South East Asia – Investing in a recovery

International firms are having to adapt in order to ride out the financial crisis in South-East Asia, reports Richard Tyler

Faced with a grinding halt in project finance work, foreign lawyers in Singapore are staying put but are having to learn new ways to earn fees from clients.

The word everyone uses is “retooling”. The reason – an explosion of restructuring work for both lenders and debtors in Indonesia and Thailand, the two countries hardest hit by the regional financial crisis.

But the region's corporates are not looking for lawyers who come to the negotiating table saying :”This is how we do it in London.”

Instead, a working knowledge of how business is conducted in South-East Asia and an understanding of the changing political and regulatory environment in which it operates is essential.

Last week, The Lawyer reported that Lovell White Durrant is setting up an office in the city state, while Masons made the commitment in August last year.

But it is the firms that had the foresight to open Singapore offices earlier this decade and which now have established and are developing offices or strong associations with firms in Thailand and Indonesia that are exploiting their local know-how to the best advantage.

Firms like Linklaters, Freshfields and Clifford Chance have had offices in Singapore for many years. Freshfields and Clifford Chance have now opened in Thailand, while firms like Norton Rose and Linklaters have combined a strong Singapore office with close regional ties to give local legal advice when needed.

Norton Rose, for example, has a strategic alliance with Jakarta firm Lubis Ganie & Surowidjojo, and has sent a lawyer to work in its office.

Lawyers at these firms, with a number of years experience of working with local corporates in the region, claim that they can offer both an understanding of how those companies think and a knowledge of what western banks want to hear.

Roger Dyer, the new managing partner of Freshfields' Singapore office, says: “You have to try to educate both banks and borrowers what is practical in these circumstances. You cannot take a very legalistic approach – rather a pragmatic one.”

Some firms, including Freshfields, Norton Rose and Clifford Chance, have adopted this strategy and have retooled from a pure capital markets or project finance focus.

Other firms have decided that tapping the pool of expertise at their London office is a better approach. But again, extensive previous experience of working in the region is a must. Jo Windsor, recovery partner at Linklaters, was one of the first of the “old hands” to make the jump when he arrived in Singapore in December.

The reason for all this activity is that firms are hoping for extra work from the crisis in the long term – enough to keep their offices profitable.

According to a report by UK investment bank Flemings, the second half of 1997 saw western companies complete more than $6bn of Asian deals, compared with $5.7bn in the first.

“A lot of western multinationals see what is happening in Asia as a once-in-a-lifetime opportunity,” says Laurence Heyworth, emerging market strategist at Flemings.

And Dyer has seen a growth in mergers and acquisitions work as foreign companies snap up cheap Asia ones.

Local and regional corporates are looking at ways of raising cash as the traditional sources – local and regional banks – have shut down credit lines in an attempt to remain solvent.

There is a lot of sniffing around but not much evidence of deals being completed. For the typical Singapore office there is still some securitisation work, but no new equity offerings. Dyer has seen some Indonesian energy projects mothballed, while other projects are being restructured.

This experience is echoed by many offshore firms. Clifford Chance, for example, has seen a Thai steel mill project postponed, but the office still has work ongoing in Thailand, Laos and Indonesia.

Projects are being held up, not just by the financial crisis but by the ever-changing political and regulatory environment.

For Sam Bonifant, managing partner of the Clifford Chance singapore office, Indonesia is a particular problem area. He says: “The creditor committee and contact committee in Jakarta and the IMF are getting the framework [for a recovery loan package] agreed, but it is much slower than expected.”

The “crisis work” firms report that they are doing is limited to information gathering – balance sheet and forecasts – for the banks, and looking at the paperwork to figure out what rights creditors have to recover their loans. Anything more substantial has to take account of the political dimension.

“The biggest problem at the moment is people don't feel there is stability,” says Dyer. You can only restructure when things stop moving.”

With this in mind lawyers and financial advisers are telling their banking clients not to enter negotiations with unrealistic expectations.

Despite new bankruptcy and insolvency laws being enacted in Indonesia and Thailand, creditors are being told they have to tread warily.

“You have to restructure on the basis that the court system has never seen a crisis of this type before,” says Bonifant.

“Indonesia does not have the court system that creditors would approach to go through bankruptcy; here restructuring is reached through voluntary negotiations. I suspect this gives rise to a more consensual approach.”

Lawyers are hesitant to put a timescale on the corporate recovery process, but Calvert Miller, head of project finance at Shearman & Sterling's Singapore office, says the feeling is that although Thailand has turned the corner, it still has a long way to go.

And he is even more pessimistic about the outlook for Indonesia. “I expect the start of the beginning [of the recovery] by the end of the year,” he says.

So whether instruction is coming from corporates or international creditors, the approach that foreign lawyers based in Singapore are taking is unique to the region.

All the foreign firms are sticking around in Singapore. In the long term, they hope, the fees will flood in because previously nationalist governments will allow flagship national corporations to be bought up, in part or in whole, by western multinationals.

The first indication of this came in January when the Philippine government said it was considering allowing a hostile bid for brewer San Miguel.

If the relaxation of economic nationalism – the hallmark of corporate Asia up to now – spreads to other countries in the region, then the involvement of international law firms representing multinational clients in the region could be substantial.

Practising local law

Singapore's position as a regional financial services centre is the primary concern of the republic's ruling elite.

Fears that this position is slipping has prompted the attorney general, Chan Sek Keong, to form a nine-member legal services review committee, which includes White & Case's J Haywood Blakemore as the legal world's sole international representative, to look at possible liberalisation of the city state's legal infrastructure (see box, page 15).

At the moment, foreign lawyers are not allowed to practise Singapore law and it is understood that this is seen as one reason why Singapore law has not become dominant law for regional trade.

While committee members will not comment on the proposed changes until the report is released in June, it is generally understood that offshore firms will be allowed to practise Singapore law in areas of trade that promote the republic as a financial services centre.

This change is one of the factors that persuaded Lovell White Durrant to commit to Singapore and also fuelled Sinclair Roche & Temperley's association with local corporate firm Colin Ng & Partners in January.

However, there is little consensus among established firms on the attraction of practising Singapore law.

For Roger Dyer, managing partner of Freshfields' Singapore office, the liberalisation offers a number of opportunities. “We see it as a useful addition,” he says. “Overall, it will reinforce Singapore as a major centre if international firms can practise these certain [corporate finance related] aspects of Singapore law.”

Sam Bonifant, managing partner of Clifford Chance's Singapore office, agrees. He says: “It is relatively important. The Singapore legal market is highly competitive. But it will provide opportunities where clients want a one-stop-shop and can pay for it at our rates.”

But this should not distract from the real reason that firms have chosen to invest in the region – to service international clients' regional legal needs.

Paul Giles, managing partner at Norton Rose's Singapore office, says: “Foreign firms have practised international law in the region. And that is what we offer best. It depends how successful Singapore is in the future. But it is sensationalist to say that its a bonanza.”

Legal Services Review Committee

Singapore's legal services review committee has been set up to investigate possible legal liberalisation. It includes:

attorney general Chan Sek Keong

Deputy senior state counsel Soh Tze Bian,

White & Case partner J Haywood Blakemore

ShookLin & Bok senior partner Dr Philip Pillai

John Koh & Co managing partner John Koh

Supreme Court Justice Judith Prakash

Executive vice-president/ regional manager of the Bank of America Colm McCarthy

Deputy president of DBS Bank Tan Soo Nan

chief executive officer of investment banking at Deutsche Morgan Grenfell Asia Pacific Dr Hans Beck

principal private secretary in the Prime Minister's office Heng Swee Keat