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

September 15 2008: D-day. The sudden and dramatic collapse of Lehman Brothers proved to be the defining moment of the pandemic recession of the past year....

September 15 2008: D-day. The sudden and dramatic collapse of Lehman Brothers proved to be the defining moment of the pandemic recession of the past year. US lawyers speak of the date as a pivotal point to measure all gain and loss since. The term "post-Lehman" became synonymous with the panic and uncertainty flooding the market. Suddenly everyone was vulnerable; everyone needed advice. Aside from restructuring work, regulatory practices were in demand to help control the bleeding and answer a seemingly simple question, what next? "This environment places a premium on experience," says one partner. "You clearly need to be more than a one-trick pony to survive and do well by your clients in an atmosphere where you're seeing new twists every day and problems that can't simply be solved by refinancing the whole deal," notes another.

After months of speculation, forecasts thought unthinkable only months before were suddenly feasible. Investment banks in particular faced serious questions about their subprime exposures, securities whose depreciating values turned once sound balance sheets into question. This scenario caused what some have referred to as the end of an era that saw market dominance by the Wall Street investment banks of New York. Bear Stearns collapsed and was acquired by JPMorgan Chase in March 2008; Lehman Brothers filed for Chapter 11 protections in September; Merrill Lynch was acquired by Bank of America a week later; Goldman Sachs and Morgan Stanley converted to bank holding companies.

With the banking landscape so wholly altered by the disappearing investment banks, as well as by the acquisition of Wachovia by Wells Fargo and Washington Mutual by JPMorgan Chase, the US government attempted to control the deluge in the financial sector. New lending was significantly reduced under the new directive of risk aversion. The Troubled Asset Relief Program (Tarp) and Term Asset-Backed Securities Loan Facility (Talf) programs were created under the advice of the US Department of the Treasury and the Federal Reserve with the intent of restoring the lending capabilities of American financial institutions. Both Tarp and Talf look to relieve banks of depreciating assets and equity, with mixed results. "The Fed hasn't changed its colours; The Fed is still the Fed," says one partner. "On the margins there's a little bit of liberalisation to permit ... but it hasn't revolutionised the landscape yet."

Broad programs like Tarp and Talf have led to scrutiny over any proposals of permanent changes to the regulatory framework. "When Congress responds to a crisis it's hard to know how things will shake out," says one partner. "It's much easier to create agencies in response to a crisis than it is to eliminate them."

US capital markets suffered a predictable slowdown in the wake of the credit crisis. The collapse of Lehman Brothers and the subsequent shockwaves it sent through the investment banking industry left the market without appetite for the majority of debt and equity issuances, particularly anything below investment grade....

US capital markets suffered a predictable slowdown in the wake of the credit crisis. The collapse of Lehman Brothers and the subsequent shockwaves it sent through the investment banking industry left the market without appetite for the majority of debt and equity issuances, particularly anything below investment grade. "The markets have been anaemic," says one partner. "I think people who really need access to markets are still doing it, they're just doing it very carefully." The harshest of market withdrawals was reserved for the structured finance market, whose products still carry their toxic associations with the greater public for low visibility collateralised debt obligations (CDOs) and subprime mortgage investments.

Such dislocations in the market have challenged the operating models for US firms, particularly for those with highly-leveraged capital markets departments. The absence of transactional activity that began in structured finance last year progressively carried over into general debt and equity departments through 2009, contributing to the massive layoffs of associates and staff that occurred at firms like Latham & Watkins and White & Case throughout the year. Partners describe the downturn as forcing many capital markets programs into offering a diverse range of products or looking to acquire from lateral hires the talents to do so.

Those with close ties to financial institutions saw some reprieve from an otherwise barren market. Rescue financings for lenders like Citigroup and Merrill Lynch in 2008 evolved into negotiations with the US Department of Treasury over convertible equity stakes in distressed financial institutions under the Troubled Asset Relief Program (Tarp). Still, even these high-profile types of transactions were fleeting. "Once those deals worked their way through the pipe, there was a real kind of drying up of new activity, with specific spots in the market that would open up for [a] very brief window," describes one partner.

