Leveraged finance: has the British lion lost its roar?

They’re getting the mandates, and they’ve got the hiring power. Are US firms elbowing out the magic circle on leveraged finance?

When BC Partners agreed to acquire Mergermarket from Pearson in November 2013 it seemed a relatively straightforward deal. BC turned to its usual borrowers counsel Dickson Minto for its acquisition financing, and put the wheels in motion to arrange a typical European-style bank loan. 

Then everything changed. The underwriting banks proposed an opportunity for BC Partners to achieve financing in the US market at more attractive rates. And as the signing approached, the technicalities of the financing transformed from a European loan to a New York-governed Term Loan B – a high-yield loan issued to the US market. 

Eagle vs lion

BC Partners sought help from regular high-yield adviser Latham & Watkins, which was able to implement the Term Loan B after the signing had taken place. Dickson Minto lost its position advising the sponsor on the debt. 

It is not the first time a US firm has taken a refinancing deal due to its New York law expertise. 

Just last month CVC invested in Prague-based antivirus software business Avast. Clifford Chance won the lead corporate role for CVC on the transaction. In the past, the magic circle firm has generally also advised the private equity house on its deal financing. However, this time round CVC turned to White & Case for advice on the deal’s related US borrower financing. 

While US firms have always been pre-eminent in New York law-governed financing structures, the popularity of US financing options in the European market means London finance practices without a strong connection to the US high-yield market are struggling to keep the debt mandates on major buyouts. The implications for the UK’s traditional banking giants, the magic circle, are worrying. 



For the magic circle, navigating the finance world was relatively plain sailing until about 2006. Banking clients had a monopoly on the debt market and offered the UK’s top banking firms spots on their legal panels. Magic circle firms built their leveraged practices on the back of these banks, which include Barclays and RBS. 

However, as the economic crisis took hold the European bank loan market diminished. According to Thomson Reuters, in 2007 bank syndicates provided 62 per cent of funds for European firms. By 2013, this had shrunk to just 26 per cent. 

The market welcomed a flurry of innovative new lenders who stepped in to fill the void left by the banks. 

Faced with a new range of options, investors began to tentatively branch out, taking greater risks for higher returns. Senior debt products governed by New York law and high-yield bonds proved to be a popular choice in Europe. They offered an array of investor-friendly terms, including looser covenants and relatively low interest rates. 

According to Thomson Reuters, the European syndicated loan market halved in size between 2007 and 2013. High-yield in the region was blossoming at an even faster pace. 

European high-yield witnessed record highs in 2013. New-issue volumes exceeded their previous high-point of €44.4bn (£37bn), recorded in 2010, by a massive 59 per cent to hit the €70.4bn mark. 

The high-yield deals placed in 2013 comprised a diverse group of borrowers hailing from 27 countries and 26 sectors, says S&P Capital IQ. 

As US-governed products swept across the European financial markets, underwriters including Credit Suisse, JP Morgan and Deutsche Bank became in demand. They were not only targeted by sponsors but also by law firms hoping to take their own share of the profits on these deals. 

So where does this new landscape leave the magic circle? Did the UK’s traditional banking giants take their eye of the ball? 


A changing legal landscape 

The first English law syndicated loan agreement in London is popularly supposed to have been entered into in April 1968, drafted by Coward Chance partner Hugh Pigott. The syndicated loan market has been a sweet spot for the four key magic circle firms ever since. 

The firms still have an impressive raft of European lending partners on their books. In fact, they have a wide range of finance partners covering every aspect of the financial markets, spread around the globe. 

According to The Lawyer UK 200 2013, Allen & Overy (A&O) can boast an estimated 230 partners dotted across its vast finance practice. Clifford Chance has 223 on its books, while Linklaters has about 180 and Freshfields Bruckhaus Deringer roughly 80. These cover every part of the banking and finance spectrum, from banking to real estate finance, project finance, insolvency and acquisition finance. 

