Brexit dealt a blow to banking and finance lawyers as investors got nervous, and this uncertainty looks set to continue – however, this problem will be partly offset by a new wave of foreign investors and direct lenders that are targeting the Iberian market
Banking and finance lawyers claim that, in general, the market
is improving and that there are currently good opportunities for
law firms. However, it's not all been plain sailing. Brexit, in
particular, had the effect of unsettling investors, and a number of
lawyers in Spain report that the flow of deals slowed as
businesses' took time to digest the implications of the
UK's historic referendum. Though investment activity picked up
again in the latter part of 2016, the UK government's recent
invoking of Article 50 – which begins the process of
withdrawing from the European Union – could mean that deals
start stalling once again, lawyers warn. That said, it's not
all doom and gloom – institutional investors are targeting
Spanish assets, while there is also high demand for legal services
from construction companies seeking to refinance debt. In addition,
an array of non-traditional lenders are also currently looking for
business in Spain.
Meanwhile, in Portugal, banks are frantically trying to clear up their balance sheets – there is a consequently a massive amount of non-performing loan portfolios, for example, that need to be shifted and this is an area that is providing rich pickings for lawyers in Lisbon. Meanwhile, new players are entering the market as the country's banks pass into foreign ownership. In addition, shadow banking – specifically, lending by private equity funds and insurance companies – is on the increase.
Deal flow was affected by the Brexit vote last year, says Allen & Overy partner Ignacio Ruiz-Camara. "There was a slowdown for a couple of months," he adds. Despite this, Ruiz-Camara says it was a busy year in which a wide range of financing options came to market, with project bond structures being "particularly successful". He adds that there were also a significant number of sales of non-performing loans.
According to one partner, 2017 has been "somewhat uncertain and volatile". He adds that, though deals continue to flow, there is a degree of political uncertainty – the partner, who works in the Madrid office of a 'Magic Circle' firm, expresses some doubt that Brexit will "actually happen", despite the UK's invoking of Article 50, which begins the formal process of withdrawal from the European Union. He continues: "For investment bankers in London, it's business as usual."
One of the most significant developments in the last year has been banks offering more friendly terms for borrowers says one partner. "Banking deals now have terms that are more appropriate for borrowers," she says. Meanwhile, Uría Menéndez partner Ángel Pérez López says the traditional banks are now facing significantly more competition "not only among themselves but also with some direct lenders as well as the capital markets". Pérez López also says that Spanish real estate investment trusts, SOCIMIS [Sociedades Anónimas Cotizadas de Inversión en el Mercado Inmobiliario], are the most active players in real estate financing, acquiring commercial real estate such as shopping malls, office buildings and hotels. In addition, distressed M&A deals are also generating significant work for banking lawyers, as are sales of non-performing loans. In this regard, Pérez López says the volume of transactions involving secured non-performing loans now exceeds that involving unsecured non-performing loans. He adds that 2017 is expected to be a "very active year for distressed M&A due to new banking regulations on risk policies and loss allowances, which will be effective on 1 January 2018 and will foster plenty of divestments before that date."
There is currently a massive amount of liquidity in the market, according to Gómez-Acebo & Pombo partner Rafael Aguilera. He adds that Spanish credit funds have entered the market in the last year, as well as institutional investors, to finance Spanish companies. However, Aguilera adds that he is pessimistic about Brexit: "There was a slowdown of transactions due to Brexit and my concern is that this slowdown may return following the UK's invoking of Article 50."
Considerable opportunities for banking lawyers are being generated in the construction sector as construction companies look to refinance their debt, lawyers say. Meanwhile, Brexit could mean that Spanish law is increasingly used when drawing up contracts, according to Cuatrecasas partner Iñigo de Luisa. "Because of the Brexit-related uncertainties, we already see more reliance on Spanish law with regard to finance documentation," he says. "There could be more international funds relying on Spanish law, not only for restructuring situations but also for new facilities." Pérez López adds that there is "uncertainty as to the proceedings and timings for the recognition of English court rulings in Spain after the UK leaves the European Union".
However, Ruiz-Camara argues that English law will continue to be used outside the UK, regardless of Brexit. He adds that Brexit will create a lot of work for lawyers as "it will activate transactions which would not have happened otherwise and deals will have to be restructured". In a global context, there is an understanding that the US government could be set to abolish some existing banking regulations. Jabier Badiola, partner at Dentons says that, if this was to happen, it could lead to "financial business being transferred there [the US]".
There have been some "inconsistencies in the interpretation of the law by different insolvency courts" that have disappointed investors, according to Ruiz-Camara. However, he adds that there have been more deals, particularly disposals and securitisations. How will law firms adapt to the changing market conditions? Ruiz-Camara says that some firms could adopt the approach of having smaller teams and being more selective in the deals they take on.
If work is of a commoditised nature, clients are not willing to pay significant fees, say lawyers. However, there is a perception that, if the client believes the law firm is adding value to the deals, they will pay larger fees. Lawyers also report that some clients have panels and that some law firms agree to offer some services for free in order to be given the opportunity to bid for future work. Freshfields' partner Ana López says that one of the major developments in recent years is that it is becoming more difficult to predict exactly how deals will be "structured and refinanced given the wide range of financial instruments and flexibility that are available in the market".
Alfredo Barona, partner at DLA Piper, says in general, the market is improving and there has been an increase in leveraged deals. However, he adds that global political uncertainty is a concern. In addition, Barona observes that the market is now much more challenging for lenders due to the increase in competition and the difficulty in finding attractive business that requires financing.
