When the Government bailed out RBS for £45.5bn in October 2008 all the bank’s prayers seemed to have been answered.
However, RBS, which is 82 per cent owned by the UK Government, is now struggling to avoid a second bailout. As pressures mount on all sides, and with the bank planning to shrink its investment banking function and ditch its M&A operations in the Middle East, the question as regards lawyers is how these changes will affect its roster of law firms.
“I don’t think much will change in the short term as there are still many disposals to take place, so there’s still a lot of legal work to hand out,” comments one banking partner.
Certainly, there will be much work ahead for law firms as RBS continues to get rid of all non-core assets to meet the target of the end of 2013 set by the chancellor, George Osborne.
RBS should be well-prepared for this. After all, one of the first things chief executive Stephen Hester did after joining in October 2008 was to split the bank into ‘core’ and ‘non-core’ assets. While ‘core’ means the ongoing business functions within the bank, ‘non-core’ consists of the assets that are no longer considered part of RBS’s future business that and which been set aside for disposal.
According to the Financial Times, RBS has just under £100bn of non-core assets on its books, so law firms may not have to worry just yet.
Indeed, a number of firms have already benefited from work created by RBS’s non-core disposals. In 2011 the bank set up a vehicle for offloading around £80bn of toxic UK commercial real estate (CRE) loans in a process nicknamed ‘Project Isobel’.
In July 2011 Blackstone was rumoured to be in talks with RBS about buying a 25 per cent stake in Project Isobel. On 21 December 2011 it was announced that the bank had sold the stake to the US private equity group for £1.36bn. Berwin Leighton Paisner (BLP), which advises RBS regularly on real estate matters, was the lucky firm picked to advise RBS on the landmark deal, which was the most high-profile loan portfolio sale seen in the UK since the onset of the financial crisis, and one that is slated to create a wider class of investors.
BLP partner Paul Severs, who led on the deal, notes that difficult market distribution factors and other destabilising factors in the eurozone caused the transaction to take more than five months to close.
Severs advised RBS alongside partners Michael Wistow and Emma Howdle-Fuller, as well as finance partners Tom Church, Jayne Black, Trevor Wood and James Duncan and senior associates Hugh Mildred and Andrzej Janiszewski.
Clifford Chance also acted on the deal, with partner Andrew Forryan assisting RBS as senior debt provider on the disposal of its CRE portfolio. RBS has £87bn worth of property assets on its balance sheet, around half of which are set aside for sale.
Clifford Chance has also done relatively well out of the disposals so far. On 17 January it emerged that the firm had landed the role of adviser to the bank on the sale of its Dublin-based aviation unit RBS Aviation Capital to Sumitomo Mitsui Financial Group, Japan’s largest bank, for $7.3bn (£4.7bn). Corporate partner David Pudge fielded a multijurisdictional team to help the bank complete its biggest single disposal since its 2008 bailout.
While the deal was a clear coup for the magic circle firm – as Linklaters is often seen as RBS’s go-to adviser – one City partner acknowledges that Clifford Chance’s strong record in aviation finance made it the obvious choice for this particular transaction.
But one firm that has lodged itself firmly in the affections of the bank is Linklaters. It is called upon regularly for key disposals, such as the sale of 318 branches to Santander in 2010.
Corporate partner Simon Branigan led on the deal on this occasion. That said, a source close to the bank wonders whether the firm is somewhat limited by its bench strength, adding that Rushad Abadan, RBS general counsel for corporate and M&A, is always conscious of making sure he feeds other firms and does not give Linklaters all the work.
When Linklaters announced that its global M&A co-head and key RBS relationship partner Matthew Middleditch would relocate this month to Hong Kong, many market sources questioned how this would affect the firm’s seemingly rock-solid relationship with the bank. Middleditch has acted on a raft of deals for the bank, including his role as lead adviser on the £2bn sale of a majority stake in its WorldPay arm to private equity houses Advent International and Bain Capital in 2010.
Since Middleditch’s relocation Anne Drummond has joined senior partner Robert Elliott as a key RBS relationship partner.
“RBS is consistently a top client of ours and Anne Drummond and myself work closely with it,” says Elliott. “Although Matthew is now spending more time in Asia, he’s still working on a few RBS deals out there and comes back to the UK when necessary to help out with RBS deals here.”