In acquisition finance they have a fairly strong senior debt bench, but when it comes to US products and high-yield – including the intrinsically related sponsor-side aspects of these transactions – the magic circle lacks depth. None of the four leading firms would provide figures, but market sources suggest that each only has one or two powerful players in this field. 

A&O’s standout partner on the high-yield front remains Kevin Muzilla – the partner it hired in from Milbank Tweed Hadley & McCloy in September 2009 to kick-start its junior debt practice. 

At the time of his hire, A&O claimed to have five partners and 20 associates with high-yield experience. However, the A&O website reveals that Muzilla is one of only two dedicated high-yield partners at the firm in the UK. 

Muzilla told The Lawyer at the time: “A&O has faith in the high-yield market in Europe […] Hiring into this arena is critical.” 

However, the firm’s strategy has largely failed to materialise. A glance at its website shows it has 21 partners globally who claim to have high-yield expertise, although none dedicate their entire practice to the product. Only two of these – Muzilla and leveraged finance partner Paul Flanagan – are based in the City. 


Finance first

Meanwhile, Clifford Chance has had its own fair share of problems breaking into the high-yield market, despite being one of the first City firms off the blocks with the hire of Michael Dakin in 2005. Dakin joined the firm’s New York office as a senior associate in 2005 before relocating to London and being welcomed into the partnership. 

The firm’s website flags up six partners specialising in high-yield in London, although only two of these – Dakin and partner Fabio Diminich, a former Latham associate who joined as a partner in October 2011 – are thought to be serious players in the field. 

Meanwhile, US firms have been building up their high-yield offerings in the City. Among these, Latham has made a particularly big impact on the UK’s acquisition finance market. 

Latham entered the City market on a high-yield ticket in 2000 following failed merger talks with Ashurst. Its strategy in London was to emulate the successful opening and growth of its New York outpost. In the US, the firm had already built a solid sponsor- and lender-side practice in the leveraged buyout sphere, with major clients including the booming Deutsche Bank and JP Morgan. 

Latham’s strategy in London seems to be paying off. In addition to longstanding City corporate co-chair Richard Trobman, who has overseen the outpost’s growth, it can now add partner names including Jocelyn Seitzman and Jennifer Engelhardt to its leveraged finance partner list. 

The firm has recently been on a spree to bolster its sponsor-side practice, hiring a trio of partners – David Walker, Tom Evans and Ken Ihenacho – from Clifford Chance. The team share strong existing ties to powerful private equity house, the Carlyle Group, with which the firm already enjoys a healthy relationship in the US. 


White magic

Another US firm to grow its City practice is White & Case, which has also achieved the feat of developing a full-service practice mirroring the magic circle’s much more sizeable presence. High-yield partner Rob Mathews has dominated the growth of his practice at White & Case in the past decade, advising underwriters and sponsors such as Jefferies and JP Morgan. 

Weil Gotshal & Manges has also made significant inroads in London, focusing with particular intensity on growing its bank-side practice by hiring a clutch of debt finance partners from the magic circle including Stephen Lucas, who joined from Linklaters in 2011, and Gil Strauss, who left Freshfields the following year. 

Other firms including Kirkland & Ellis and Simpson Thacher & Bartlett have used their traditionally strong sponsor-side practices and longstanding client relationships to bed down roots in London. 

Kirkland boasts some big-name partners such as Ward McKimm, who jumped ship from Shearman & Sterling in 2011 with the remit of pushing forward the firm’s bank-side market. Meanwhile, Simpson Thacher is associated with the likes of Nick Shaw, who has particularly close ties with KKR and Mark Brod. 

Ropes & Gray has also fired up its leveraged finance offering in the City since opening its London office in 2009. Like Latham, its office was launched on the premise of capitalising on the firm’s longstanding relationships with private equity houses and take advantage of Europe’s growing high-yield market. 

The firm claims to have five leveraged finance partners in London, of which a handful have particular expertise in high-yield, including Jon Bloom and Jane Rogers. 


The key to US success 

So how and why are US-originated firms doing so well in the leveraged finance world? 

