The International Who’s Who of Banking Lawyers brings together Lee Suet-Fern of Stamford Law Corporation, Zulfiqar Bokhari of Sidley Austin, Johan de Lance of Webber Wentzel and Giuseppe Schiavello of Gianni Origoni Grippo Cappelli & Partners to discuss levels and types of activity, the impact of regulatory changes following the global financial crisis, developments in the legal market and the emergence of new jurisdictions of significance in this sector.
Stamford Law Corporation
Who’s Who Legal: Many of the lawyers we spoke to said they have had a busy year with more deals, a return to traditional financing and a more active market. In this the case in your jurisdiction? Or are refinancings, workouts and restructurings still forming a large portion of your work?
Lee Suet-Fern: At Stamford Law, our banking and finance department has had a busy year with many deals centred around traditional financing, many of which were structured as syndicated financing for regional mergers and acquisitions as well as business expansion. Although there had been a general expectation that workouts and restructurings were the call of the day for the few years following the 2008-09 global financial crisis, the strong economic growth seen in Singapore and Asia has generated more funding needs. Perhaps due to the continuing low interest rate environment coupled with several rounds of quantitative easing, Singapore has been seeing strong credit growth and asset inflation in both the real estate and financial markets. The predominant REITs market and vibrant real estate industry in Singapore has also attracted a healthy pipeline of banking and finance transactions throughout the year.
As noted in the Moody’s Investors Service report published on 15 July 2013, domestically, the Singapore household debt “increased to 77.2% of GDP as of March 2013 from 64.4% at the end of 2007. For the same time period, prices for private property grew 1.2 times and prices for Housing Development Board (HDB) real estate 1.7 times.” Moody’s has also observed similar or even more dramatic trends regionally.
Zulfiqar Bokhari: In the US, we have been very fortunate to continue to see a high volume of front-end work comprising brand new facilities or refinancings of existing deals. The traditional loan markets are indeed very active and this has been the case for both pro rata bank investor credit facilities as well as institutional term loan B facilities. There are a variety of factors responsible for the current state of the markets but certainly two of the most important are a historically low interest rate environment and a deployment of capital from investors looking for higher yields. These factors have led to borrowers and sponsors successfully testing the market with increasingly favourable terms.
Johan de Lange: The Webber Wentzel banking and finance group has had an extremely busy year in 2013, with the 2014 financial year promising to be equally busy. Deal flow is certainly up from 2012. While some of this may well represent early signs of economic recovery after the 2008 downturn, there are several other factors that have had a bearing on loan markets activity in Johannesburg. First, we are involved in a number of significant refinancings of leveraged financings implemented in 2006/2007 based on the senior/high yield/payment-in-kind financing models. Often these highly leveraged structures have resulted in unsustainable capital structures and the refinancings include a significant element of restructuring at the same time. Second, the frontline Johannesburg banking practices are supporting their project finance colleagues in energy project finance transactions, resulting from a renewables programme sponsored by the South African government. Third, we are aware the local private equity funds have completed fund formation activity of the last 18 months or so, and are sitting on funds to invest – we are seeing the first signs of investment activity with related acquisition finance transactions. Lastly, we are seeing a lot of outbound transaction activity into the rest of the continent – at the moment, it is primarily the M&A, mining and resources lawyers that are benefiting from this, but the banking and projects groups are starting to see some spin-offs, in the form of project financings, commercial real estate work in places such as Nigeria and Ghana, and even multi-jurisdictional acquisition financings.
Giuseppe Schiavello: The banking and finance-related work in Italy is still very much focused on deals which are not “new money deals”, but rather refinancing, restructurings and workouts. Some acquisition financing transactions have nevertheless completed during the course of 2013. An increasingly important area of work is related to the investment by opportunity funds in distressed assets, with securitisation being a commonly used structuring tool for these investments. There is also an expectation that, given the restricted access to credit, Italian companies will resort to the capital markets to raise financings, with the banks taking an advisory and arranging role in such transactions.
Who’s Who Legal: What has been the impact of the regulatory changes that have come in following the global financial crisis, such as Basel III and the European directive on the future regulation of managers of alternative investment funds? Have you noticed a significant increase in demand for regulatory advice from clients?
