IFLR 1000
The Guide to the World's Leading Financial Law Firms

Stress in the market has led to a freefall in firm fees across all practice areas. Something that can be best illustrated by Cuatrecasas Gonçalves Pereira's mandate to advise the Spanish government on the largest financing transaction in Spanish history for a token fee of €1....

Stress in the market has led to a freefall in firm fees across all practice areas. Something that can be best illustrated by Cuatrecasas Gonçalves Pereira's mandate to advise the Spanish government on the largest financing transaction in Spanish history for a token fee of €1. The €35 billion injection into Spain's economy is designed to clear debts amassed by local authorities and Cuatrecasas beat local rivals Clifford Chance, Garrigues and Uría Menéndez.

Some firms are outraged at this recent turn of events prophesising a race to the bottom. "The regulatory body needs to step in at this point. There is little work and this competitive undercutting is damaging. This is not pro bono this is a professional mandate. We will not denigrate ourselves, it is bad for the market."

A more favourable peer says of the move: "No-one wants to do work for free but long term it is a clever plan. They will make a lot of work from this down the line and it is good publicity to be working to save the Spanish economy."

CONTEXT AND TRENDS
The crisis in the banking and finance sector has hit Spain's legal market hard, and in that respect little has changed over the last year. On going to press Spanish premier Mariano Rajoy remained locked in discussions with Europe's leaders over the possible terms of a proposed and highly contentious €300 billion sovereign bailout....

CONTEXT AND TRENDS

The crisis in the banking and finance sector has hit Spain's legal market hard, and in that respect little has changed over the last year. On going to press Spanish premier Mariano Rajoy remained locked in discussions with Europe's leaders over the possible terms of a proposed and highly contentious €300 billion sovereign bailout. Whether this will go ahead is unclear but Spain's economy has without doubt entered a more dangerous phase.

In June 2012 the Eurozone made available a €100 billion credit line to rescue Spain's ailing banks. Nonetheless, the four national institutions continue to struggle under €184 billion of toxic property loans, a situation made more acute by a rigorous shake up of the banking system. For example, banks are required to take fresh provisions of more than €80 billion in 2012 and Spain's second largest national bank (Bankia) is suffering huge losses as a result, despite its historic 'bailout' of €23.5 billion.

Not surprisingly, work flow in the legal market continues to centre around the restructuring of the banking system and consolidation of the industry. Spain's savings banks have already been reduced from 47 to 10 and the process of mergers and integrations continues, although at a much slower rate than in 2011.

One side effect is a dramatic increase in regulatory work for law firms, as one partner explains, "consolidation means a vast swathe of job and budget cuts which have kept regulation departments busy in law firms."

Mandates are linked to restructuring, refinancing and the sale of non-performing loan portfolios. In terms of fresh financing "there is none" and according to one lawyer leveraged acquisition work has all but "dried up". "However we are seeing some corporate loans with borrowers closing banking syndicates. Refinancing is less numerous though. Either companies re-finance easily because they aren't in that bad a state or they fall into insolvency. There isn't really much middle ground."

Under the terms of the bailout the Bank of Spain has tightened up rules on loan refinancing which has precipitated a dramatic increase in the number of banks filing for insolvency. This is "the shape of things to come" says one lawyer. "Twelve months ago this would have been unheard of. You would see a trade collector doing it but never a bank. But now the banks are fighting to stay afloat and they're chopping off dead wood. These cases will grow more numerous," is the opinion of a partner.

MAJOR LATERAL HIRES

José Guardo
From: Garrigues
To: Clifford Chance

CONTEXT AND TRENDS
In 2011, the sovereign debt financial crisis deepened leaving the capital markets in contraction. Hopes that a new government and finance minister Luis de Guindos could steer the economy out of a double dip recession now seem optimistic at best and throughout 2012 there has been a steady decline in the number of deals coming out into the market....

CONTEXT AND TRENDS

In 2011, the sovereign debt financial crisis deepened leaving the capital markets in contraction. Hopes that a new government and finance minister Luis de Guindos could steer the economy out of a double dip recession now seem optimistic at best and throughout 2012 there has been a steady decline in the number of deals coming out into the market.

"We are in unchartered waters", says one lawyer "many transactions are open and then the window closes just when we want to launch."

The Spanish securitisation sector has been substantially affected by the downgrade of most of Spain's financial companies. "A slow moving economy with very low lending activity has impacted the banks´ ability to generate assets portfolios which may be securitised at the same rates," explains one lawyer.

Meanwhile stricter rating agency criteria has made it more expensive to achieve top-notch ratings and Spanish companies have been slashed in order to comply with cut-backs.

In another blow The Bank of Spain introduced new account provisioning rules relating to corporate mortgage lending and real estate exposures in early 2012, thus "favouring off-balance sheet sales of portfolios as opposed to in-balance sheet retained securitisations".

