Banks continue to be the subject of vigorous and stringent regulation. Tasked with cutting their loan books and longer term liabilities, banks’ corporate lending has declined. Despite this, banking and finance remains an active sector for law firms. M&A and high-value loan transactions are still prominent, while panel spots are continually up for grabs.
Lawyer Market Intelligence (LMI) data has identified the biggest deals that occurred in the sector in 2015, together with important trends and latest developments in banking litigation.
The biggest deals
Allen & Overy (A&O) led the way in the banking and finance sector in 2015. According to LMI data, along with advising on some of the biggest deals the firm had one of the largest rosters in the sector, with clients including Bank of America Merrill Lynch, Barclays, JP Morgan, the London Stock Exchange Group and RBS.
Last year A&O acted on the largest commercial loan in the history of the global loan markets, advising a consortium of banks comprising Bank of America Merrill Lynch, Bank of Tokyo-Mitsubishi, Barclays, BNP Paribas, Deutsche Bank and Santander on a $75bn (£53bn) syndicated loan to brewer AB InBev for its $100bn bid for drinks manufacture SABMiller. London-based partners Nicholas Clark and Frederic Demeulenaere led on the transaction.
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In May A&O won a top spot on the financing aspects of the UK Government’s £13bn asset mortgage portfolio sale to Cerberus Capital Management alongside Slaughter and May, Hogan Lovells and Linklaters. A&O finance partner Salim Nathoo led the team alongside banking partners Trevor Borthwick and Ian Powell.
Slaughter and May partners Guy O’Keefe and Craig Cleaver represented holding company UK Asset Resolution on the transaction while Hogan Lovells partners John Allison, Jon Chertkow and Rachel Kent advised TSB Bank, which acquired £3.3bn of the debt from Cerberus.
Linklaters advised Cerberus on the transaction led by finance partner Adam Fogarty and corporate partner Tracey Lochhead.
Fellow magic circle firm Clifford Chance was active as usual in 2015. One of the firm’s biggest deals was advising Siemens in the issuing of a $7.75bn bond, with partner Sebastian Maerker advising on German law and George Hacket advising on US law.
In February the firm also advised Goldman Sachs and UBS in the provision of a €900m (£706m) bridging facility, led by banking and finance partner Alexandra Hagelüken. The firm, led by partner Angela Chan, also advised the China Construction Bank on its issuance of preference shares worth $3bn. LMI shows that 3i Group, the Asian Development Bank and Citigroup all turned to Clifford Chance for external advice in 2015.
Outside the magic circle White & Case and Norton Rose Fulbright were the most active firms in the UK. The former was appointed to Deutsche Bank’s legal panel in June 2015 and Frankfurt-based partner Gernot Wagner advised it on the provision of a €1.5bn financial package to Centerbridge Capital Partners for its leveraged buyout of wind turbine company Senvion.
White & Case also acted as external adviser to a number of large banking and finance entities including Bank of China, Credit Suisse, Morgan Stanley and Santander.
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Meanwhile, Norton Rose, with a roster of clients including Deutsche Bank, Goldman Sachs, HSBC, the Royal Bank of Canada and Standard Chartered, advised on a number of high-value and cross-border transactions.
Among the firm’s biggest deals in 2015 was a $1bn project financing for the second stage of the Shah Deniz gas development project in Azerbaijan. Norton Rose partner Charles Whitney instructed a consortium of international financial institutions on the deal, including the Asian Development Bank.
In Asia the firm, led by Singapore-based partner Stephen Begley, advised a consortium led by Malayan Banking Berhad on the £494.9m refinancing of facilities for the Jurong Island power generation project.
Trends
Despite a general decline in corporate lending transactions among UK banks LMI data indicates a comparative rise in a new crop of financial transactions – Islamic financing in particular. Active clients include the European Islamic Investment Bank, the Islamic Development Bank and Qatar Islamic Bank.
In July 2015 Linklaters partner Neil Miller advised the UK Government on its first-ever Sukuk issue, an Islamic bond. This was the first such bond to be issued outside the Islamic world in a move intended to cement the UK’s position as the Western hub of Islamic finance.