Lee Suet-Fern: Indeed, significantly higher compliance standards have been imposed on banks and financial intermediaries over the past few years in response to the issues and concerns that were identified following the 2008 global financial crisis. For instance, the Monetary Authority of Singapore (MAS) introduced tighter controls on the sale by financial intermediaries of complex investment products to the public and revamped the fund management licensing regime with increased supervisory oversight being exercised by the MAS. With a view to ensuring prudential lending by banks and financial institutions in Singapore in the face of persistent low interest rate environment and asset inflation contributed significantly by the few rounds of quantitative easing, the MAS has also issued lending guidelines which all banks must observed. The MAS has also proposed implementing a new liquidity framework for banks, finance companies and merchant banks that is based on the Basel III liquidity coverage ratio rules with the aim of improving the short-term resilience of a bank’s liquidity risk profile. The aforesaid actions taken by the MAS are just some of the measures and regulatory changes put in place and have resulted in significant increase in demand for regulatory advice from clients, especially the financial intermediaries. The relocation of fund managers, especially those from Europe, to Singapore has also generated a greater demand for legal services and support – primarily in connection with the establishment of new fund management business, the conversion of existing exempt fund management business under the new licensing regime, and compliance and regulatory advice on the conduct of fund management activities under the enhanced compliance and regulatory guidelines.
Zulfiqar Bokhari: We have seen a substantial increase in regulatory work for clients, from the basic inquiry as to how a proposed new rule will work to more significant restructuring in anticipation of the new rules. Our bank clients have understandably become more sensitive about regulatory capital and other regulatory considerations. One example of this is the liquidity coverage ratio that will require them to maintain sufficient liquid assets to protect them in a major short-term market dislocation, and we understand this is causing banks to re-evaluate their approach towards liquidity facilities such as commercial paper backstop credit facilities and credit facilities for financial institutions.
Johan de Lange: In very practical terms, we have seen the international regulatory changes of the last couple of years affecting two key aspects of loan financings: first, banks and financial institutions are taking a hard stance on increased costs clauses, where the possible pricing implications that may result from the staggered implementation of Basel III are generally included without restriction, particularly in leveraged transactions (with very little bargaining power for borrowers on this aspect); and second, there is a new emphasis on aspects of transferability of loan exposures with bank lenders especially having very little appetite for any restrictions. Traditionally, Johannesburg banks were fundamentally “balance-sheet builders”, but Basel III and its potential costs implications, especially for long-dated exposures, has certainly placed the spotlight squarely on syndication and exit strategies. Again, this was probably also highlighted by the significant energy programme of the SA government, where it quickly became clear that banks came into those deals with new syndication and securitisation strategies.
Giuseppe Schiavello: The increase in regulatory constraints for banks following the global financial crisis has negatively impacted on credit availability and generated non-core or distressed asset disposals by banks. The Italian market has always been very restrictive in terms of the possibility for foreign funds to be distributed in Italy. Essentially, only UCITS funds have been allowed. As of July 2013, due to the enactment of the alternative funds managers directive (AFMD) the Italian market will, upon the issuance of all the regulatory measures implementing the AFMD, open to, initially, European alternative funds and then also to non-European vehicles that could have a critical impact on the market. Conversely, the AFMD will pose significant challenges to Italian collective investment managers, since it also enlarges for them the possibility to operate across the European Union.
Who’s Who Legal: We have heard mixed reports about the legal market in different jurisdictions around the world, although many seem to concur that medium-sized or smaller firms are struggling to retain a strong position in the market. Is this the case where you are? How has the legal market changed over the past few years?
Lee Suet-Fern: The legal practice landscape in Singapore has certainly changed quite significantly with the deliberate measures put in place by the Singapore government to open up the Singapore legal market to foreign firms to practise in areas of law that were traditionally restricted to Singapore-qualified lawyers. As the legal market opens up to foreign players, competition intensifies and many firms who are not prepared for such competition are finding it challenging to stay on top of the game in terms of securing premium work as well as retaining talents within their firms. This cuts across different areas of corporate practice and, to some extent, affects dispute resolution practices (in particular, the arbitration practice).