They have history on their side. Firms in the US have been bulking up their junior debt practices since the 1980s, when investment bank Drexel Burnham Lambert discovered there was a market for high-yield debt from new issuers – often in connection with companies making takeover bids. 

The magic circle didn’t take its first tentative steps into the high-yield market until Clifford Chance brought Dakin on board in 2005. A&O was the next to take the leap, with Muzilla in 2009. Linklaters kicked off its efforts the following year with the hire of high-yield specialist Mark Hageman from Cravath Swaine & Moore to its partnership, just weeks after Freshfields raided the aforementioned Gil Strauss as partner. 

Notably, each of these partners has remained at the same firm except for Strauss, who spent less than two years at the magic circle firm before defecting to US rival Weil in late 2012. 

The practice’s relatively late arrival at the magic circle has meant high-yield and Yankee loans more widely have been a hard nut to crack – even in the growing European leveraged finance market. 

One key reason they are losing out is their perceived lack of flexibility. As one US firm partner puts it: “There are three key products for leveraged refinancing in the market – Yankee loans, high-yield and European loans – and UK firms aren’t qualified to do two of them.”

One of the magic circle’s big problems is that the road to leveraged financing is not always smooth. It is not unusual for a deal to begin life as a European loan, then morph into a mosaic of European and US products. Hence, many sponsors are keen to instruct firms they believe to have the strongest offering across the board. 

The firms that are winning a large share of the spoils are those that can show genuine expertise and experience in a range of European and US products, as well as in various bank and bond structures. 

Dickson Minto being trumped by Latham on BC Partners’ leveraged buyout of Mergermarket is just one example of a deal becoming increasingly complex and taking on into a US-oriented structure, with US partners being added to the deal. 

Latham’s global finance vice-chair Dominic Newcomb worked on the deal in the UK for the sponsor, alongside New York corporate finance partner Dennis Lamont. White & Case London banking partners Jake Mincemoyer and Jacqueline Evans and US-based Eric Kler led advice for the lenders on the deal. 

UK-listed software company Mysis also saw some changes during its buyout by Vista Equity Partners in 2012. The transaction started life as a European senior mezzanine loan, but later migrated to a US first lien and second lien structure due to fav-ourable market conditions in the US. 

Kirkland & Ellis fielded a team for Vista, including City-based European debt finance chief Stephen Gillespie and banking partner Sam Norris, while the underwriters turned to Latham’s London finance head Chris Kandel and banking partners Melissa Alwang and Jane Summers in New York. 

On deals where the sponsors are switching their gaze the other way – from US to UK markets – US firms are also finding themselves retained. Global packaging supplier Chesapeake’s leveraged buyout by Carlyle in July 2013 was sold solely into European markets but took the form of a standard Term Loan B. 

Latham advised Carlyle, led by Necombe in the UK and finance partner Jeff Chenard in the US. Weil’s London banking head Stephen Lucas and the firm’s global banking chief Daniel Dokos in New York were instructed by lenders. 


American prescient

However, below the surface of the leveraged finance legal market a bitter debate is raging about whether US expertise is truly necessary. 

While a high-yield agreement will need to be signed off by a US-qualified partner there is nothing to say it needs further US expertise. The consensus at UK firms is that Americans have done a stellar marketing job on US debt products. 

As one magic circle finance lawyer says: “One of the benefits that US firms have in London is that the market assumes they can draw on a huge amount of expertise in the US. But there are a lot of nuances in the European market and structuring European deals requires a different skillset and awareness. Having a high profile in the US is good for the badge but it’s not the be-all and end-all.” 

The problem with UK firms’ acquisition finance practices does not stop at their lack of US expertise. It is argued that they are simply not the right size or shape to effectively navigate the contemporary debt market. 

“The great and terrible thing about magic circle firms is history,” says one former magic circle partner. “England made the first underground train system but it’s hardly fit for the modern day. The tunnels are too small and the cost of expansion is prohibitive. Magic circle firms are supertankers and changing them takes time. It’s great they have a rich history, but the world changes faster than they’re able to adapt.” 