“The rise of the alternative lenders means law firms have had to expand their client relationships”
The rise in Islamic finance has sparked an increase in activity in the Middle East, with a number of big firms establishing offices in the region. Among Islamic financing deals in 2015 was the Islamic Development Bank’s record issuance of $1.5bn. Norton Rose advised on the transaction led by the firm’s head of Islamic finance Mohammed Paracha alongside London-based capital markets partner Tak Matsuda.
LMI data also shows that acquisition financing continued to make up a considerable bulk of banking and finance transactions in 2015, with Barclays, Fidelity International, HSBC and Lloyds Banking Group the most active players. One of the biggest acquisition financing deals of the year saw HSBC issue a $9bn loan for investment holding company Hutchison Whampoa’s $15bn acquisition of cellphone operator 02 from Spain’s Telefonica.
The liquidity gap
Meanwhile, the combination of tighter regulation and a lower appetite for risk has seen major banks lend less where they once lent plenty. At the same time, driven by increasing M&A activity, obtaining finance has become a necessity. The result has been the rise of alternative lenders willing to take a risk and exploit the expanding liquidity gap. Banks, it would seem, have become selective and specific in their lending while alternative lenders have become more flexible and progressive.
Data gathered by LMI shows the most active form of alternative lending is real estate financing. The market, once dominated by big banks, has a seen a rapid rise in lending from non-banks, insurance companies and private equity investors active in their desire to fill the void and grasp the opportunity of high-value returns.
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Aviva and Allianz were particularly active in real estate financing in 2015. The former provided a £1bn loan facility to Criterion to secure a portfolio of 16 properties including the landmark Trocadero Centre and Criterion Theatre in London. In March the insurer also provided a £130m 15-year loan to property investment company Shaftesbury. Previously, in 2014, it had provided a loan to Kennedy Wilson Europe Real Estate to buy 180 UK property assets. Berwin Leighton Paisner head of real estate finance Naveen Vijh advised Aviva on the deal.
Allianz turned to CMS Cameron McKenna’s Berlin-based equity partner Volker Zerr for a €133m loan facility secured against the Marineda shopping centre in Spain, its first financing transaction in the country. Zerr also advised the insurer as it took over the financing of the Alsterarkaden retail complex in Hamburg.
The rise of alternative lenders means law firms have had to expand their client relationships. Gone are the days when firms worked exclusively for the big banks and panel places for major banks are now no longer adequate work pipelines. Incorporating alternative lenders as part of the client base is now a necessity.
Litigation
Together with stricter regulation, the banking and finance sector is subject to litigation and rising related costs. The rigging of foreign exchange markets, interest rate mis-selling and, specifically in the UK, the mis-selling of PPI have been the most litigated issues.
LMI data shows that the most litigated UK banks since 2012 have been RBS and Barclays. The former is the subject of a continuing £4bn litigation from shareholders over its 2008 rights issue, incurring costs of £90m from its external adviser Herbert Smith Freehills.
Meanwhile, Clifford Chance and Sullivan & Cromwell advised Barclays on a foreign exchange manipulation penalty fine of $2.3bn.
Clifford Chance, which was appointed to the bank’s panel in 2013, has advised it on numerous cases including interest rate mis-selling related to Libor manipulation. LMI data shows that Barclays has also turned to Baker & McKenzie for litigation advice.
In October Barclays and RBS, together with BNP Paribas, Goldman Sachs and HSBC, agreed to pay £900m in settlements to US regulators over foreign exchange rigging. A&O, Cleary Gottlieb Steen & Hamilton, Davis Polk & Wardwell, Locke Lord and Sullivan & Cromwell all won leading roles.
The panels
In-house changes leave question marks over longstanding relationships
Part of the banking and finance sector’s response to the economic crisis has been the restructuring of its legal panels. The result has been a hotbed of roster review activity and an increase in competition for spots.
The sector continues to bear the scars of the global crisis and financial transactions are increasingly closely scrutinised as a result. Firms are now faced with banks and financial institutions that are undertaking panel reviews with more stringency and selectivity, while increasing their demands in terms of cost and quality.
