Cadwalader rolls up its sleeves in City capital markets offensive

Cadwalader Wicker-sham & Taft’s City arm has put capital markets firmly on its agenda. With this in mind, the firm has been on a hiring spree to bolster its capital markets offering through structured finance. So with a series of high-profile laterals under its belt and the support of a huge capital markets practice in the US, Cadwala-der will be hoping its London capital markets practice does not suffer the same fate as its now defunct UK projects practice. What’s more, can the practice emerge successfully from the shadow of its stellar restructuring group?
Cadwalader has made no secret of its desire to be a bigger capital markets player. This has been demonstrated most clearly in the series of high-level partner hires it has made in recent months. In March the firm raided Allen & Overy (A&O) f or collateralised debt obligation (CDO) specialist Angus Duncan, swiftly followed by Norton Rose securitisation partner Christian Parker.

But is it too little, too late for the firm? Cadwalader has, after all, dabbled in capital markets in the past.

Capital markets has been one of the three key practice areas since Cadwalader launched in London in 1997, along with financial restructuring, tax and structured finance. But the capital markets group has never really taken flight. Its first real success is said to have been driven by James Croke, the former head of international capital markets in London.

Croke relocated to the London office in 1999 and was one of the firm’s first US lawyers in the City. He moved back to New York last year after overseeing what was considered a successful period for the department. But since his departure, the London office seems to have lost its way in the capital markets arena.

Although rivals may (and sometimes do) sniff at the idea of Cadwalader becoming a capital markets player in Europe, the step certainly makes sense from a firmwide perspective. As with restructuring, in the US Cadwalader is one of the biggest names in structured finance.

In the US the firm made an early entry into the commercial mortgage-backed securities (CMBS) market, becoming one of the dominant players in this area. As one rival puts it: “Along with Sidley Austin Brown &Wood, Cadwalader has this market stitched up.” Cadwalader then successfully exported that business to Europe thanks to Charles Roberts, who was brought over from the US to kick-start the firm’s CMBS drive in 2002.

So why hasn’t Cadwalader made any headway in City capital markets? Capital markets is already an over-crowded marketplace, and US rivals such as Shearman & Sterling, Sidley Austin Brown & Wood and White & Case have got a good foothold in the London market, as do many UK firms, such as A&O, Linklaters and Clifford Chance. Cadwalader does not expect to compete with the likes of Clifford Chance and Linklaters, but is building a specialised structured finance practice based on two main products – CMBS and CDOs – in a bid to mirror its strengths in the US.

Partner Neil Weidner, who came over from New York in 2004 to help grow Cad-walader’s capital markets practice, rejects the categorisation of the firm’s London capital markets business as being based on just two products. “Our platform in London is much broader than just CMBSs and CDOs. We focus on a number of structured products and on innovating and creating new products,” he argues.

He also claims that the firm is planning to bring the London practice to the same position of prominence as it has achieved in the US. The firm trailed in at number 17 in The Lawyer UK 100 Annual Report 2005’s London finance group rankings.

But even after the recent hires, Cadwalader’s capital markets team is still relatively small by City standards. The team has just four partners supported by a team of around 24 lawyers.

For Duncan, moving to a smaller outfit was one of the reasons behind his decision to join the firm. “Cadwalader is the ideal platform to build a structured finance business in London,” he explains. “We’re relatively small [in the UK], but pre-eminent in the US.”

Small may be beautiful, but the size of Cadwalader’s team will constrain its achievements and one of the main challenges Duncan will face must certainly be to raise the group’s profile.

The capital markets group’s aim is simple – to make money. “The firm’s very focused on profitability, so we want to win work that’s profitable for us. There’s no highly sophisticated business plan. The idea is to build up and develop a highly profitable structured finance group,” explains Duncan.

Hardly surprising for one of the most profitable firms in the world, with a global profit per equity partner of £1.2m. The firm refused to give figures for its London capital markets practice, but according to The Lawyer UK 100 Annual Report, it generates £20m from its London finance group. However, at least £15m of that is attributable to Andrew Wilkinson’s star restructuring practice.

Duncan believes the firm has reached a tipping point in the type of work it is able to do. “We now have a number of lawyers in London, which means we have the critical mass to be able to do large transactions,” he says.

Cadwalader’s argument is that it boasts a strong client list in Europe, which includes Credit Suisse, Deutsche Bank and Wachovia. The firm also states that more than 80 per cent of its instructions come from European clients.

But despite the claims, other market participants still point out that Cadwalader’s structured finance business is based primarily on two products, CDOs and CMBS, both of which have become highly commoditised in recent years. They are markets where there is already a high level of competition. For instance, AshurstWeil Gotshal & Manges and White & Case all boast high-profile CDO practices.

Weidner sees plenty of potential areas for growth, including hedge fund-related and insurance-based structured products.

Some market rivals also claim Cadwalader is lowballing on fees. One told The Lawyer that “there’s a perception in the market that they [Cadwalader] buy work, that they price is so low as to be unsustainable”. Weidner says this is “simply not true”.

Cadwalader’s capital markets practice has had a stop-start existence and the question is whether this push will last longer than the rest.

Perhaps the real problem for Cadwalader’s capital markets group is the strength of its restructuring practice. Andrew Wilkinson’s department casts such a big shadow over the London office that nothing else is given space to flourish. Just look what happened to projects.

Cadwalader’s UK capital markets deals

  • Represented Barclays Capital as arranger of $1bn (£550m) high-grade asset-back security (ABS) CDO transaction using commercial paper execution.
  • Represented Tricadia CDO Management as collateral manager in a $500m (£276.3m) ABS CDO transaction.
  • Represented Stanfield Capital Partners as portfolio adviser in connection with bespoke synthetic collateralised loan obligation transactions.
  • Acted for Cheyne Capital Management, a leading UK investment manager, in connection with a $1bn ABS CDO.
  • Represented Société Générale in connection with a $800m (£442m) synthetic-cash hybrid CDO-squared transaction.