Ideally placed as a hub for investors in Central and Eastern Europe (CEE), Hungary is unique. But while the numerous opportunities for legal firms, both domestic and international, have been exploited, some areas are now slowly starting to dry up as the global financial crisis deepens, cross-border transactions decline and the majority of privatisations complete.
Economically ;Hungary ;is ;being challenged and was among the first of the emerging market countries to feel the effects from the current global financial crisis. The country has relatively high debt levels (the International Monetary Fund has agreed an undisclosed bailout package for Hungary if it adopts “strong policies”) and in October its financial problems deteriorated drastically. Its currency and stocks have fallen sharply and its growth forecast has been cut for next year.
With the best part of Hungary’s banking sector being foreign-owned, it is bound to be shaken, if not stirred. Domestic banks are in a relatively strong solvency position (the government recently announced a strong bank support package), so firms with robust banking practices are reaping the benefits of the ongoing expansion of local firms into the surrounding countries (Hungary is one of the main investors in the CEE region).
But while some firms are having to put some transactions on hold, not all law firms are feeling the pinch. “While it’s true that M&A and real estate work have slowed in recent months, instructions from banks continue to account for significant volumes of our work, albeit adjusted to fit new economic circumstances,” relates Péter Berethalmi, a partner at local firm Nagy és Trócsányi. “We’ve also seen an increase in the amount of work from the energy sector. New types of instructions are also likely to grow as a response to the changing economic environment.”
French firm Gide Loyrette Nouel says it has enjoyed its most successful year in Hungary to date, with a strong banking and finance practice (it recently advised on a e276m (£233.65m) refinancing for Hypo International Real Estate Bank) and steady M&A work, including advising Groupama on its partnership with OTP Bank – one of the most significant investments ever made in the country.
Clifford Chance has maintained a strong local presence for some 14 years now and is busy with real estate, telecommunications and media transactions, as well as in financing. Péter Köves, senior partner at Clifford Chance’s Budapest office, believes the current climate has not really affected the legal market, but admits that “no practice is booming” and says the credit market is “really depressed”.
“In the energy field I know a few projects which are suspended because long-term credit became impossible,” he adds. “There are a number of ongoing deals at the moment in all fields.”
Budapest has proved somewhat of a long-term disappointment to some international law firms in a now crowded legal market. Foreign firms, many of which set up shop in the early 1990s, have been slowly withdrawing from the country as the middle European economies become more mundane.
Freshfields Bruckhaus Deringer now operates, as part of a strategic plan, as the independent brand name Oppenheim, which, although a preferred firm, is not a part of the Freshfields network.
International firms that are still maintaining their Hungarian practice bases includes Allen & Overy, Baker & McKenzie (particularly its capital markets practice and international project finance) and DLA Piper (Horváth & Partners DLA Piper Weiss-Tessbach). But the latest casualty is Linklaters, which has formed a spinoff firm, Kinstellars (an anagram of the magic circle firm).
Nick Eastwell, Linklaters managing partner for emerging markets in Europe, explains that Linklaters can now focus more on the new emerging markets in the Middle East, Russia, China and Brazil, with Kinstellars remaining its “best friend” firm in Hungary.
How successful these independent pseudo international firms will prove to be remains to be seen, but one thing is certain: the exodus of multinational firms will help local firms take larger stakes of the Budapest market.
“In the CEE local and regional offices and firms seem to have an edge over international firms,” says Oppenheim partner Ivan Bartal.
Oppenheim, which recently advised Rank Group on its $2.7bn (£1.81bn) acquisition of Alcoa’s packaging and consumer business, has seen a rise in the acquisition of companies that have gone, or come close to, going bankrupt. So while the prevailing economic climate is detrimental to some law firms, it clearly benefits practices such as insolvency, restructuring, employment and dispute resolution.
International law firms may be losing ground, but domestic firms are doing well, with many competing on a level playing field with the remaining international firms for local work. This is indicative of the changing nature of domestic European firms – through necessity they are becoming increasingly global in their capabilities in order to attract and keep the best clients.
Firms and their clients are being cautious now, but are more optimistic about the longer term. In the short term, though, firms in Hungary will be seeing increasingly new types of instructions in response to the changing economic environment. Whether the current pinch will become more painful will become apparent in 2009.