"In the first half of 2011" says one lawyer "we were still seeing corporate debt issuances, six months later this is gone." As such, legal activity has "focused on liability management transactions", which according to many will continue throughout 2012.

Equity capital markets activity slowed down significantly in the second half of 2011 in a difficult context of economic crisis, persistent tensions in the Eurozone and the political uncertainty arising from the outcome of the general elections in Spain. In 2012, it has remained very limited with activity driven by the restructuring of the financial system and the recent capital requirements imposed to the banks. Only three major deals closed (Bankia and Banca Civica's IPOs and DIA's listing).

Despite there being no IPOs, one lawyer noted that listed companies are making efforts to improve their structure: "There are signs of some capital increases but these will attend a specific transaction and aren't accessible to the market," explains one lawyer.

Indeed, stresses on the market have led to a couple of unexpected capital markets transactions. Spain saw its first issuance of the CoCo (contingent convertible) bond by BBVA and some lawyers report an increase in cross-border structured finance deals since 2012. "In structured finance there are more distressed deals that need a lot of restructuring. Here we will see issuances, in adapting transactions that are already there."

The only single secured debt in operation is high yield. "We are seeing an increase in high yield because of the difficult market situation, either buying back instruments or as an exchange for convertible bonds." According to one lawyer this could pave the way for interesting innovation: "Everyone is looking for the perfect hybrid instrument which is considered debt but will also be equity as a means of re-capitalisation. Whomever is able to find this will lead the market. The question is does it exist."

Meanwhile, all eyes are on the Eurozone crisis in the knowledge that normalisation there is key to any revival of capital markets in Spain.

RISING STARS

Clifford Chance
Eduardo Garcia

Gómez-Acebo & Pombo
Fernando Herrero Suárez

CONTEXT AND TRENDS
"It's a tough market and it's been an interesting year", sums up the ominous outlook from most lawyers. The combination of a double dip recession and a flailing economy with bank lending on hold has rendered M&A almost exclusively reliant on distressed work....

CONTEXT AND TRENDS

"It's a tough market and it's been an interesting year", sums up the ominous outlook from most lawyers. The combination of a double dip recession and a flailing economy with bank lending on hold has rendered M&A almost exclusively reliant on distressed work. According to one lawyer "the market is so weak that 80% of the volume of the transactions in June [2012] are related to six transactions carried out by international funds."

Another partner adds: "The market hasn't vanished altogether but it's a slow motion picture. A number of big ticket transactions are underway but it's still mainly limited to the financial sector and to a lesser extent energy."

However, lawyers report an upsurge in medium sized transactions, which are keeping the big firms "ticking over" and it's widely believed that the string of strong reforms put in place by the new government in July 2012 may enhance confidence in the Spanish market.

Outside of the financial sector there remains activity in energy (in particular renewable) and there is a steady trickle of work in telecoms, transport, insurance and industry.

There are mixed reports on the health of private equity investment. One partner argues that the drop off in bank lending has forced private equity investors to do deals without facilities. "These tend to be the domestic Spanish groups because they are less nervous." But according to another lawyer: "As well as those who need to divest funds to avoid lapsing there are also a lot of private equity funds keen to leave Spain and with these you are getting the good prices and good companies, offset by higher risk."

Some believe distressed asset transactions could be about to pick up with reports there are several foreign investors looking into opportunities which could be cemented by the new government reforms which some believe, "will enhance confidence and the trust of people in the Spanish market." Even with distressed asset transactions in the pipeline reports suggest there remains a marked price gap between what investors are willing to pay and seller expectation.

Furthermore, investments are "long, cumbersome and difficult to get through" explains one partner, "there are less transactions and an important number of them fall at the last minute because of financing or a bank says no or it wants new conditions before signing."

Indeed, one of the frustrations reported by lawyers is the stop-start deal culture that's taken hold with "the majority of transactions suspended for financial reasons."

Another trend relates to the hot and decidedly controversial topic of pricing. Competition has forced prices so low it's "permanently altered inter-firm dynamics. Clients are putting a lot of pressure on law firms to obtain lower prices and reign in efficiency. This is putting tremendous pressure on some of the largest firms. They are suffering a lot. Their structures are not coping. Two years ago there was a very traditional system of client loyalty."

For many it is difficult to see a light at the end of the tunnel. "Everyone thought a new government would change how the international market were looking at us, now we are being squeezed and companies feel the rules of the game have changed. Labour taxes are up, interest rates, taxes, public deficit and unemployment are all up so companies are performing worse, they are slashing costs and of course the economy is contracting. M&A will stay distressed in this climate."

RISING STARS

Uría Menéndez
Rafael Núñez-Lagos

CONTEXT AND TRENDS
Project finance is proving to be one of the financial crisis' lingering casualties, having been all but extinguished since early 2012. There remains very little fresh financing and only sporadic refinancing of existing projects....

CONTEXT AND TRENDS

Project finance is proving to be one of the financial crisis' lingering casualties, having been all but extinguished since early 2012. There remains very little fresh financing and only sporadic refinancing of existing projects.

