With the world rocked by economic crisis, and new trade deals sinking with the rest of the financial ship, how are the lawyers charged with making deals watertight coping?
Is the surge in litigation and restructuring enough to make up for the shortfall in new business for trade and commodity lawyers? Helen Castell finds out.
If you took a year from October 2007 to September 2008, that would be the busiest year we’ve probably ever had,” says Geoffrey Wynne, partner – head of international trade and export finance, at Denton Wilde Sapte (DWS) in London. “New business then almost fell off a cliff.”
Since then, restructuring work has increased and new business has started to come back, albeit patchily, he says. “It’s from established relationships dotted around emerging markets – in the CIS, a bit in the Far East, a bit in Africa, and an increasing amount in South America, particularly Brazil.”
While previously, a poor economic climate has helped trade finance – as it is a traditional and secure method of financing – “this time round, we’ve got an economic downturn, but we’ve got this problem of liquidity, that we didn’t have in the last recession in the early 1990s”, says David Lacey, partner – finance group, at Stephenson Harwood in London.
Now, “while trade finance is more attractive, because it’s seen as safer lending, you still have the problem of finding a bank who’ll lend you the money”.
Many of today’s deals are much smaller than in the days of US$3bn Rosneft financings, Wynne notes. Meanwhile, credit committee resistance is forcing banks to miss out on business from new borrowers, some of which “could prove the salvation of a lot of banks”, despite their lack of borrowing track record.
“We can point at umpteen opportunities. But do you drop down to second-tier producers in emerging markets? If you’re prepared to do that, there are lots of them around,” Wynne remarks.
In Ukraine, the economy has taken a heavy toll during the financial crisis. “We are less busy, but we are not facing a sharp shortage of work or clients,” says Tatyana Slipachuk, partner – international trade and international arbitration practices, at Vasil Kisil & Partners in Kiev.
Most of the firm’s workload is now connected with restructuring, while the number of litigation and arbitration cases has “rocketed”. A surge in bankruptcy proceedings will likely follow, Slipachuk predicts.
Bad times do, of course, see an upsurge in litigation and arbitration, and the complexity of such cases can prove very lucrative for law firms.
While new business in the export trade insurance market has in recent months largely dried up for existing credit or political risk policies, “there’s a significant increase in the number of enquiries being made in connection with claims”, says Peter Flint, partner – head of international arbitration at Barlow Lyde & Gilbert (BLG) in London.
Claims are on the up
The volume of enquiries from trade and political risk insurers on coverage issues is set to increase, as is the call for specialist assistance in working with underwriters in pursuing subrogated recoveries – both under the assureds’ contracts and under bilateral investment treaties and similar instruments, Flint adds.
The increase in claims has political as well as commercial causes, says Flint. Governments in emerging markets increasingly want to appeal to nationalist sentiment, particularly ahead of elections, and “one of the easiest ways of doing that – we’ve seen a lot of this in South America and West Africa – is to pick on foreign companies who might be seen as exploiting the natural resources of a developing country, and just to kick them out”.
BLG is currently supporting Australian clients in such a case against the Gambian government, where the disagreement may ultimately have to be resolved by the International Centre for Settlement of Investment Disputes (ICSID).
Another example is Nigeria, where South Korea’s national oil company KNOC is in court against the government following the cancellation in January of its oil and gas development licences there.
The collapse in commodity markets has also made already tenuous operations in often unstable environments commercially unviable, forcing the exit of foreign development from some countries.
Chinese companies that invested hugely in copper smelting in the Democratic Republic of Congo for example “have effectively had to just pack their bags and go home”, Flint says.
Ukraine is one country where the global financial crisis has taken a particularly firm grip, and this has created a “litigation and bankruptcy boom”, says Vyacheslav Korchev, managing partner at Integrites in Kiev.
BLG has also advised in connection with termination by the Ukrainian government of a licence the previous administration had granted to US oil explorer Vanco for development of the deepwater Prykashenka shelf deposits.
