Who’s Who Legal brings together Ulrike Naumann of Bowman Gilfillan, Phillip Cornwell of Allens and Hamish Masson of Harney Westwood & Riegels to discuss issues facing banking lawyers and their clients in the sector today.
Ulrike Naumann: We have seen an uptick in leveraged finance deals relating to private equity buyouts of medium-sized, privately owned businesses. In the metals and mining industries we have seen an increase in disposals and acquisitions as a result of the depressed commodity prices creating opportunities for some players in that market. The low commodity prices have also resulted in more debt restructurings and work-out negotiations with creditors.
Phillip Cornwell: In Australia, 2015 has been another big year for infrastructure, with a steady flow of both PPPs and toll roads (old and new), as well as some major privatisation transactions in the energy sector. My firm Allens has been in the thick of things, working with the Commonwealth Department of Infrastructure on their innovative A$2 billion concessional loan for the funding of stage two of the WestConnex Tollroad in Sydney NSW. This transaction is important, as it shows you really never can say never. Although banks and equity investors alike have been burned by past greenfield toll road transactions where the traffic fell well short of projections, this greenfields patronage risk project looks like being well banked.
The NSW Poles and Wires privatisation, where Allens is advising the NSW state government, has garnered a lot of interest and is slated to help generate $20 billion, which will be reinvested in funding new infrastructure.
In resources and energy, most action has been in M&A, workouts and capital raisings rather than new projects. However the improved political climate for renewable energy is having an impact, and this is likely to be a busy sector.
Private equity is active but the deal flow is still a little subdued.
Hamish Masson: In the BVI we have seen a general increase in financing activity in 2015 and deal flow was certainly up from previous years. Specifically we have seen growth in UK commercial real estate, commodity and trade finance (mainly from non-bank lenders), mining and the sales of non-performing loans.
I think that there are a number of reasons for the uptake. Banks are no longer funding underperforming firms to keep them afloat and seem to have decided that the market is right for them to cut their losses and get a best price for these assets. Lenders who have been looking for safe returns since the financial crisis are now lending again (although we seem to have been saying that since about 2010). The activity in the mining sector appears to have been driven by low commodity prices and no foreseeable increase in those commodity prices; certainly, the terms of commodity sales/financing seem more purchaser/lender-friendly. Finally, investors are looking for alternatives to the global stock markets whose recent run of constant returns has come to a temporary end.
Ulrike Naumann: South Africa has leapfrogged many more developed countries which have greater physical infrastructure for retail banking, and as a result, there is a thriving internet banking industry in South Africa. The insurers have also innovated in this space and are offering many products via mobile applications or other forms of internet service. This has resulted in an increased workflow in the areas of financial regulatory law and consumer protection.
Phillip Cornwell: Yes most certainly. This is a major focus for both the banks and the new peer-to-peer lending platforms. The new Australian prime minister has stressed the need to embrace innovation, and I think the Australian financial services sector is ahead of him in this respect. Australia has well and truly embraced the growth and opportunity of “fintech”. Sydney and Melbourne are recognised as leading global fintech hubs and are home to many exciting and innovative fintech startups. At Allens we have seen tremendous growth in both enterprise and consumer fintech offerings, with a number of our established clients also exploring the fintech space. And earlier this year my firm Allens established a fintech-focused innovation hub, dubbed Accelerate, to help foster start-ups and emerging tech companies, and we are a founding partner of Sydney’s fintech hub, Stone & Chalk.
The high speeds, low costs and information accessibility benefits of the internet mean that fintech presents both opportunities and challenges for consumers, businesses and regulators as they adjust to the new paradigm. Law firms that understand and are excited about these opportunities and challenges are best placed to help shape this brave new financial world.
Hamish Masson: We are seeing more regulatory queries from onshore internet financial service providers wishing to offer their services to BVI companies, and local commercial law is well set up for BVI companies conducting business over the internet. However almost all of the financings involving BVI companies are provided by international banks and financial institutions based outside the BVI and so unless we see dramatic and fundamental change to the BVI’s financial services, then the growth of the provision of internet financial services is unlikely to be driven by the BVI.
Ulrike Naumann: South Africa has not been directly affected by the Greek financial crisis.