This is not simply the result of a lack of credit from struggling Spanish banks. Regulatory changes in the energy industry have knocked it sideways. "Retroactive cuts in the subsidies paid to the producers of solar photovoltaic energy have brought photovoltaic project financing to an almost complete stop and to a refinancing process of operative plants," says one partner. Meanwhile, there are fears that more changes will come, rendering everything on hold. With another wave of reforms on the way there is no security for investors.

One lawyer says: "Once the law is clear we may see some deals revived." But others remain less optimistic citing local factors as key to the current stasis: "The saturation of installed capacity in the electricity sector" and "budget cuts in the public expenditure in infrastructures" have according to one lawyer smothered what was once the most active sector in banking and finance.

On the positive side there have been a few M&A deals off the back of halted projects and lawyers expect more to come when regulations are fixed.

Infrastructure projects are equally scarce with pressure on local authorities to claw back funds. Projects such as Madrid M-30 have hit the wall. "There are too many uncertainties around how the government will give support to failed projects like this." According to one lawyer. "Traffic estimates aren't enough, they need to sit down and extend the time the concessionaire has to pay back subordinated loans." As many in the market agree: "The government holds the key to unblocking these projects but keeping public expenditure down whilst supporting them is very challenging."

Many believe the only solution is to get EIB (European Investment Bank) to finance projects. Project bonds have been used to test the water elsewhere says one lawyer "but in the current environment these are incredibly difficult to structure."

MAJOR LATERAL HIRES

José Guardo Galdón
From: Garrigues
To: Clifford Chance

CONTEXT AND TRENDS
The rate of insolvencies is increasing by the week in Spain. Before 2012, banks were still predisposed to opt for out-of-court restructuring if companies could pay back their debt but after two rounds completed it seems many financial institutions have lost the appetite and are more inclined to cut their losses....

CONTEXT AND TRENDS

The rate of insolvencies is increasing by the week in Spain. Before 2012, banks were still predisposed to opt for out-of-court restructuring if companies could pay back their debt but after two rounds completed it seems many financial institutions have lost the appetite and are more inclined to cut their losses. "Banks no longer have an incentive to refinance some of their borrowers and there is maybe a temptation to prompt insolvency."

Powerful restructuring tools introduced under the Spanish Insolvency Law in 2012 theoretically provide for the first time in Spanish history a formal framework to facilitate business rescue. However, there are mixed feelings as to whether these will embed change and reduce insolvency rates. "They are a step in the right direction as they provide an initial framework for restructurings which a year ago looked impossible. However, I doubt that we will see many restructurings implemented in this way, due to the hurdles that the debtor must overcome to achieve creditor and court approval." It is hoped by many lawyers that further changes will be introduced, in order to offer a more evolved restructuring option for distressed debtors.

There are however more deals within bankruptcy proceedings in order to keep a company in business on a limited basis. "The use of schemes of arrangement remain popular" says one partner, and "in some instances a compromise can be struck to provide fresh money which is then ring fenced for specific projects on a long term basis. Write offs and trades with assets are also common."

As regulatory change mounts and the economy contracts, lawyers are being forced to be more innovative and creative. As one explains: "The standard plain vanilla approach doesn't work on the big complex cases. Only the top end firms can do these. So all the plain vanilla is going to firms who've never done restructuring before. There's enough to go round."

As with all practice areas clients agree that all firms are becoming increasingly flexible and restructuring and insolvency is not immune.

The degree to which real estate is feeding the restructuring market has waned. "Real estate is dead and companies with speculative interests therein are dead by association. The option of restructuring is no longer available for many companies so more are liquidating."

"At the beginning of the recession, our first clients to have financial problems were mainly in the real estate and construction sector. Today, the economic situation affects clients in all industries, especially high-industry companies, so we have advised these on renegotiating debts or on their insolvency procedures," says one partner.

This trend is further driven by pressure on banks to take out the real value of under-performing portfolios, which increased for two reasons. Firstly, the bailout forced transparency and banks no longer needed to hide their portfolios from the public sector and secondly the regulatory positions have been much tougher for non-performing loans since the start of 2012 so banks must start selling real estate at a much lower price.

At the end of 2011 lawyers say they began to see other sectors being squeezed, particularly in the areas of hotels, retails and airports. "This is more complex work as it involves the operating company and not just the holding company."

Most agree an emerging trend exists in the recent peak in interest from vulture funds and high-risk investors. "Companies in Spain are going under because there is no liquidity, not because they are bad. Distressed investors from the UK and the US see this. Loanstar and Oaktree have been sniffing around. This has intensified over the last 12 months and we are starting to see more work from this."

MAJOR LATERAL HIRES

José María Alonso Puig
From: Garrigues
To: Baker & McKenzie

RISING STARS

Cuatrecasas Gonçalves Pereira
Antonio Carreño
Francisco Pérez-Crespo