“That gave rise to a number of interesting questions on challenges to the validity of the original licence application as a ground for terminating the licence,” says Flint. “And then a whole host of very complex issues relating to the question of how you calculate damages under those circumstances where a long-term exploration and development contract, the viability of which is largely untested, has been unilaterally terminated.”
“We are as busy as we were last year, but the scope of the work has substantially changed,” says Christian de Lima Ramos, partner at Ramos e Zuanon Advogados in Sao Paolo. Although new deal flow in Brazil has been very slow, a slew of high-profile corporate failures has created more bankruptcy, litigation and restructuring work for law firms, he notes.
Meanwhile, the volume of restructuring work has grown some 50% in recent months at Gide Loyrette Nouel London, says partner Christopher Czarnocki. A year ago, “we were doing considerably less financial ‘restructuring’ work”.
“There’s been a massive shift from new money deals to restructurings and waivers,” agrees Mirthe van Kesteren, partner at Linklaters in London. “The pipeline deals that are out there look promising and the prospect of some high-profile jumbo deals is very exciting, but banks are having tremendous difficulty getting them syndicated.”
Lack of experience
The shift in workload has, however, revealed some talent gaps among law firms.
“People who’ve only been in the business 10, 12 years, don’t actually have any insolvency experience,” says Lacey. “So old grey-haired guys like me get dragged out, because we actually remember what it was like when people went broke. That kind of knowledge is suddenly fashionable again.”
“The first time a restructuring happens [young lawyers] look at you like rabbits in a headlamp,” comments Wynne.
However, “if you’ve got experienced lawyers who know what they’re doing … you can turn your young fledglings into hard professionals quite quickly”.
“Experience of having worked through a previous downturn can help more established lawyers,” agrees Charles Williams, partner at Thomas Cooper in London. “Lawyers who were around in the early 1990s know what they’re dealing with. They’ve been this way before.”
The law firms that do well in the current crisis will be those with the flexibility to tap demand for new and changing services, says Integrites’ Korchev.
As well as setting up a new debt restructuring department and actively hiring lawyers to staff it, Integrites has in recent years beefed up its team that deals with mergers and acquisitions, says Korchev. Although several M&A transactions are currently on hold while would-be buyers wait for prices to fall, this year is expected to produce a flurry of deals as commodities players acquire distressed projects on the cheap, he says.
Integrites is also somewhat cushioned from Ukraine’s own banking crisis in that around 70% of its clients are foreign, many of them being ECAs, he adds.
The company works with most Berne Union members, as well as exporters to Ukraine and local importers. Its services are a hybrid of legal counsel and financial analysis, as it estimates the risks associated with deals and counterparties, and helps to create financial models to minimise them, Korchev says.
Law firms that have historically focused on smaller bilateral deals may be “a little more shielded” as their key banking clients continue to do business, albeit more slowly, says Linklaters’ van Kesteren.
Over the past year, banks have traditionally been quite happy to use smaller firms for new money trade finance work, however van Kesteren argues that when it comes to restructuring – and their investment is on the line – there has been this flight towards the most highly regarded law firms.
“Most lawyers can find their way through an LMA [loan market association] document. But when it comes to restructuring, it often involves out-of-the-box thinking and structuring and analysis,” she argues.
Niche firms with specialist experience of trade also have a unique contribution to make, Thomas Cooper’s Williams argues.
“Trade finance is taking security on real goods. Where there is a problem, those people with a hands-on approach are more likely to find solutions,” he says.
“Somebody who’s put a hard hat on and walked down a pipeline or into a warehouse has an actual appreciation of how goods are handled.”
Improved income for lawyers?
A shift to more complex cases has increased law firms’ fee income, says Ramos from Ramos e Zuanon Advogados. “Each renegotiation is unique. But it’s very difficult to anticipate the number of hours that will be spent.”
Such work therefore “often ends up being a tad more profitable than the normal deals where you had to start from the outset with a fee cap”.
This “key change” towards litigation, however, increases the number of law firms that Ramos e Zuanon now has to compete with, he notes.
“Because of the unpredictable nature of any financial restructuring, it could be over in a month’s time, assuming there is an urgency and a coming together of minds, or you could still be sitting around the negotiating table going over the finer points six months from now,” agrees Czarnocki at Gide Loyrette Nouel London.