Phillip Cornwell: This has triggered large falls on the stock exchange and in bond markets but in the world of corporate finance the Greek crisis has had relatively little impact – mainly just prompting Australian banking firms to check and adjust their precedent loan and hedge documents to allow for the possible unwinding of the euro or the introduction of capital controls. Although we have seen a round of capital-raising transactions for the major banks, these are really an outcome of tighter capital rules imposed following the Global Financial Crisis (GFC), rather than the Greek crisis.
Hamish Masson: BVI companies are used across the globe, and as such our practice is very diverse geographically; so the Greek financial crisis has had limited impact on Harneys’ BVI banking and finance department. We did see a downturn in ship finance transactions involving Greek lenders, but not in overall ship finance transactions and the void left by the Greeks has been more than filled by UK, European and Asian lenders. The banking crisis in Cyprus was a major development for my colleagues in Harneys’ Cyprus office, and Harneys created a dedicated team in March 2013 to advise clients on legal issues arising from those events. In April 2015 the final banking restrictions were abolished and Cyprus is officially predicted to be out of recession in Q1 of 2016. BVI/Cyprus deals have always been very popular and we are starting to see the deal volumes increase, although there is still some way to go before they return to pre-crisis levels.
Ulrike Naumann: South Africa has seen an influx of international firms into the legal services market. Many of these firms at this stage have a niche offering focusing mostly on banking and finance in South Africa and on the rest of the African continent, resulting in increased competition with the larger more established firms in these practice areas. We will continue to see top-tier South African firms playing a significant role in the South African and African legal market, although the number of firms considered top-tier may reduce from five to around three firms.
Philip Cornwell: The market in Australia is very competitive. Arguably the large firms had grown too big by the time of the global financial crisis, and with Australia escaping recession and moving into a commodity price driven boom, many overseas firms were attracted here, arriving just in time for the inevitable correction. As a result there has been some downsizing.
Hamish Masson: While there will always be a place for specialised, small, one-jurisdiction firms, the past decade has shown that the potential for growth for such niche firms is limited and that the traditional “best friends” network is coming under stress as traditional friends move into each others’ jurisdictions and become competitors rather than partners. There are a number of possible reasons for this: it may be in part a reflection of a natural desire for clients to obtain all their offshore services under one roof (most complex offshore structures involve more than one offshore jurisdiction), but smaller firms with more limited product exposure also struggle to provide client facing offices in major commercial centres like London and Hong Kong, which have become increasingly important. By having offices across the globe, Harneys is able to offer, when needed, an around-the-clock team of lawyers working in different time zones (London, East Coast USA and Hong Kong), servicing the more global multi-jurisdictional transactions.
In a way the offshore market is also responding to very similar trends that have caused legal services in general to move towards global brands delivering service from around the world. It is important that when law firms do move into other jurisdictions that they do so fully and commit sufficient resources, so that they are a credible alternative to the best friends network that they are attempting to replace. We have seen a few instances when a law firm has not done this and they have struggled to provide the same levels of service that they do in their home jurisdictions, or what would have been provided by using the traditional best friends network. This has reflected poorly both on that jurisdiction and that law firm – a global brand is only as strong as its weakest link. Harneys have ensured that whenever we have moved into a new country (be it practising law in that offshore jurisdiction, or being an office in an onshore financial centre from which we practise our existing offshore jurisdictions), we have dedicated sufficient resources to ensure that this new addition adds to, rather than diminishes, the Harneys global offering.
Ulrike Naumann: To remain nimble and innovative and to spend much more time trying to understand their client’s needs and what drives their business.
Phillip Cornwell: Keep close to clients, and keep on the front foot in chasing deals and new trends. Important here is sustainability – Australian banks are world leaders in corporate social responsibility, and they expect their “supply chains”, including legal services providers, to comply. To this end (among others), my firm recently became the first major Australian law firm to be certified carbon neutral.
Embrace technology but also keep investing in your staff, training and precedents. There is no substitute for quality.
Hamish Masson: No other multi-jurisdictional offshore law firm has grown at the same pace and with the same drive as Harneys over the past five years. On the macro level we have achieved this by staying alert to opportunities and remaining agile enough to capitalise on them. At the client level, we don’t believe in a magic recipe and prefer to keep it simple – responsiveness, price transparency and consistently providing quality and pragmatic advice are key, but clients also want to deal with experienced and commercial offshore lawyers who can add real value to deals and not “over-lawyer” things. That is what we strive to do.