While the high-yield and broader debt & equity markets return from their drastic reductions in the wake of Lehman, structured finance and securitisation has yet to reinvent itself in the wake of collapse. "Six months ago, if you went into the market with something called a securitisation, people would have just thrown up on it. They didn't want anything to do with something called a securitisation," remarks one lawyer. Partners note the back-to-basics mentality for any new structured products, highlighting the increase in diligence and collateralisation for even the most basic products entering the market.

"That was the craziest week of my professional career" is how one partner describes the week of the Lehman Brothers bankruptcy filing and its subsequent asset sale to rival Barclays. The investment bank's collapse has proved to be the moment of change for how corporations and their legal counsel look to structure M&A deals, disrupting not only potential lending agreements but the stock values associated with target companies....

"That was the craziest week of my professional career" is how one partner describes the week of the Lehman Brothers bankruptcy filing and its subsequent asset sale to rival Barclays. The investment bank's collapse has proved to be the moment of change for how corporations and their legal counsel look to structure M&A deals, disrupting not only potential lending agreements but the stock values associated with target companies. Needless to say, deal certainty was the most prominent issue to come out of this recession for M&A lawyers, proving the difference between companies acquired in distressed situations and those forced to restructure or face outright liquidation. The crossover occurring between these departments at many firms mirrors this fine line between viable M&A transactions and those borne out of restructuring efforts.

The absence of leveraged financing in the market has forced acquisition structures to rely more heavily on cash and equity foundations, two commodities in this market that companies either believe too valuable or, in the case of stock, unfairly priced. "Deal certainty two years ago was all about competition. You just wanted to make sure you didn't get topped," says one partner. "Then deal certainty turned to how the deal could get closed, and that came up from the private-equity deals that were hung from the financial collapse."

This dislocation between buyer and seller left the market largely to the strategic acquisitions of distressed competitors. The US financial sector witnessed significant consolidation as subprime mortgage exposures, a depressed capital markets system, and stratospheric Libor prices left lending institutions with few options to repair their balance sheets. Among the headlines to come out of this scenario were JPMorgan Chase's acquisitions of Bear Stearns and Washington Mutual, Bank of America's takeover of Merrill Lynch, and Wells Fargo's contested acquisition of Wachovia. The prominence of the target companies involved in these mergers speaks to the direness of the market itself, prompting the intervention of the US Treasury Department and Federal Reserve to provide government guarantees on behalf of the acquirers in order to ensure Lehman's effects on the market were not repeated.

One counter-cyclical sector that has provided firms with an unusual amount of transactions during the downturn has been pharmaceuticals. Three significant deals were structured and executed throughout early 2009, merging Merck with Schering-Plough for $41 billion, Genentech with Roche for $46.86 billion, and Pfizer with Wyeth for $68 billion.

The romance between private equity and the financial sector never reached the heights some partners had predicted a year ago, though the inroads made into lending institutions because of the recession have challenged the historic identities of many funds. The greatest example of this shift can be seen in the acquisition of the distressed California lender IndyMac by a consortium of private-equity groups....

The romance between private equity and the financial sector never reached the heights some partners had predicted a year ago, though the inroads made into lending institutions because of the recession have challenged the historic identities of many funds.

The greatest example of this shift can be seen in the acquisition of the distressed California lender IndyMac by a consortium of private-equity groups. Placed into receivership with the Federal Deposit Insurance Corporation (FDIC) in July 2008, IndyMac was purchased for $13.9 billion by a group of private investors in IMB Holdings that allowed the bank to emerge as OneWest Bank almost a year later.

