
It’s also interesting to see that the European leveraged loan market is as active now as it was pre-crisis. August was certainly the busiest I can remember. We have seen the emergence of a new breed of credit provider – the direct lending funds, the convergence of markets on either side of the Atlantic and the establishment of a mature high yield bond market Europe; there are more and more players piling into the space and investor appetite seems unabated. Some people are worried that the absence of an issue is the real issue for this market, but really it’s much deeper and more liquid than in 2007, so well placed to withstand market shocks.
The projects, energy and infrastructure market has seen one of the most interesting evolutions since 2007. While our teams working on greenfield developments and financings remain as busy ever across the full range of energy, natural resources and infrastructure transactions for governments, sponsors and lenders/bond arrangers they are now just as busy working on capital recycling through refinancings and M&A related transactions for sponsors and lenders.
“We are now in a new era of uncertainty”
This reflects the emergence over the last decade of specialist energy and infrastructure funds, pension funds, insurers and sovereign wealth funds investing in social infrastructure (such as hospitals and schools), subsidised infrastructure (such as railways and roads) and economic infrastructure (such as energy network assets, airports, ports and renewable electricity generators).
This new work opportunity can be seen, in part, as a response to the financial crisis as it reflects a desire from these long-term investors to find yield bearing investments that are not correlated with the public markets.
While yield seeking may cease to be a driving force once interest rate normalisation is achieved the desire for “alternatives” to achieve portfolio diversification will not disappear. We therefore anticipate that this is a new and exciting market that is here to stay – a great example of how opportunity arises out of crisis and how our teams can easily be reconfigured to work with clients to innovate and achieve their aims.
From a structured asset finance perspective, the aviation industry was largely unaffected by the crisis. Fuelled by low oil prices and an abundance of liquidity, lots of airlines have continued to order new planes and have needed to raise capital to do so.
They’re tapping into the traditional debt finance markets but also looking at new forms of capital from newly set up funds and insurance companies, capital markets and Islamic structures, all of which we can help with. It’s not all good news though, as some of the major carriers in the Middle East have had a lot to deal with recently in terms of geopolitical events in the region, the recent economic slowdown and lower load factors as well as some airline casualties and restructurings that some of these airlines invested in, including Air Berlin and Alitalia. That’s something we’re monitoring. In shipping, the drop in oil prices which unfolded against the backdrop of the crisis has understandably meant a dip in shipping finance – with the exception of the cruise industry, which seems to be doing well – and consolidation in general is an ongoing theme. The market looks quite different to 2007.
The restructuring landscape has experienced change that has affected us too. One key point is the introduction of European high yield bond restructurings, which has brought our restructuring and high yield bond lawyers together in a way that they previously haven’t experienced, but problems within the construction, retail and shipping sectors have also had an impact. In the realm of insolvency legislation, modernisation and (a bit of healthy) competition are the main themes underpinning the swathes of legislative and other legal developments affecting the restructuring and insolvency market across Europe. We’ve also seen proposals from international bodies seeking further cross-border cooperation and a push towards greater harmonisation of insolvency laws.
Overall, it has been fascinating period. Uncertainty has become the new norm for much of the past decade, but now almost ten years on from the crisis, we feel that we are now in a new era of uncertainty. Geopolitical factors like Brexit and the Trump administration have added to market volatility, and we’re working extremely closely with our clients, understanding their challenges, ambitions and perspectives to ensure that we continue to serve them as best we can. That involves embracing change and moving with our clients as changes play out in their businesses and markets, so that’s where our focus will continue to be.