Magic circle seeks to make impact on US-dominated high-yield market

New hires highlight UK firms’ ambition to break into sector.

Kevin Muzilla
Kevin Muzilla

In the conservative world of investment banking, the winds of change tend to blow at a leisurely pace. But as senior lending continues to be thin on the ground in Europe, the inexorable rise of the high-yield bond market is altering the landscape, and the magic circle is beginning to notice.

Last month, Freshfields Bruckhaus Deringer hired Gil Strauss as a partner into a newly created group of US securities lawyers, with the aim of cracking the high-yield market. The move comes in the wake of Allen & Overy’s (A&O) capture of Kevin Muzilla from ­Milbank Tweed Hadley & McCloy last year. A third magic circle firm, Linklaters, is also understoood to be close to securing its own high-yield signing in the near future.

The hire of Strauss demonstrates the importance that ­Freshfields attaches to trying to capture a piece of this lucrative pie. He joins from Simpson Thacher & Bartlett, where he was counsel, making him the first ­lateral who had not previously been a partner to move straight into Freshfields’ equity since Chris Howard in 2003.

While Strauss is described in glowing terms by firm insiders as a star of the future, the need to eye talent below partner level ­indicates just how few high-yield specialists there are in the UK market. The extra sting for domestic firms is that virtually all those who do have the expertise hail from the other side of the pond. As one magic ­circle private equity partner jokes: “You need an American accent to do high yield.”

So why the sudden rush into this US-dominated space? And, more crucially, will it earn the UK’s big cats the kind of cream they crave?

“There’s a boom in high yield and everyone wants to be a part of it,” says Muzilla. “It’s replacing the senior [debt] on lots of ­refinancings, so firms want to pick up ­business they may not have been getting on the senior side.

“There’s no question there are more deals to go around because the market’s very hot right now.”

So far, the majority of Muzilla’s mandates at A&O have come on the issuer side since he left ­Milbank last October, with bond issues from Manchester United and Cable & Wireless the most prominent. There has been some underwriting work, too, such as on William Hill’s high-yield ­offering, but that has been more trickle than flood.

The difference with the ­Freshfields move is that, whereas Muzilla was already an established name that had built Milbank’s high-yield practice in London over the best part of a decade, and who joined A&O as part of a three-strong team, Strauss is less well-known and making the great leap solo.

The banking in-housers who have to be persuaded to switch sides are so far unconvinced by the firm’s latest attempt to mix it with the likes of Latham & Watkins, Cravath Swaine & Moore and Shearman & Sterling.

As one source at a major investment bank explains: “All Simpson people are good, but he [Strauss] isn’t a big name yet. It’s going to take more than just him to get Freshfields into the ­underwriting space. Maybe it’ll strengthen their issuer side.”

A London corporate partner at a US firm echoes the sentiment: “You need name recognition; Kevin Muzilla is someone who has a big reputation.”

Nevertheless, the magic circle’s move into high yield could be well-timed as the non-US market ­finally matures.

White & Case high-yield partner Rob Mathews, one of the clutch of US partners to have dominated the underwriter and sponsor side of the market over the past decade along with Cravath’s Philip Boeckman and Rich Trobman at Latham, thinks the days of a US cartel could be over.

Rob Mathews
Rob Mathews

“There’s an opportunity for them [magic circle firms] in the high-yield space,” says Mathews. “One of the reasons it has been dominated by US firms is that high yield is ­traditionally governed by New York law, but that may change.

“Europe has always been about the mezzanine and senior debt. High yield is now the big, open international funding source. ­Corporates now look at high-yield bonds: where there used to be, say, 10 high-yield deals annually, now there may be 40, so there’s a ­market opportunity in Europe.”

The problem facing the UK elite is that they’ve been here before. In the early 2000s, when high-yield bonds were taking their first tentative steps in Europe, several firms brought US securities ­partners over from the States.

As one finance partner – formerly at a magic circle firm – remembers: “This isn’t the first time round. They looked at high yield as the way of the future, but they hired generalists.

“They dipped their toes into the water, but didn’t do it in a ­convincing way. It was easy for US firms to take pot shots at them.”

One thing in the newcomers’ favour is that an internationalised market means the broader ­network of the UK firms, coupled with strong banking relationships on the traditional finance side, has become more crucial.

Latham’s hire of a four-partner banking team from White & Case earlier this year, led by Chris ­Kandel, was as much about ­supporting its existing high-yield practice as about winning more bank loan work.

The idea that a small US firm operating in London without a wider European network or large banking practice behind it – as Cravath and Cahill Gordon & Reindel have done over the years – can continue to dominate the high-yield scene could be a thing of the past.

But with no magic circle firm yet proving capable of cracking the market on the underwriter side, it will take some spectacular hires to prove to banks that they’re ­taking it seriously this time. If ­Linklaters is about to enter the frame, it will need to be with a very big name in tow.