There is an increased interest in direct lending, but there is considerable competition and limited opportunities for lenders at present, according to Clifford Chance partner Rodrigo Uría. He adds: "The new lenders entering the market are here to stay – it's currently a borrowers market and they are driving the deals."
EU: Uncertain future
Pérez López says that the sophistication of both products and players in the Spanish finance market continues to increase, and there is considerable finance-related M&A, particularly in relation to assets in the renewable energy sector. However, he also says that a decrease in restructuring work – which has been "one of the main work streams for banking lawyers in recent years" – is a concern, as are uncertainties surrounding the future of the European Union. Pérez López adds that competition between banking clients as well as law firms is fierce and the pressure on fees continues.
With regard to the activities of the legal arms of the ´Big Four' auditors in the banking and finance market, Barona says that, while they are not usually "seen on big deals at present, they are doing things really well and could potentially be serious competition to big law firms and they need to be respected". Meanwhile, one partner says the 'Big Four' have the contacts that enable them to "penetrate corporates" as well as significant resources.
De Luisa remarks that there are significant opportunities for financial transactions in Latin America, particularly Mexico, Colombia and Peru. He adds: "All Spanish firms are deploying resources there and in many situations, firms' finance practices are taking the lead in key infrastructure and energy projects in these jurisdictions."
Portugal: Banks under stress
The Portuguese banking sector is under stress, according to Servulo managing partner Paulo Câmara. "There are regulatory constraints, staff cuts and new owners," he says. "There is less investment from Angola and more from China." Another major issue facing banks is non-performing loans and, specifically, whether there should be a single universal solution to this problem, or whether solutions should be tailored to meet local requirements, Câmara adds. He also says that smaller banks and consumer credit organizations are entering the market. However, there are fewer initial public offerings (IPOs), partly because businesses "fear the regulation costs involved when listing," according to Câmara. Yet there are considerable opportunities for law firms to advise banks, he adds, to the extent that his firm is hiring more people to meet demand.
A lot of banking lawyers' work is devoted to clearing banks balance sheets – particularly selling off non-performing loans – says Uría Menéndez partner Pedro Ferreira Malaquias. He adds that private equity funds have a growing role in the Portuguese banking sector. Meanwhile, Ferreira Malaquias says lawyers also dedicate "many hours" to banking regulation work, in particular matters concerning how the Portuguese government will interpret EU banking regulations. He adds that there are around €40 billion worth of non-performing loans that are up for sale in Portugal and some private equity funds are keen to buy them.
Foreign banks are becoming more active in Portugal due to Portuguese banks' lack of availability with regard to lending, says Filipe Lowndes Marques, partner at MLGTS. He adds that the uncertainty in the Portuguese banking system is highlighted by Novo Banco being up for sale, Millenium BCP being subject to state intervention and therefore having its "hands tied", as well as shareholder disputes at Banco BPI. Lowndes Marques also says that there are now more non-traditional lenders – such as Caixa Credito Agricola – appearing in syndicated financing deals, though they are "still feeling their way in the market".
Shadow banking is another growing trend in the Portuguese market, according to Lowndes Marques. He adds: "Private equity funds and insurance companies want to lend [in Portugal] – technically only banks and credit institutions are authorised, but I don't think entities licensed elsewhere can be stopped from lending in Portugal – for example, if a credit fund is set up in Luxembourg or France, can regulations in Portugal stop them lending here?"
There is, in general, a greater emphasis on the management of balance sheets in the banking sector, says Linklaters counsel Gonçalo Veiga de Macedo. "There is a focus on the sale of non-core assets – banks are currently selling loan portfolios and residential mortgages," he continues. However, Veiga de Macedo says there is now a "spotlight on Portugal as a new destination for investment – real estate assets have more value".
Achieving a "certain, large, scale" is an increasingly important objective for banks, Câmara argues. "It is difficult for a bank to deal with regulatory constraints if it is small," he adds. "Banks now need to have a certain scale, otherwise they face difficulties, as we now see with smaller banks."
PLMJ partner Hugo Rosa Ferreira says the "continuing recovery" of Portuguese banks is creating plenty of opportunities for law firms "be it in recapitalization or quasi-capital raising transactions". He adds: "Also, the consolidation of the market looks to continue – some smaller banks continue to look for exit strategies and this is something that always brings a lot of work to law firms. With regard to Lusophone Africa, Veiga de Macedo says that there is "significant project investment" in Angola and Mozambique that is generating plenty of opportunities for lawyers.
Meanwhile, the increasing use of digital banking is also creating considerable regulatory work for law firms, lawyers say. Law firms´ banking practices used to be largely transaction-based, but now there is an increasing need for them to be more proficient in the regulatory aspects of banking. "Banks need considerable outside support [with regard to regulation] and this is an opportunity for law firms," one partner says.
Banking with Google?
With regard to the issue of fees, Veiga de Macedo says some clients that "recurrently work with international firms will prioritise quality rather than cost when selecting their lawyers". Lawyers also say that clients are less loyal to their legal advisers – one partner remarks that "substantial shareholder changes in banks mean there is often a reset in the client-lawyer relationship".
Banks cannot ignore the rise of the fintech sector, lawyers say; they also anticipate that companies like Google will have an ever-growing role in the banking sector. Such developments mean that banking lawyers have to become increasingly technologically minded, one partner says. "If you want to add value for clients, you have to have data protection knowledge," says one Lisbon managing partner. SPS Sociedade de Advogados partner Nédia da Fonseca Nunes says: "The investment in technology has played a crucial role in banking development, significantly changing the paradigm in the rendering of these services." However, despite the rise of the fintech sector, lawyers warn that the more traditional banks are not properly addressing this emerging threat at board level.
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