The brakes have well and truly been applied to the flow of transactional work in the US and Europe. But while the boom period has ground to a near halt, a different type of lucrative mandate has emerged.
As banks seek to replenish depleted funds after the credit crunch forced many to make dramatic writedowns, US and UK law firms have been reaping the rewards, scooping lead roles on these crucial deals.
After Citigroup announced its latest equity offering totalling $4.5bn (£2.31bn) in the US in April, the markets have come to expect US banks to seek muchneeded capital to rescue them from ongoing liquidity problems.
Citigroup has raised a total of $41.7bn (£21.4bn) – the most of any international bank in the recent shaky economy. While Citigroup has clearly seen better times, regular adviser Cleary Gottlieb Steen & Hamilton has certainly benefited from the high-value deals generated by the bank.
Earlier this year (1 February) The Lawyer reported on Cleary partners Alan Beller and Jeff Karpf leading the firm’s team advising Citigroup on its $19bn (£9.75bn) equity offering which saw several sovereign wealth funds in Asia and the Middle East invest in the bank.
More recently, Beller and Karpf advised on Citigroup’s $4.5bn (£2.31bn) offering, while Sullivan & Cromwell’s New York-based partner Mitch Eitel advised on regulatory matters.
With these deals typifying the credit crunch in the US and increasingly in Europe, which firms are stealing the limelight and capitalising on the rocky times facing the financial markets?
As well as Cleary’s entrenched relationships with Citigroup, Sullivan & Cromwell chairman H Rodgin Cohen, together with partner Eitel, have scooped roles advising Citigroup on the regulatory aspects of these deals.
“Cleary are the main advisers but Cohen’s experience and relationships with regulators puts the firm in a good position on these deals,” says one US partner. And it’s not just the banking relationships that have propelled Cleary to the forefront of this new wave of work – its US private equity relationships have also helped ensure the firm retains a position of strength.
Earlier this year (9 April) The Lawyer reported on US bank Washington Mutual (WaMu) turning to private equity house TPG for emergency investment. Simpson Thacher partner Lee Meyerson advised WaMu, while Cleary’s Benet O’Reilly, Michael Ryan and Paul Shim advised longstanding clients TPG on the investment vehicle, which raised a total of $7bn (£3.59bn) for the bank.
While Cleary and Sullivan & Cromwell have clearly been dominating the US market, the magic circle firms bestride the UK bank capital raising arena. “This is certainly the time to be sure of and to be confident about your relationships,” says Linklaters global head of banking Robert Elliott.
“This is now a very significant part of what we do and it’s the same for other global firms.” Elliott and Linklaters corporate partners Anne Drummond and Matthew Middleditch advised the Royal Bank of Scotland (RBS) on its £12bn rights issue in April.
The deal represented Britain’s largest ever rights issue, with underwriting banks Goldman Sachs, Merrill Lynch and UBS each sharing a £210m payout. Freshfields Bruckhaus Deringer corporate partners Simon Witty and Sarah Murphy worked alongside financial institutions partner Will Lawes to advise the underwriting banks. This was the first UK bank to launch a rights issue since the credit markets became unstable last summer.
“While we did see UBS become the first European bank to raise capital, this is the first time a UK bank has done it and it is different from what we have seen in the US,” says Elliott. “US financial institutions have taken advantage of the direct investment approach, which is clear and generally has less regulatory hurdles, while the UK banks that have done rights issues have turned to shareholders for investment.”
With more financial institutions in the US opting for the easy access of private equity and immediate investment from liquid sovereign wealth funds, US firms have had more opportunities to win mandates on capital infusions in recent months. Soon after RBS announced its £12bn rights issue, HBOS quickly followed suit, announcing its £4bn rights issue at the end of April.
Freshfields again scooped a lead role on the deal, advising underwriters Dresdner Kleinwort and Morgan Stanley. Corporate partner Witty led the Freshfields team on HBOS as well as on RBS.
Last week Freshfields earned yet another lead role on the lastest rights issue. Lawyers led the firm advising underwriting banks Citi and UBS on Bradford & Bingley’s £300m rights issue. Herbert Smith corporate head Michael Walter led the firm’s team advising Bradford & Bingley.
“There’s an expectation that we will see similar activity in the corporate sphere,” says Witty. “Given that we often see activity in the US move over to the UK and Europe in time, it seems feasible that these types of deals will become more common here.” While Freshfields has undoubtedly taken the lead on these UK deals, Lovells and Norton Rose landed lead roles on one of the first sovereign wealth fund deals – albeit one that occurred before the credit crunch kicked in. Last summer (30 July) The Lawyer reported on Barclays turning to regular adviser Clifford Chance to advise it on China Development Bank’s purchase of £1.5bn worth of Barclays shares.
China Development Bank instructed a Norton Rose team led by corporate partner Martin Scott on the deal, which represented the bank’s first major investment outside of China. In the same month, Lovells was instructed by Singapore’s Temasek Holdings, which took a £1bn stake in Barclays with Lovells’ then of corporate finance head Hugh Nineham leading the team.
“It’s quite a different environment in the UK,” says one US partner. “US banks need to get the fast injections of cash that we have seen. It’s not the same in the UK yet. This could well change, and the UK banks could look to these large-scale capital infusions like in the States.” Exposure to the subprime mortgage market is varied in the UK, with some banks not experiencing the level of writedowns seen in the US.
“If you think about banks like Lloyds, they won’t have the same problems as others,” says Elliott. “Then you have HSBC, which is suffering from exposure in the US because of the subprime mortgage business it acquired last year.”
The outlook forglobal economies is uncertain at best, and as a result US banks are continuing to look to outside sources of capital for assistance. While Cleary and Sullivan & Cromwell continue to clean up on these deals in the US, the magic circle is, predictably, gearing up to control the market this side of the Atlantic.