With new money deals, banks are almost invariably instructed by clients to shop around for the cheapest quotes, and price is a key factor in law firm selection.
And while still sensitive to costs that ultimately have to be passed on to financially stretched clients, “banks really value good quality legal advice in stressed or distressed situations”.
“If you’re a bank dealing with a company that’s in trouble, if it all goes down, you stand to lose millions. So having good advice now – there’s actually a value to it,” says Lacey. “And if you’re getting advice as a director, you really care that the guy you’re talking to knows what he’s doing because that’s your neck on the line now.”
Regulatory issues: controlling the markets
With the chaos caused by the global financial crisis, governments across the globe are calling for tighter regulation of financial markets, including trade. This has brought issues with the Basel II charter to the forefront again.
“We sorely need a greater recognition of structure,” says DWS’s Wynne. “Because under Basel II it’s still quite difficult to get within the specialised finance exemption.”
Basel II “should be blazing the trail that says ‘yes, if you’ve structured, we’re no longer going to say you must have immediate access to a commodity’. As long as your structure is there, then we will allow you better capital adequacy treatment”.
Developments specific to Ukraine include the ongoing regulation of the country’s debt collection practices, says Integrites’ Korchev. “I think it will improve the payment behaviour of Ukrainian customers.”
Banks in Ukraine have also in recent months become obliged to extend credit agreements for agricultural producers without interest rate increase, revaluation of pledge or any additional commissions and payments, notes Slipachuk at Vasil Kisil & Partners. Until January 2011, imports of products using energy-saving technology have also been exempted from import duty and VAT.
In Brazil, pledges of commodities are now, wherever possible, being substituted by CDAs (agricultural certificates of deposit) and WAs (agricultural warrants), “which was something that we were advocating for years”, says Ramos. “So we’re happy to see that.”
New players in the market
Litigation, restructuring and regulatory change are not, of course, the only areas of trade work that are doing well, with new players, ECAs and more ‘difficult’ geographical regions all keeping law firms busy.
“When you have some alternative to a bank stepping in and doing work that banks have traditionally done – that suggests there are signs of life there,” says Celia Gardiner, partner at Watson Farley & Williams in London. Those large trading houses that have remained strong are continuing to finance trade and commodity deals, she notes.
She explains that now banks will often be happy to bank the trading house but not the producer. In these situations, this is where the trader comes in and provides a pre-payment structure or some other deal that provides liquidity to the producer.
The current crisis will create a new order of banks in trade finance, with new players – especially from markets like South Africa – already waiting in the wings, says DWS’s Wynne.
And while last year’s poor commodities performance has forced some financiers to pull out of this arena, the sale of their booked assets has created an opportunity for others to enter.
“Where we have been busy is with development finance institutions (DFIs), ECA and multilateral-backed deals,” says James Willcock, solicitor at DLA Piper in London. “We’re seeing a lot more activity from them.”
The firm did a large ECA-backed deal in Tanzania before Christmas and was recently instructed on a related deal from a German DFI, also in Africa.
This trend should increase given commitments made at the April G-20 meeting to provide an extra US$250bn in funding over the next two years to trade finance, and indications that US$200bn of this will come through ECAs, he notes.
Working on ECA and DFI-backed deals can also be more complex than commercial-only transactions, says Willcock, especially when they have environmental or social policies written into their charters.
“There can be additional requirements whereby ECAs or DFIs, because of the way their constitutions work, must as a condition of funding have rights to be able to enforce upon certain policy events.”
Stephenson Harwood’s Lacey also observes: “We’ve certainly seen a growing interest in invoice discounting, which is no longer seen as the finance of last resort.”
And with Gulf banks now holding a comparatively bigger proportion of what liquidity there is in the market – and western borrowers being more prepared to take finance in whatever structure they can – Islamic finance deals are finally starting to get completed, Lacey says. This opens up opportunities for lawyers, who are being asked to talk through risk structures that borrowers may be unfamiliar with, he notes.
