There's something a bit smug about Allen & Overy (A&O), Link-laters & Alliance and Clifford Chance when they talk about European medium-term note (MTN) programmes. Not only have they captured the market, but they are now squeezing out the competition. Voluntarily or involuntarily, competitors are deciding not to attack the market. Instead, they are pulling out and leaving these three magic circle firms to rule the roost.
There is one exception. German firm Hengeler Mueller Weitzel Wirtz is the only firm making an effective challenge to their pre-eminence (albeit only in German law). This is no surprise considering the firm's reputation in finance, but it is a tribute to its debt capital markets practice that it is managing to dominate the German MTN market while the work is all but under lock and key elsewhere in Europe.
Hengeler has been active in the market since December 1997, when it advised Commerzbank and Morgan Stanley Dean Witter on an MTN programme for Rheinhyp. The firm set up a structure which incorporated German law, and as a result German issuers have returned to Hengeler time and time again. Clifford Chance and A&O are present on the scene, but they are having to offer cheaper rates in order to get a look-in.
Freshfields Bruckhaus Deringer and Slaughter and May have all but vanished from the market; Lovells and Simmons & Simmons have also receded to concentrate on the structured programmes. All that remains to dent the armour on the top trio is Hengeler and one or two US firms, which win work through corporate relationships. Despite not being geared up for the work and in some cases viewing it as outside their core practices, a number of US firms are still visible in the market. Sullivan & Cromwell, Skadden Arps Slate Meagher & Flom, Cravath Swaine & Moore and Sidley Austin Brown & Wood have all advised arrangers this year. Most of the time, though, they do it to keep the issuer happy or to bolster an existing relationship.
Surprisingly, the market is still as buoyant as ever and the frequency of mergers and spin-offs, plus the annual updating and individual issues, keep all of the participating lawyers busy. However, there may be a small blip in the process. The European Commission has recently published a proposal prospectus directive with the intention of driving pan-European capital markets forwards.
This may sound promising, but the reception of the professionals in the market is not encouraging. The word on the street is that it is a badly-thought-out proposal by people who do not understand the Eurobond market. In fact, it is deemed to have damaging effects that will drive issuers away from the European market.
One flaw is the possibility that issuers will be forced to have their prospectuses approved by an authority in their own jurisdiction. This would rule out shopping for the most appealing regulations, which are currently coming out of Luxembourg. Another worry is the blurring of distinction between retail and wholesale investors, which would deprive wholesale investors of the benefits of a light regulatory touch.
The directive is currently up for consultation and there is said to be vast political will behind the impetus for fast-track implementation. But the battle is not yet lost and the market is building up a strong opposition. The fight is being led by the International Primary Markets Association, which is demanding the modification of the directive on the grounds that it is imposing unnecessarily restrictive and damaging regulations.
Central and Eastern Europe are developing as the emerging markets and there has also been a small amount of activity in South America and Asia. But with investors only interested in buying into German and UK law, the market is restricted to a limited number of firms. But surely it should be more than four? It is a buoyant market that shows no signs of slowing down, so why don't a few more firms make the effort and demand their share of the pie?