We have kept our leadership position in the market despite the advent of numerous foreign firms from Europe and the United States alike, by maintaining our focus on doing cross-border transactions and recruiting top practitioners of diverse expertise and track record including many who have cross-border experiences and multi-jurisdictional qualifications as well as those who had had practised in global and regional law firms.
Zulfiqar Bokhari: In the US, medium-sized firms have been able to maintain their traditional strength in the “core” middle market space where pricing pressures prevent larger global firms from meaningfully participating on a regular basis. In addition, there are a number of very active mid-size firms outside of New York that have close relationships with leading banks and other capital providers for large-cap deals and these firms have been able to retain their deal flow.
Johan de Lange: We believe that this is also the case in South Africa and specifically in Johannesburg. We believe the Johannesburg sector for legal services is clearly developing into a market that is likely to be dominated by three large firms with an approximately 150-partner headcount, or a 400 to 500 total professional headcount (depending on gearing strategies). At the same time, we are seeing significant new recruitment activity in Johannesburg by top international firms, especially in the areas of banking and finance and project finance, and expect some of these firms to establish niche finance practices in the next two to three years, which will compete with the senior local firms in these specialised areas, but with a focus on Africa work. We also expect this to result in a clearer distinction of first-tier and second-tier law firms in Johannesburg, with the high-end cross-border and specialised domestic finance and equity transactions increasingly being done by top-tier local firms and international firms with niche practices in Johannesburg. In other words, the current assessment is that the senior Johannesburg law firms with resources in the form of top lawyers, logistical ability, domestically and across Africa, and international affiliations, together with new international entrants with niche finance practices, are likely to dominate in the foreseeable future.
Giuseppe Schiavello: While smaller “boutique” firms are retaining a strong position in niche areas of practice, such as IP, tax, labour or criminal law, this is not the case for transactional work, particularly on the banking and finance sector, where large and general practice firms are definitely dominant.
Who’s Who Legal: With some traditionally strong markets, such as Europe, still struggling, are you seeing new jurisdictions emerging in this sector? Looking at the banking industry on a global level do you expect to see a shift away from the West in the future?
Lee Suet-Fern: Asia, as a whole, has experienced significant economic growth (especially in the past two years) despite the downturn observed in Europe and the United States. Aside from China and Indonesia, there has been a lot of interest in Myanmar as a potential new jurisdiction for increased banking and finance activities, especially in the areas of financing for infrastructures and projects. There has also been an obvious shift in focus from the manufacturing and service sectors to the minerals, oil and gas sector in terms of fundraising and other financial activities. This focus on the minerals, oil and gas sector augurs well for the emerging markets where much of the minerals, oil and gas are waiting to be tapped – and the expected growth of emerging markets such as Indonesia, Myanmar and, to some extent, the Philippines will cause a shift away from the West, at least until the West gets its act together for a sustainable economic recovery. We anticipate that a lot of work will involve the emerging markets around Singapore – and also anticipate the use of Singapore as a platform for the raising of financing, with increasing investment interests from the West, as many will seek to relocate their investments and wealth management to this part of the world.
Zulfiqar Bokhari: While we have seen certain Asian-based or Asian-oriented banks and other financial institutions become more active in the US syndicated loan market, these capital providers have, generally speaking, not taken the leading position in deals we have worked on. This is something which may evolve over time as these financial institutions become more comfortable with the lending environment in the US.
Johan de Lange: It is well known that there is significant international interest in developmental activity on the African continent. Most of the large South African corporations are active on the continent and are actively looking at expansion opportunities. This obviously includes key players in the mining and resources industries and related industries (such as energy and infrastructure), but also in areas such as financial services and retail. It is understandable that the hype about Africa is sometimes questioned in certain quarters, but we believe the opportunities in terms of developmental prospects, new finds of resources, consumer market demographics and the onset of some apparent stability in areas of political and socio-economic uncertainty, historically associated with the continent, bode well for the future. It is not for us to speculate about whether or not Africa will see a shift away from the West in future. At the same time, we can report what we see on a practical level and that includes significant increases in transaction activity. As lawyers on the African continent, we think there is a lot to be very excited about.
Giuseppe Schiavello: No significant presence of Asian-based emerging countries’ banks has been detected on the Italian market so far.