US firms charge the magic circle with hiding behind their increasingly commoditised senior debt work for struggling lenders, rather than holding on to their positions in the more prestigious and lucrative sub-investment grade arena. 

Although the magic circle firms contest this assumption they have clearly had difficulty holding on to some of their top talent and strongest client relationships in the acquisition finance space. 

People moves 

While US firms in London have been flexing their deal-making muscle, they have also been busy demonstrating the sheer buying power of their armoury. 

A quick glance at the figures says it all. According to research by The Lawyer and Deacon Search, there have been more than 129 lateral private equity and finance partner hires in the UK since January 2012. 

While this is not a comprehensive list – it contains all well-publicised moves and those with particular market significance – it paints a vivid picture of comings and goings between the UK’s key legal players. 

For the purposes of this research, the term ‘partner’ refers to all those lawyers who either left or moved into a partnership position, including those who were formerly senior associates or have jumped from a partner to counsel role. 

A breakdown of the 129 recorded lateral partner hires is particularly enlightening. 

The magic circle was hit especially hard by departures, leaking about 24 partners in total. Of these, 10 left for non-magic circle UK firms and a further 14 snapped up the chance to defect to a US rival. 

Meanwhile, not a single US firm partner moved the other way – into a magic circle firm. Twenty-five partners left US firms, 17 moved to another US firm in London, with the remainder exiting for a non-magic circle UK firm. 

Of the magic circle firms Clifford Chance saw most partners walk out the door. Ten left in total, of whom just four moved to US firms. This figure includes the aforementioned sponsor-side trio of Walker, Evans and Ihenacho, who each had an individual grip on the firm’s Carlyle relationship. The fourth was structured finance partner Matthew Cahill, who departed for a new role at Sidley Austin. 

Clifford Chance also witnessed the exit of New York-qualified high-yield and leverage partner Tony Lopez, who joined DLA Piper in November 2013. Lopez joined Clifford Chance’s London office in 2011 after five years in New York, where he worked on a string of cross-border deals including advising Carmeuse on its $375m (£225m) seven-year high-yield bond issue. 

Lost links

Linklaters saw the second largest outpouring of the magic circle from its finance and private equity teams in the past two years. Three of the eight departures headed for US firms – its two sponsor-side stars Richard Youle and Ian Bagshaw left for White & Case in 2013, while banking and restructuring partner Chris Howard departed for Sullivan & Cromwell in May. 

Youle and Bagshaw’s exits will have hit the firm where it hurts, due to their close ties with a number of its key private equity clients. Bagshaw had fostered a relationship with Carlyle as well as being Linklaters’ relationship partner for Macquarie on the banking side. Meanwhile, Youle acts for a slew of mid-market private equity houses, boasting particularly close ties with HG Capital, Montagu and Hermes. 

Freshfields saw five partners pack their bags during the period, with all but one – former longstanding global managing partner Ted Burke who joined client Arclight Capital – heading straight for US firms. Senior acquisition finance associate Sebastien Marcelin-Rice joined the partnership at Baker & McKenzie, while the defection of Strauss to Weil left a void in the heart of the firm’s high-yield team. 

Of the magic circle, A&O had the fewest partner exits since January 2012, but one departure – that of private equity co-head Derek Baird to Simpson Thacher – contributed its fair share of collateral damage to the firm’s sponsor practice. It is thought that the heavy-hitting partner left with a hefty client book, including his close relationship to private equity house Charterhouse. 

While all the UK’s premier firms have sprung a few leaks in the past few years, it is interesting to note that A&O is the only one to have made any attempt to plug the gaps with lateral hires. 

Neither Clifford Chance, Linklaters nor Freshfields hired a single partner from outside during the period. However, A&O pulled off the lateral hire of former Ashurst corporate chief Stephen Lloyd, who enabled the firm to strengthen ties with Apax Partners. Lloyd’s former Ashurst colleague Karan Dinamani joined him at the firm earlier this month. 

Meanwhile, the firm managed to sign up former Goldman Sachs in-house lawyer Denise Gibson, topping up the firm’s expertise in investment grade and leveraged acquisition finance. 

