Convergence or divergence? Before the lockdown, on a cold and snowy February morning in the City, lawyers gathered for the second breakfast roundtable co-hosted by Paul Hastings and The Lawyer to discuss the direction of travel in the transatlantic acquisition finance space.
Following on from the first roundtable, hosted in October, this discussion took as its starting point the results of a research study conducted by The Lawyer and Paul Hastings into finance trends.
The conversation touched on issues such as the similarities and differences between the European and New York acquisition finance space, the increasing participation of non-bank lenders in the market and the configuration of teams working on deals.
The convergence of US and EU markets is inevitable in the long term, especially as players continually increase their cross-border transactions. Brexit, as it continues to develop, is unlikely to have an impact. “When we talk about the terms of finance, and how finance is constructed and underwritten, convergence is relatively unaffected by Brexit, because the two dominant laws in acquisition finance are New York and English law and there was never really a European law component in that,” one lawyer said.
“That doesn’t appear to be changing at all. So, save for the one piece to solve, the enforcement of foreign judgments, a very solvable piece of law, there doesn’t seem to be any real reason why that dichotomy between New York and English law servicing the whole world in leverage finance needs to change,” he added.
However, there is still divergence at the granular level of deal-making due to distinct regulatory and monetary policies, for example, with one lawyer saying that, “regulatory differences are always going to be there, and there are core legal fundamental differences that will mean that we can’t have a global set of finance documents”.
Furthermore, while commercial understanding and underwriting processes may be becoming aligned, the documentation, however, remains distinctly different in certain cases. “We have incorporated the bond covenants style, whereas the American agreement is done under standard credit agreements, and so the American loan-style agreement still looks very different,” added one lawyer. This translates into the expectation for counsel to understand both English and US law.
“The way it’s been done more recently, is that there’ll be a bond lawyer who will go through the (bond) covenant with us, but they will need to understand the loan world too. More and more, you’ll see that that needs to be just one person,” said the same delegate.
The differences in bids between the non-bank lenders and the investment bank in types of underwriting deals is closing in”
Away from convergence and divergence, the conversation also turned to the biggest trend (and a possible threat to banks) that lawyers are dealing with on both sides of the Atlantic: direct and non-traditional lenders.
“When I’m advising my clients, and they’re from the borrower side or private equity side, the fact that we can introduce them to 10, 15 direct lenders and non-bank lenders and say, ‘here is a huge variety of debt solutions to choose from and they’re all super competitive’, together with the fact that they’re desperate to deploy it, the borrowers absolutely love this,” said one lawyer. “So that trend, the amount of dry powder they have and the increasing power they have, is definitely long-standing.”
While the mid-market has been the main field of operation for these lenders, that is bound to change too, as the institutional names are becoming second nature on $1bn+ deals, added another. “The differences in bids between the non-bank lenders and the investment bank in types of underwriting deals is closing in,” while also becoming more competitive and upfront in costs, he says.
Within Europe, non-direct lenders are likely to become even more prevalent as the Continent edges towards homogeneity. As one lawyer points out, in its efforts to create a common capital markets union, the EU says to non-bank lenders, which would otherwise have fallen foul to bank monopoly rules in certain European jurisdictions, that they can now lend directly because of the concept of mutual recognition.
That is, the lawyers says, if a lender has presence inside the EU, and meets certain conditions and characteristics, every European country is supposed to accept that institution as a lender, even if they’re not a bank. The trick, however, is that this is system has been rolled out by way of directive, and not regulation; therefore countries can mould the mutual recognition process: for example, Italy places conditions on mutual recognition in a way that Germany does not, the counsel added.
In the middle of a conversation about team structures, the cost implications of how, if and when transatlantic teams are put together, and how US firms have been increasingly frowned upon for “over-staffing” their teams, in turn overcharging their clients, the question of technology arose.
Has tech reached, or improved, the acquisition finance world? Not quite, in one lawyer’s opinion. “I’ve looked at a lot of the solutions, I don’t think they’re there yet for what we do. I do think it will come, but for what we do, it’s not good enough yet. You look at it and think – ‘People are still going to have to check over it anyway’,” he said.
Another lawyer, however, takes the view that tech has become an enabler as opposed to a pure player in and of itself, with the trend of creating a smarter client.
“What we’ve been guilty of, in the past as a client, is not necessarily tracking deals accordingly, and understanding that this was one deal and it cost this amount, and now that we have multiple deals, why can’t we get an understanding of what the costs are and more intelligently challenge those costs upfront?” he says.
There was also scepticism towards technology in the room.
“With apologies in advance to my hosts, when you look at the two biggest tech development in the past 30 years: word processing and these stupid things” – here the lawyer said gestured to his iPhone – “that allow us to be contacted at any time of the day; how has this been beneficial to clients? It’s profited the law firms immensely; I’m not so sure that the clients have benefited from it.”
This, in turn, drives behaviour towards trying to establish values in different ways, one lawyer commented, saying the conversation has been moved past availability of lawyers to quality of work.
Sponsor’s comment: One size doesn’t fit all: balancing transatlantic trends with local knowledge
It was a privilege for Paul Hastings to host the second roundtable discussion on transatlantic finance trends. We were very grateful to our panellists for braving the early morning February cold and providing their valuable contributions and insights.
The opportunity to revisit the themes from the first roundtable and, at the same time, dive into the research survey results provided by The Lawyer prompted a fascinating, thought-provoking and refreshingly candid discussion all round.
The strong consensus was that the acquisition finance landscape has fundamentally changed over the last decade or so, with the continued convergence of US and European markets, and the much greater variety of debt products and funding sources profoundly influencing deal structures and terms.
Clear from the discussion was that clients expect their lawyers to navigate these broader market trends in a way that recognises and accounts for the specific regulatory and legal environment relevant to their deals. Terms and structures may indeed cross borders and influence deals, but clients want to ensure they are properly adapted to work under local laws – particularly in the downside context.
Of course, what we didn’t know a few month ago at the time of the roundtable would be the devastating social and economic fallout from the COVID-19 pandemic. The crisis has highlighted even more the importance of local expertise, as lawyers guide their clients through such vital measures as government loan programmes, payroll subsidy schemes and changes in insolvency laws on one hand, and complex credit agreement covenants and sensitive debtor/creditor discussions on the other.
One size doesn’t fit all in the more globalised transactional finance world. Our panellists wholeheartedly agreed then that convergence has to be “lawyered” competently (and seamlessly) by teams of legal professionals that are adept across markets, products and jurisdictions, delivering quality work. It’s clear now that these teams are best placed to lead clients through the deal lifecycle and to also guide them through any economic, social or other unexpected macro shocks that may arise down the line.
Of course, no discussion relating to the law would be complete without touching on the thorny issue of professional fees. There was a much welcomed diversity of opinion on this issue, including on the potential role legal technology could play in driving efficiency (with some more unconvinced than others!). Many panellists reiterated that the quality of work remained the overriding concern, particularly on more complicated acquisition financings, and that teams ought to be structured appropriately to manage that deal complexity.
Luke McDougall, partner, Paul Hastings, London