For others, though, the jury is still out. A partner at another firm believes “[Middleditch’s relocation] has created a challenge for Linklaters”.
Although lawyers are not concerned about the work coming from RBS in the short term, the worry is whether, after all the non-core advisory work has dried up and RBS has downsized its international and European operations to become more of a domestic UK bank, there will still be enough work to go round. Apart from BLP, Clifford Chance and Linklaters, City firms such as Ashurst and Herbert Smith act for the bank regularly, although Herbert Smith was spectacularly ditched by RBS from acting on the ongoing legal battle with US hedge fund Highland Capital (The Lawyer, 24 October 2011). The beneficiary? Linklaters of course – or more specifically litigation partner Christa Band.
However, the structural changes at the bank cannot help but have some effect on these firms and others on RBS’s roster.
“The real problem now for firms is that they stand to lose out from the lack of big-ticket leveraged financing,” notes one City banking partner. “This was previously the big money-maker and the RBS pie has shrunk considerably in this respect.”
There is also the question of how the downsizing of RBS’s business will affect the size of the bank’s legal function. RBS bulked up its in-house legal personnel considerably prior to 2010 and is thought to have had more than 300 lawyers on its staff at one stage.
However, that has not stopped secondments. Travers Smith litigation partner Toby Robinson will be on loan to RBS for six months in 2012 as acting head of litigation, regulatory and investigations. It has not been disclosed whether he is taking on a new role or replacing an existing in-house lawyer at RBS. Travers is not believed to be on RBS’s legal panel, but it certainly has litigation connections with the bank. William Luker is head of litigation at RBS, but his predecessor Stephen Pearson was a former Travers partner.
Safe as in-housers
It seems inevitable that there will be at least some redundancies in the
in-house team, although “it is unlikely that the impact will be as great on the legal department as on other parts of the bank”, according to one banking partner.
As Neil Smith, a banking analyst at WestLB, highlights, there is a huge amount of work at RBS to be done, and this is likely to keep both the in-house lawyers and the bank’s external law firms busy for some time.
“It’s the most complex bank in the sector,” Smith stresses, adding that “there’s a huge amount of work to do to satisfy key stakeholders; and I think the fruits of their labour are probably still to be revealed, since the bank’s improvements to its balance sheet, risk reduction and better share price have been largely overshadowed so far by the macroeconomic situation”.
Certainly, it seems likely that the in-house lawyers will continue to have their work cut out for some time yet. And while the forthcoming panel review may be pretty low on their list of priorities in the short term, as RBS continues to make changes to fend off criticism over bonuses and insurance cover-ups, it may need all the help it can get from its external advisers to keep its head above water in the coming months.
RBS declined to comment during the preparation of this piece.
RBS acquisition finance deals: who gets the nod
When it comes to acquisition finance, a few select firms bring home the bacon. Although leveraged finance deals have been rare of late, Ashurst finance partner Mark Vickers still sees a good amount of work, while Clifford Chance partner James Johnson has a historical relationship with the bank from his NatWest days.
A smaller amount of work goes to Allen & Overy (A&O), which is thought to have received less work in this area since the exit of key relationship partner Jacqueline Evans in 2009.
When it comes to investment-grade work, RBS is pretty evenhanded and doles out work to A&O, Clifford Chance and Linklaters equally, with A&O partners Trevor Borthwick and Michael Duncan, Clifford Chance partner Nicola Wherity and Linklaters partner Philip Spittal active.
RBS: key people
Chris Campbell general counsel (since February 2010)
John Collins deputy general counsel
William Luker general counsel, litigation
Rushad Abadan general counsel, corporate/M&A
Leonie Fleming general counsel, lending transactions, corporate banking and Emea (previously lending transactions)
Donald Macdonald UK head of retail markets
Helen Cockcroft general counsel, global banking and markets
Laila Page head of legal (soon to retire)
Key relationship partners
Allen & Overy
Trevor Borthwick, Michael Duncan, Simon Roberts, Melissa Samuel
Helen Burton, Lee Doyle, James Duncan, Mark Vickers, Nigel Ward
Berwin Leighton Paisner
Kate Binedell, Emma Howdle-Fuller, Michael Wistow, Trevor Wood
James Johnson, Robert Lee, Malcolm Sweeting,
Anne Drummond, Robert Elliott, Philip Spittal