“Oil-based deals are proving somewhat easier to finance than metal deals,” notwithstanding recent further drops in oil prices, says Gide Loyrette Nouel London’s Czarnocki. Oil, with its perceived transparency compared with metals, is easier to hedge, while metals prices are more vulnerable to geographical effects, he explains.
African telecoms are producing a healthy stream of deals, largely because of the continent’s under-developed fixed-line networks. “We’ve done a lot of work in West Africa on telecoms financings,” says Michael Kenny, partner at Watson Farley & Williams in London.
“We did a very large financing in Nigeria, we’ve done one in Guinea, and I’m currently working on another large financing in Ghana.”
Because of a perception that Africa has been less affected by the global financial crisis, many law firms are starting to focus more on the region – and this benefits lawyers who are already specialists, says Willcock.
In Africa, it is especially important to understand not just the laws and regulations of each jurisdiction but the practicalities in terms of enforcement and registration of documentation, he argues. Strong relationships with local lawyers are also key to gaining that understanding.
“Just because you’ve got a security document or you’ve registered a security doesn’t necessarily mean that when it comes to enforcement you’re going to be in the position that you think,” Willcock notes.
A perceived thawing of relations between the west and some of the world’s most difficult markets could indeed open new opportunities for trade finance lawyers.
With US President Barack Obama making conciliatory noises towards countries such as Cuba and Iran – which, because of their very disconnectedness from world trade, have escaped some of the banking crisis’s worst effects – this could produce new deal flow while other markets take longer to recover, observes Kenny from WFW.
That said, Iranian sanctions and associated problems with letters of credit are throwing up some interesting work for Thomas Cooper, says Williams. “Even if a ship is not listed, then certain banks won’t touch bills of lading for the cargo if that ship is Iranian,” he notes. “This makes life difficult – but it’s just part of the new world we have to live in.”
However, despite these emerging opportunities, and the chance for lawyers to pick up extra fees through increased restructuring work, most in the profession are lacking in optimism. It looks like 2009 will be marked by a high number of deals going wrong.
“It will be a bleak, cold year,” predicts Stephenson Harwood’s Lacey. And the fact that a number of high profile law firms have slashed sections of their finance teams so heavily means others share this view, he argues. “You don’t do that unless you’ve taken a five-year view that that market is just gone.”
Other lawyers are a little more upbeat. “As well as a continuation of restructurings, litigations and the odd new deal, Brazilian lawyers can expect some more M&A work through this year, as an anticipated wave of consolidation kicks off,” Ramos says. And within this, private equity players “are going to strike big”, he predicts.
Linklaters’ van Kesteren adds: “Although we are seeing some large new money deals in Russia and we might start seeing some more new money deals in new jurisdictions in the second half of the year, I’m not optimistic that things generally are going to start moving in a big way this year.”
Gide Loyrette’s Czarnocki adds: “I would expect for us to continue to be engaged in financial restructuring, or renegotiation of existing deals, for several months to come. We’ve obviously seen some deals go bad – clearly we’ll see others.
“Do I expect new deals to start coming down the pipeline with a greater frequency than they are at the moment? Yes I do. Do I really expect that before the end of this year? Probably not.”
Who’s the best law firm in trade finance?
GTR has received and counted votes by email for its annual readers’ poll of the best trade finance law firms 2009. Rankings are based on which firm/s received the most votes.
We asks voters which law firm/s they thought is/are the best in the trade finance market, both from a contentious and non-contentious viewpoint.
1. Denton Wilde Sapte
3. Reed Smith
4. Stephenson Harwood
5. Clifford Chance
6. White & Case
7. DLA Piper
8. Thomas Cooper
9. Norton Rose
10. Ince & Co
11. Clyde & Co
14. Sullivan and Worcester
16. Watson Farley & Williams
17. Gide Loyrette Nouel
19. Chadbourne & Parke
20. Baker & McKenzie
(Also mentioned: Allen & Overy, Ashurst, Salans, Debevoise and Plimpton, Hammonds, Schulte Roth & Zabel, Cleary Gottlieb, Milbank Tweed,
Simmons & Simmons)