While magic circle firms’ key partner losses have been costly, perhaps even more worrisome in talent management terms is the volume of up-and-coming partners heading for the door. Clifford Chance partners Evans and Ihenacho, for example, were widely hailed as key characters in the firm’s private equity pipeline, charged with some of the firm’s primary client relationships. 

It is likely that some magic circle defectors simply became disillusioned with the long wait for promotion and jumped ship for better prospects in the mid-market (see table). Take Linklaters’ managing private equity associate Ben Rodham, for example. He joined Addleshaw Goddard’s partnership with a number of sponsor-side client contacts, including Bridgepoint, Carlyle and Montagu, under his belt. 

Of course, many of these partners will have been lured to growing US firms by the prospect of being a big fish in a small pond. However, it is impossible to overestimate the influence of the bottom line when it comes to lateral moves. 

US firms are among the most profitable in the City, paying substantial average profit per equity partner (PEP). In 2012, PEP at Kirkland & Ellis almost doubled that of Clifford Chance, with the two firms’ totals recording totals of £1.96m and £1m respectively (see table). 

Simpson Thacher paid an average of £1.61m to equity partners globally in 2012, while Latham’s PEP reached £1.47m. Meanwhile, the highest average payout among the magic circle fell to Freshfields, which recorded a total of £1.4m. 

For ambitious lawyers looking to bump up their pay packets, it also helps that most US firms take a heavily merit-based approach to remuneration, gifting additional cash to those who are able to source work independently. 

As the winds of the market continue to blow in favour of US firms, the magic circle and other UK firms must address some gaping holes in their strategies. Ultimately, as long as they don’t have a serious stateside finance offering, they are left with two choices: pay their stars more or lose even more ground to US rivals.

Fresh blood in the finance war

Of the big four, the firm that has promoted the most new finance partners in London in the past three years is Freshfields Bruckhaus Deringer, which has made up five compared with three at Clifford Chance and Linklaters and two at Allen & Overy (A&O). 

Magic circle firms’ biggest practice investments have actually been in insolvency and restructuring, with 2012 a vintage year. A&O made up Tom Crocker, Linklaters promoted Richard Hodgson and Freshfields welcomed Ryan Beckwith and Geoff O’Dea to the partnership. 

Looking specifically at acquisition finance Clifford Chance promoted one general acquisition finance partner in 2012 (James Boswell) and 2013 (Peter Dahlen) and Linklaters two: Oliver Edwards in 2011 and Edward Aldred in 2013. However, their deal lists suggest a general finance practice with a large chunk of investment-grade work. 

Of the 13 finance partners made up in London by the big four over the past four years, only one has been in pure leveraged finance: Michael Steele at Freshfields (2012). Steele spent a year at Goldman in the leveraged finance group, an experience reflected in his deal sheet at Freshfields, where he has handled debt work for sponsors such as Cinven and CVC. He is a relationship partner for Blackstone and Goldman Sachs.

US vs UK: what the partners say

US firm partners: 

“DLA Piper’s Tony Angel once said that Charles Darwin was wrong that evolution was about the survival of the fittest. Rather, the ones that survive are those that adapt best to change.” 

“US firms aren’t interested in investment-grade finance, so they’re not interested in the commodities business. UK firms do more asset finance, trade finance and low-level stuff. US firms do top-end work which is more profitable and specialist.” 

“If the pure European loan market comes back UK firms will still only be able to offer one service without their clients going elsewhere. For the biggest and most complex deals, UK firms are wrong-footed.” 

UK firm partners: 

“Not all leveraged finance requires high-yield – in fact, as a percentage it’s relatively few deals. That is partly because to be high-yield a deal needs to be above a certain value. Below that, it’s not high-yield and has no US law requirement.” 

“US firms have done a great job of convincing the finance community in London that its lawyers need to have an American accent.” 

“UK and US firms in London are competing on an equal footing and have the same sort of people. That said, the growth of US firms in the UK has been driven by English-qualified partners who have been offered significant amounts of money.”