In most respects, the banking and finance market in Scotland is a microcosm of the UK as a whole, but there are some distinctive features. The starting point for any analysis of the market should be the clients. In Edinburgh are the headquarters of two of the most significant banks in the UK – and increasingly worldwide – banking market, the Royal Bank of Scotland and the Bank of Scotland (HBOS). What impact does the presence of the headquarters of those organisations have on the Scottish banking market? What does the activity of the teams in those banks say about the market and the lawyers’ roles? Before considering that in detail, a review of the activity and markets into which banks have been lending in Scotland and further afield will inform much of the discussion.
More projects, fewer LBOs
From a position three to four years ago where acquisition finance (leveraged buyouts, public to privates and the like) formed the bedrock of most banking and finance practices in Scotland, the activity levels, and in some cases profitability, of such work has plummeted. This has coincided with a strong and stable real estate market and the continued growth in, and political support for, public private partnerships (PPP).
Banking lawyers, wherever they start and finish their week, need to follow the clients, physically and into different markets as they change their focus of operations. With such a dramatic change in underlying business activity, it is no surprise that the major banks have undergone a period of significant change internally, where large acquisition finance teams have refocused to other areas of activity.
This has impacted on all banking lawyers active in the market, requiring further development of significant real estate finance and project finance capabilities – infrastructure is currently the name of the game.
This does not mean that the acquisition or leveraged market is dead. There are some signs of increased activity and increased deal flow this year, but there is not the great upsurge of activity some had been predicting. In this respect, Scotland is perhaps more pronounced than the rest of the UK. Economic growth is sluggish and the corporate market is thinner than other parts of the UK and, therefore, the gentle upsurge in the economy will take longer and have a less significant effect on banking activity by banks based in Scotland in Scottish deals.
Another trend in the market has been the relative decline in the number of significant Scotland-based corporates other than the banks. With a few notable exceptions, there has been a decline during the past few years, with the acquisition by overseas corporates of some of the more significant Scottish plcs – with fewer significant borrowers, the banks need to look further afield.
But all is not gloom and doom. Banks have refocused their real estate finance and project finance markets, which continue to grow. On the project finance side, Scotish PFI has grown more quickly than in the rest of the UK and there continues to be strong activity. The ‘import’ of the LIFT model for small projects from England and the announcement of the new school, hospital and prison projects all indicate a continuing strong market. There is also significant secondary trading in PFI/PPP projects and refinancings. Scotland is also leading the way in the renewable field with on and offshore wind power and wave power developments, of which all require significant bank finance. Even the biggest players in the market, such as Scottish Power and RWE Innogy, despite having committed large sums of their own resources, are actively looking at the banks as these deals come to market. The development of brownfield sites and inner city mixed housing/retail and other amenity sites is a political imperative that is now translating itself into real transactions throughout the UK and is a major focus for the Scottish Executive. The ability to draw on experience and skills developed on deals in other parts of the UK should stand us in good stead when looking at urban regeneration projects in Scotland.
One other theme that is developing is the increasingly close relationship between the funders and Government policy. For example, the current interest in urban regeneration is one that the banks are actively supporting, not only in Scotland but throughout the UK. McGrigors’ recent role acting for HBOS is an example.
Projects such as this involve the development of multidisciplinary infrastructure skills and require a knowledge and appreciation of policy objectives.
Although there is this bedrock of activity in Scotland, it is not in itself sufficient to fully occupy a significant banking and finance team or practice, as there are an insufficient number of highly structured and complex deals. The tactic has therefore become one of following the clients – banks are increasingly concentrating on the markets in which they operate, rather than on the physical location of their employees.
Scottish presence, City reach
Much of the workload is UK-wide and a strong English law capability is essential to enable full-service legal advice on all deals, which even if they are Scottish may be financed under English law. The capability to handle deals throughout the UK, principally in London, and further afield is a fundamental skillset if one is to be able to properly operate as a banking and finance team. The clients are not restricted geographically and although some of the banks may be headquartered in Scotland, the transactional bases are often in London. Those banks based in Scotland are increasingly doing deals throughout the UK and focusing on markets rather than the geographical location of a deal.
The challenge facing law firms with a Scottish presence and a full-service finance team is to retain and develop that team and the business, exploiting the Scottish presence but growing and emphasising the London and international enterprise. A key deliverable must, therefore, be a full-service London office.
It is through the wider UK and international coverage that real value can accrue for a Scottish lawyer. They would have the ability to draw on wider experience gained in other geographical markets and also the ability to exploit skills learned on Scottish deals elsewhere in the UK.
So, where does this leave the Scottish market? Activity levels will increase again in the acquisition and corporate finance markets, but with so few large corporates domiciled in Scotland and focusing solely on the Scottish market, the added value that Scottish legal advisers can deliver is through advising on transactions within the UK and beyond. If lawyers can emulate the banks, there is no reason why one cannot be wholly or partially headquartered in Scotland yet operate globally.
Michael Watson is head of the banking and finance unit at McGrigors