Magic circle firms divided over vision for asset finance practices

Freshfields and Links shrink teams, but no U-turns at Clifford Chance or A&O. By James Swift

William Glaister
William Glaister

”There’s been a shift away from asset finance in the magic circle over the past couple of years,” says one finance partner at a City firm. “I’m told that partners there are under pressure to deliver a profit that’s not sustainable.”

It is true that asset finance has had some hardships of late. Tax-based leasing – once an extremely profitable line of work for firms – has been in sharp decline since governments started closing the loopholes that made the practice possible. Banks are less keen too – Santander and HBOS have scaled back their lending, as has German bank HSH Nordbank.

But has the magic circle lost interest?

Most agree that Freshfields Bruckhaus Deringer’s practice has shrunk, and the firm itself makes no secret of this. The move has been interpreted as symptomatic of the firm’s strategy of focusing more on corporate work.

That said, Freshfields has not abandoned asset finance completely. According to the firm’s global finance head Alan Newton, it still has three partners and 10 associates working in the sector.

“We still have an asset finance practice; it’s smaller than it was because we’ve refocused it to be aligned with what we do in the ­sector,” says Newton. “We’re active in aircraft and rail financing as well as the financing of other big-ticket assets – it’s certainly not a practice area we’re thinking about closing.”

Linklaters, too, is widely seen as having scaled back its presence in the sector. Whether this is part of an overarching strategy, however, is less clear. The most recent shrinkage was down to the defections of the firm’s head of asset finance Robert Fugard and partner Simon Gwynne to Hogan Lovells. What prompted the departures is open to debate.

“It was probably difficult for them to be profitable at the level required by a firm such as ­Linklaters,” speculates one City partner.

Robert Elliott, global head of banking at Linklaters, does not seem in any hurry to replace the partners. He says there are no plans to make replacement hires, although he does expect to bring in internal candidates.

So, for the time being at least, Linklaters has no full-time asset finance partners; although ­London partner Olga Petrovic and New York partner Danelle Le Cren have expertise in the sector.
“Our view of asset finance is that, like other types of finance, it has its vanilla end, its middle end and its complex end,” says Elliott. “I used to do asset finance work in the 1980s when it was tax-orientated and more complex. Since the tax advantages have gone it’s lost some of that complexity.

“It’s still a fundamental way of financing equipment and other assets, and an important capability for a firm, but we see it more as an integrated part of our finance offering.”

While Freshfields and Linklaters remain committed to asset finance, their teams have diminished. At Allen & Overy (A&O) and Clifford Chance, however, there has been no evidence of pulling back, although the firms do admit that the practice area has had to move with the times.

“The business, as far as we’re concerned, is still strong and ­profitable,” insists Clifford Chance banking partner William Glaister. “But it’s certainly true that the market’s evolved.

“The principal areas we’re involved in have a specific sector focus. It’s not just pure tax leasing or pure lending; it’s about ­connecting all activity between finance and M&A.

“For example, the work we did for a client on the acquisition and merger of two big operating lessors would have been described as a corporate deal, but we wouldn’t have got that work without an asset finance capability. You need a more holistic approach now.”

A&O – the only magic circle firm on the Airbus financing panel (see ’ECA importance’ box) – has a similar stance.

“That’s not been the case here,” says Mario Jacovides, global head of structured and asset finance at A&O, when asked about retreating from the sector. “But we tend to do more structured and bespoke transactions, often cross-border.

“We’ve had a good year, fuelled by restructuring activity in shipping, portfolio transfers and sales, as well as continuing investment in the aviation sector, particularly with regard to export credit.

“There are also more synergies than people first realise,” he adds. “Leaving aside restructurings, there have been several large mergers, ­disposals and portfolio transfers. If you don’t have asset finance sector expertise you’ll struggle to put ­forward credible teams for these large deals.”

While there has been no categorical shift away from asset finance within the magic circle, the fact that the sector does not generate massive profits explains why the practice is being overshadowed by the more lucrative areas of banking.

That said, as Norton Rose ­banking head Jeremy Edwards points out, slender profit margins in asset finance are nothing new.

“I don’t think the profit margins are going,” says Edwards. “It’s always been a competitive area and arguably not as profitable as, say, M&A or acquisition finance.

“It’s always been at the tighter end of margins, but those firms that have sector expertise – like our firm, where we don’t just have general asset finance experts, but specific aviation, rail and shipping experts – remain in demand, even through leaner times.”

However, there is a difference in the practices at A&O and Clifford Chance on the one hand, and those at Freshfields and Linklaters on the other, with the latter two ­scaling back. The split follows the same fault lines as a more general shift, which has seen A&O and ­Clifford Chance intent on ­maintaining existing client lists on a global basis, while Freshfields and Linklaters have focused on smaller numbers of elite clients in fewer jurisdictions and practice areas.

Asset finance might not have changed, but it looks as if the magic circle has.

ECA Importance

As banks remain reluctant to lend in asset finance, export credit agencies (ECAs) are becoming more important as a source of work. In 2008 UK ECA ECGD, French ECA Coface and German ECA Euler Hermes announced the latest panel of firms that will act for them in the ECA financing of Airbus aircraft.

Allen & Overy, Norton Rose and White & Case were reappointed, while Simmons & Simmons and Reed Smith replaced SNR Denton legacy firm Denton Wilde Sapte and Hogan Lovells legacy firm Lovells.

Notable asset finance deals in 2010

January: Allen & Overy (A&O),
led by Mario Jacovides, advised lenders Citibank, CACIB, Credit Suisse and Natixis as well as export credit agency (ECA) Coface in a $1.5bn (£930m) financing of eight Airbus A380s for airline Emirates. Denton Wilde Sapte (now SNR ­Denton) advised Emirates, led by partner Paul Holland.

November: An A&O team, ­including partners Jon Bevan, Susan Howard, Tim Conduit, Andrew Joyce and Mark Friend, acted for Eversholt Investment Group on its £1.2bn acquisition of rolling stock company Eversholt Rail Group from HSBC Asset Finance (UK). Freshfields Bruckhaus Deringer, led by corporate partner Farah Ispahani and finance partner Marcus Mackenzie, advised HSBC.

November: White & Case, led by partner Justin Benson, advised ECGD as guarantor in the ECA-supported financing of 16 Airbus A320 aircraft for airline AirAsia, which was advised by Stephenson Harwood out of ­Singapore and financed by BNP Paribas. Clifford Chance acted for BNP Paribas, with Simon Briscoe leading. Paul Ng led the Stephenson Harwood team.