Can A&O and CC break US firms’ stranglehold on Euro high-yield?

Milbank Muzilla

Milbank Muzilla

Allen & Overy (A&O) made a bold strategic move last month, hiring Milbank Tweed Hadley & McCloy high-yield partner Kevin Muzilla. The magic circle firm wants to ­create a powerful UK-based capability, demonstrating the firm’s appetite to compete with the traditional US champions of high-yield.

“A&O has faith in the high-yield market in Europe,” says Muzilla. “Hiring into this arena is critical.”

Muzilla signifies the return to an old strategy for A&O. Back in 2001 the firm attempted to build a one-stop shop in the UK equipped to secure both bank- and bond-side instructions, taking ­advantage of the buoyant leveraged buyout (LBO) market. The firm hired ­Sullivan & Cromwell associate Adam Kupitz that year, hoping to benefit from his issuer and ­underwriter client base, including Morgan Stanley, Goldman Sachs and ­private equity house Permira.

“It was a struggle back then because high-yield was too new over here [Europe] and investment banks were reluctant to instruct UK firms and didn’t ­subscribe to the one-stop shop ­theory,” says ­Muzilla. “The appetite is there now. Mass convergence in the market means deals require bank/bond, English law, high-yield and ­European banking ­experience.”

Cravath Swaine & Moore, ­Latham & Watkins and Shearman & Sterling have dominated the area, but until now progress of the ­European high-yield market has been slow.

During the boom period ­businesses favoured bank ­financing with its favourable ­pricing. But the collapse of Lehman Brothers has changed all that.

“There’s been $6bn [£3.69bn] worth of high-yield deals globally since May,” says Muzilla. “A high-yield market hardly existed here during the 1990s and growth has been really slow. Banks are trying to get rid of assets, not take them on. This is exactly what ­encouraged the market during the 1990s in the US after Drexel ­Burnham collapsed.”

A&O now has five partners and 20 associates with high-yield ­experience, but Muzilla and Kupitz are its only dedicated high-yield partners based in the UK.

Before joining Milbank Muzilla was a senior associate at high-yield powerhouse Cahill Gordon & Reindel, securing Deutsche Bank as a key client. At Milbank he had close ties with Permira and ­Goldman Sachs and advised on Cognis’s e2.26bn (£2.27bn) high-yield refinancing in 2007.

While A&O will benefit from Muzilla’s high-yield expertise and client base, Muzilla has gained a robust banking and finance group that gives him essential expertise for European-based deals.

“I work in the context of a ­European firm,” says Muzilla. “So if I’m working on a German deal I can combine my high-yield ­expertise with German law ­capabilities of other A&O ­partners.

This isn’t the case at a number of US firms.”

Clifford Chance is taking a ­different approach to the pick-up in European markets. It hopes to secure key issuer deals in Europe via its longstanding private equity client base.
The three-partner team in ­London comprising Rob Trefny, Chris Walton and John Connolly is aiming to capture refinancing deals for issuers while bulking up its New York high-yield team as the firm expands its finance ­practice in the US. But the magic circle firm wants a New York-­centric high-yield team ­desperately, viewing the US as strategically important in the high-yield market.

“Buyers of this paper are still predominantly based in the US,” says one Clifford Chance partner. “We see New York as the logical place to grow the practice.”

Earlier this year Clifford Chance hired high-yield partner Gary Brooks for its New York office from Cahill Gordon (The Lawyer, 20 January). Brooks joined partner Tony Lopez, who moved to the magic circle firm from Cahill ­Gordon in 2006.

Clifford Chance’s existing issuer-led practice has been built on an institutional private equity base driven out of the UK. In 2004 Connolly led a team advising the Permira-owned Inmarsat Group on its $375m high-yield bond. In 2001 he led a team from the magic circle firm advising DIY giant Focus Wickes on its £170m high-yield bond. Private equity house Apax Partners acquired 29 per cent of the retailer as part of Focus Wickes’ recapitalisation.

The lack of new bonds in Europe in recent years has meant that magic circle teams have not been able to take advantage of their institutional relationships in the UK high-yield market. But as optimism suffuses the ­market and corporates seek to ­refinance debt in the capital markets Clifford Chance’s private equity client base will prove an asset.

An issuer client base is valuable to both A&O and Clifford Chance, but both firms still face a ­significant challenge: if they want to dominate the European high-yield market and compete with US firms, they will need to increase their bank-led mandates.

“The US firms have ­traditionally held these relationships with the banks,” says Clifford Chance ­global head of banking Mark Campbell. “We’ve done bank-led deals, but our practice focuses heavily on the private equity client base we have.”

A&O and Clifford Chance may disagree about the geographical growth of their high-yield practice groups, but both want to tackle US firms for bank-side instructions as the European market begins to take off. For Clifford Chance, Brooks’ relationships with Barclays, Citigroup and Credit Suisse could give the firm a good entrance into the US market. But the magic circle firms have a long way to go.

Latham has been the major pioneer in the European high-yield market. Having launched in London in 1990, the US firm used its expertise in the area and client base in the US as the foundation for its UK capabilities. Institutional relationships with Credit Suisse, JPMorgan and Deutsche have dominated its European practice.

Partner and former chairman of the European High Yield ­Association (EHYA) Bryant Edwards has been the figurehead for Latham’s high-yield group as it tried to replicate the success of its US high-yield practice in Europe.

Since Edwards relocated to Dubai to lead the firm’s Middle East practice in 2008 London partner Rich Trobman has led the European high-yield group. Both Edwards and Trobman have had lead roles on some of the most ­significant European high-yield bond issuances to date.

In 2005 the pair led a team from Latham advising ABN Amro, Deutsche and Sanpaolo IMI on Italian telecoms company Wind’s e1.25bn bond – the largest ­European high-yield bond at that time (The Lawyer, 14 November 2005).

Now, as corporates seek to ­refinance debt in the capital ­markets, Trobman and high-yield partners Tracy Edmonson, ­Jocelyn Seitzman and Brett Cassidy are well-positioned to take advantage of the surge in the European ­markets.

Indeed, the firm’s presence on the Wind deal has paid dividends. In July this year Trobman and London partner Cassidy led a team advising on Wind’s e2.7bn debt refinancing.
In June this year Seitzman led a team advising Credit Suisse, JPMorgan and Morgan Stanley on the $400m high-yield issuance for UPC. White & Case advised UPC with London partner Rob Matthews leading the team. UPC is widely regarded as one of the most significant high-yield deals this year, signalling the resurgence of the European market.
“Latham’s at the top,” says one magic circle partner. “I can’t see a European market where Latham doesn’t feature highly. It will be hard for any magic circle firm to be on the same level as Latham.”

This may well be true, but it does not stop the magic circle from trying to gain ground as a new market emerges in Europe.

A&O’s rebirth of its 2001 ­strategy is a confident move. But the smart money is still on the US firms defending their turf.