The biggest review
Data collected by The Lawyer Market Intelligence (LMI) shows that Barclays launched one of the biggest reviews of external advisers in the sector in February 2016, two years after the bank cut its global panel by 30 per cent. Its present global panel, due to expire this summer, consists of 17 external advisers including Allen & Overy (A&O), Clifford Chance, DLA Piper, Eversheds, Hogan Lovells and Linklaters. Outside this roster LMI data shows that Dentons, Latham & Watkins, Pinsent Masons and White & Case all provide the bank with additional advice.
The review of the global panel comes after the bank made a substantial number of in-house changes in 2015. In February the bank appointed former Gibson Dunn & Crutcher partner Mark Shelton as its investment banking division global general counsel and regional general counsel for the Americas. A month later Erica Handling left her position as the bank’s general counsel for EMEA investment after four years and was replaced by Victoria Hardy.
In-house changes continued into June 2015 as the bank’s deputy general counsel Michael Shaw left and was replaced by Simon Croxford as general counsel for the Group Centre Legal team. Shaw was closely followed by risk and regulatory compliance head Nick Kynoch, who left to take up the position as general counsel of New Zealand’s Financial Markets Authority.
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In-house changes also sparked panel reviews at other banks in 2015, although RBS delayed a review of its legal panel following the resignation of general counsel John Collins, who joined Santander UK as director of legal, compliance and regulatory affairs. The review was finalised just a month later, with Clifford Chance, Linklaters, A&O and Herbert Smith Freehills (HSF) all retaining their spots on the Tier One panel, which will run for the next three years.
With an average lifespan of two years, the increasing regularity of reviews has led to law firm wins and losses. In October 2015 HSF won a place on Standard Chartered’s global legal panel for the first time following a review headed up by the bank’s senior group legal counsel James Denham. The firm joined existing advisers A&O, Baker & McKenzie, Clifford Chance, Hogan Lovells, Linklaters and Slaughter and May. The review followed the appointment of Duncan Wales as deputy general counsel from ICAP.
Meanwhile, Lloyds Banking Group undertook a review of its panel in October 2014 under former general counsel Andrew Whitaker. A&O, Addleshaw Goddard, Ashurst, CMS Cameron McKenna, DLA Piper, Eversheds, Hogan Lovells, HSF, Linklaters and Norton Rose Fulbright all secured places, with the next review due to take place in August 2016.
In April 2015 the bank promoted its former deputy general counsel and Linklaters corporate partner Kate Cheetham to general counsel. In the same month the bank announced a series of in-house redundancies resulting in the cull of its litigation teams in Hove and Cockfosters. Among other in-house changes the bank appointed former Barclays corporate banking head of legal Joanna Carver as general counsel for commercial banking in July 2015.
OneSavings Bank also held a preliminary review in 2015. In March the bank revealed a 12-strong inaugural panel, choosing Addleshaw Goddard, Ashurst, Bedell Cristin, Clifford Chance, Eversheds, King & Wood Mallesons, Mourant Ozannes, Rosling King, Squire Patton Boggs, Shoosmiths, Shakespeares and Travers Smith.
LMI data indicates that OneSavings Bank is set to undertake a full review of its panel in 2016, as are Deutsche Bank, Lloyds, Société Générale and Standard Chartered. Clydesdale Bank, meanwhile, is expected to review its national panel in June 2017 while Nationwide is set to review its general panel in December 2017.
“The increasing prevalence of in-house changes in the sector may threaten longstanding relationships”
According to LMI data, Aviva and RBS have the largest number of banking and finance external advisers (31) while Aberdeen Asset Management, Barclays, HSBC and Lloyds all seek advice from more than 20 firms. The majority of the most active banking and financial institutions turn to at least one magic circle firm, all of which continually retain their panel positions upon review. Despite this, magic circle firms do not have a guaranteed place on all banking panels, with US and international firms gaining prominence in the past few years.
If firms want to continue to retain and win panel positions they must not only build on existing client relationships or form new ones, but also demonstrate a consistent portfolio of complex, high-risk, problematic transactions.
The increasing prevalence of in-house changes in the sector may threaten longstanding relationships and, while some new in-house appointments will look to maintain the status quo, others will adopt a more neutral stance in panel selection.
