Profession takes a deep breath as fears of Armageddon are put to bed

With the catastrophic predictions of the economic downturn failing to fully materialise, Margaret Taylor reflects on firms’ past, present and future strategies

Maybe the rarified air imbibed in an August spent up mountains and on beaches has gone to the legal profession’s head, but the bad times, some would have it, really could be behind us.

Don’t go trading up those ­economy flights just yet – the ­predictions are still that the ­current financial year is going to be even worse than the last one. The good news is that the Armageddon ­predicted just under a year ago has failed to materialise and lawyers are now anticipating that ­transactional markets will return to normal by the second quarter of 2010. That’s the ‘new normal’, of course, not the normal that had become the norm prior to the ­collapse of Lehman Brothers.

The impact of the financial ­crisis that began when Lehman ­collapsed on 15 September last year cannot be denied (a look at the leading firms’ financial results for 2008-09 prove that), but a year on things are not as awful as were being anticipated at the time. In retrospect that is perhaps not ­surprising, given that the outlook was exceedingly bleak.

Remembering the weeks ­leading up to Lehman’s collapse, an Allen & Overy (A&O) banking partner says the market was ­clearly anticipating that something was about to happen, because things had gone far more quiet than they would in a normal summer lull.

“If you went to a drinks ­reception you’d see people you wouldn’t normally see there,” he says, “and they’d arrive earlier and leave later.”

Clifford Chance partner Simon Gleeson agrees, adding that when Lehman did go the feeling was that the world would never be the same again.
“A year ago everyone was just alarmed, then Lehman happened and everyone thought it was the end of the world,” he says. “As lawyers we all knew something dreadful had gone wrong, we just didn’t know what. People who ­didn’t panic were panicking.”

In the mêlée that followed, with the sale of Merrill Lynch, Wachovia and Washington Mutual and the bailout of insurance giant AIG, ­followed by the rescues of RBS, HBOS and Bradford & Bingley, a raft of career-defining instructions were handed out to the leading global firms. The magic circle and the Manhattan elite were called on time and time again.

While this made for good ­headlines for those involved, ­internally even the leading firms were panicking. A choice instruction or two on the crisis of the day is one thing, but the impact that crisis will have in the longer term is an altogether different prospect.

A partner at a magic circle firm says that, as the scale of the ­banking crisis became apparent, the firm began looking enviously at rival Freshfields Bruckhaus Deringer, which had trimmed back its finance practice over a number of years.

The partner says the firm was asking serious questions about whether it should reinvent itself as a “second-rate Freshfields”. ­Partners were debating whether investment banks as clients were finished.

But they were not the only ones having a crisis of ­confidence.

“People were talking about whether Goldman Sachs and Morgan Stanley would be okay and the general feeling was that they’d be fine; but then their credit default swap spreads went wider than Lehman’s were before it collapsed,” remembers Freshfields corporate head Mark Rawlinson. “I said to my partners at the time there are two ways of looking at this: we’re on the edge of a precipice and there’s a big drop down, or we’re at the top of the Cresta Run and the next 12 months will be the most exciting white-knuckle ride we’ll ever have. It’s been an ­incredible and scary 12 months.”
Certainly Freshfields was one of the lucky ones, winning endless recession-related instructions on deals such as the administration of Woolworths and rights issues from the likes of Wolseley and British Land. At the 2008-09 year-end the firm’s corporate revenue was up by 9 per cent, while ­banking revenue rose by 25 per cent.

But while the transactional ­markets in general have been ­virtually non-existent for the past year, the feeling now is that things are definitely picking up.

One partner at a City firm says enquiries are at a level not seen for many months and the anticipation is that the flow of M&A will grow over the coming months.

Banking lawyers are ­certainly being kept busy, with the masses of debt built up during the boom now needing to be ­restructured.

As reported on the facing page, both A&O and ­Linklaters played key roles in the restructuring of e12bn (£10.6bn) of German company Schaeffler’s debt, paving the way for the ball-bearing producer to merge with auto parts manufacturer Continental. Continental also has a multibillion-euro debt that needs restructuring.

Similarly, Slaughter and May, Skadden Arps Slate Meagher & Flom and Uría Menéndez acted on the $15bn (£9.23bn) ­restructuring of building supplies company Cemex’s debt.

The nature of these deals should serve as a chastener for the market, but there is definitely optimism in the air. Things could still go wrong – the recession could turn out to be a W rather than a V and ­protectionism could stifle much-needed access to finance – but compared with expectations a year ago, things are in good shape.

“Weirdly, in retrospect, when people look at this in hindsight, one of the things they’ll see is that this was a tremendous test of the legal infrastructure of the market,” says Gleeson. “We won’t know the outcome of that for sure until the Lehman insolvency is ­complete. It’s conceivable that the aftermath of Lehman will reveal something unpleasant in the ­system, but I doubt it.”