According to LMI data, banks and financial institutions also have the largest in-house teams across any legal sector. However, as the banks set aside billions for litigation, their natural response is to cut these costs and one result may be the restructuring of their in-house teams.
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The private practice perspective
By Rachel Moloney
It’s stressful, it’s lengthy and the benefits are more elusive than ever. So why do firms still fight for bank panel spots?
Complicated”, “aggressive” and “no upside” – that is how one banking partner describes banking panels. In spite of this, winning or maintaining a place on the roster is still considered a must and firms are unwilling to loosen their grip.
One of the most important reasons for investing the time in getting on – and staying on – banking panels is their supposed profitability. Although most banks have countless firms on their rosters, partners say it is worth it if enough time is spent on the relationship.
“Bank panels can be profitable but you have to look at the relationship of the firm as a whole,” says one finance partner. “It can provide a good revenue stream if you show you’re valuable.”
This means having regular meetings with the client, which tends to mean a combination of the bank’s senior leadership team and the procurement group. Like many other areas, the financial sector has seen a rise in procurement in recent years, with teams increasingly involved in the panel selection process.
A steeper curve
“The rise of procurement has been going on for many years, but it’s becoming more obvious,” says one banking partner. “Lawyers are receding into the background as procurement teams can drive a harder financial deal. The curve is steepening.”
However, the ability to drive a harder financial bargain has led some lawyers to describe the whole process as “aggressive” and they have removed themselves from pitches altogether.
“The purchasing people are driving down the price, which is having an impact on what people choose to do,” says one partner. “At the start of the millennium the top leveraged finance lawyers acted for the banks and not the sponsors, but now it’s the other way round. People are moving over to the sponsor side.”
One of the issues for law firm partners handling the relationship is said to be the pressure of agreeing pass-through or bulk discounts. In the meantime, the banks are looking for rebates of a certain percentage which they can then spend on something else at the end of the year.
“At the start of the millennium the top leveraged finance lawyers acted for the banks and not the sponsors, but now it’s the other way round”
“Agreeing pass-through and bulk discounts can be complicated,” says a source. “We could say to someone, if we bill £2m the bank gets a certain discount. But we might also have a deal with someone else where we give a 5 per cent discount. You can’t give anyone better terms. One could say we’ve breached the terms and owe them money.”
Being aware of the firm’s existing panel arrangements while agreeing new ones is said to be one of the biggest challenges for partners dealing with bank relationships.
“To do it properly takes up a vast amount of your time,” says one partner, “and if you muck up it’s your fault.”
But ensuring you meet the hard financial terms is just part of it, with banks well known for issuing 100-page requests for tender (RFT) to be completed by the firm over a period of months. Now these RFTs are said to be getting shorter, with in-house teams instead looking for “shorter, punchier” explanations.
“They said they don’t read all of it and that they just look at four key boxes on the form,” says one partner. “This is quite irritating after spending months putting together the document, but they’ve now shrunk it to the things that they really care about.”
What do banks care about?
So what do the banks care about? Obviously, pricing is a major issue and continues to be one of the main points of contention when it comes to appointing panel firms. Last year RBS launched a review of its transactions panel, with the 50 firms on its roster asked to freeze their legal fees for the next five years.
Meanwhile, HSBC has revealed that its legal spend jumped by $500m (£350m) in 2015 as a result of litigation and investigations.
In the past few years the banks have been the subject of multiple investigations, with scandals involving foreign exchange and Libor rigging. The Financial Conduct Authority has imposed multimillion-pound fines on institutions for failing to control practices in their foreign exchange businesses, while penalties have also been issued for Libor misconduct.
As a result, some partners involved in the process say banks have become more focused on ethical issues of late, and are making more of an effort to ensure their panel firms live up to their expectations.
“They’ve long asked about female partner numbers but now they’re asking about what you do generally and what you can offer on joint corporate social responsibility [CSR] opportunities,” says one partner. “The large banks continue to be state-owned but they’ve been naughty in the past. They’re having to be conscious of values within their organisation.”
For many lawyers, making it onto the roster in the first place is no easy feat, and that’s only the start. But if, alongside the routine legal work, investments are made in things such as CSR initiatives, secondment arrangements and internal presentations, it can all be worth it.