Appeasing regulatory constraints through shared minority stakes in a central holding company, the transaction highlights how many private equity shops have survived the recession through mediated opportunism. As one partner puts it, "I don't think anything's ever permanent in private equity. It constantly changes and evolves, and the firms that are good evolve with it".

Lacking the leveraged financing that fuelled so many of the marquee private-equity deals in previous years, many groups were forced to pull back and become content with manoeuvres in the middle market. "The market isn't at a standstill. The train is on the tracks, it's just going very slow," says one partner.

Because of this restrained activity, those firms with only one or two large private-equity clients suffered compared to those employed by a variety of mid-market funds. But even this activity brought its perils, as mid-market lawyers suggest even greater difficulties in the smaller transactions because of the reduced margin for error beyond simply obtaining financing. No matter their client base, most firms spent the year examining client portfolios, attempting to refinance portfolio companies and restructure funds and their formation documents.

The aftermath of Bernard Madoff's Ponzi scheme brings many partners to conclude that intensified oversight of the industry is on the horizon. What form these regulations will take is unclear, though the spectre of a growing number of investigations by the Securities and Exchange Commission (SEC) in an attempt at greater fund transparency is expected.

Project finance work in the United States is one of the few benefactors of an ailing economy. Thanks to the Obama administration's concerted push for climate change technologies, stimulus packages supplied by the federal government have provided tax incentives and alternative lending facilities for renewables projects in the wind and solar markets....

Project finance work in the United States is one of the few benefactors of an ailing economy. Thanks to the Obama administration's concerted push for climate change technologies, stimulus packages supplied by the federal government have provided tax incentives and alternative lending facilities for renewables projects in the wind and solar markets. Lawyers note that such heavy federal involvement has subsequently shifted the market's primary financing centre from New York to Washington DC.

Despite its extended timelines, the US project finance market has provided consistent activity through 2008. "The stimulus bill has definitely helped," says one partner. "It's almost targeted job security for project finance firms." Another comments, "You could wait your whole career for project finance lawyers in Washington DC to come into demand, and thanks to this perfect storm of circumstances it's happened. I wouldn't have predicted that five years ago."

The inherent length of project development, however, has largely staggered tangible results. Instead, the early victory for project finance is one of positive market sentiment. "Since the stimulus there was really a pronounced slowdown until mid-February in renewables," says one partner. "It's kind of like everyone's been crawling out of a hole in the ground to see where the sun's shining."

The US Department of Energy (DOE) expanded funding efforts for its Loan Guarantee Program and State Energy Program, further subsidising renewable energy projects nationwide. Congress also renewed the Production Tax Credit (PTC) system as part of the Emergency Economic Stabilization Act of 2008, ensuring tax benefits to projects focused on wind and geothermal energy.

Federal subsidies have partially filled the void left in the wake of decreased lending by financial institutions and private equity sponsors. Similarly, the lack of a B-loan market and any appetite for syndication has forced many deals to access the market through club financing. "It's kind of back to project finance 101. Investors are looking for plain vanilla, things that are easily structured," says one partner.

The severe recessionary cycle of the past year has redefined what is and should be expected out of a top restructuring practice. For many firms it has been the balance of quality and volume, as veterans of the industry struggle to find a comparable time in recent history when so much has been asked of a law firm in such a short period of time....

The severe recessionary cycle of the past year has redefined what is and should be expected out of a top restructuring practice. For many firms it has been the balance of quality and volume, as veterans of the industry struggle to find a comparable time in recent history when so much has been asked of a law firm in such a short period of time. "I've lived through three other cycles, but I've never seen anything like this. This is a period no modern restructuring lawyer has ever seen," remarks one partner.

Lehman Brothers stands out as the largest bankruptcy filing in history, with an excess of $600 billion in debt commitments, but the subsequent filings of LyondellBasell and General Growth Properties exhibit the true systemic nature of the economic downturn. "Following the form, and following what the statute says, and just being a good lawyer isn't enough," says one partner. Broad corporate platforms in lending, regulatory, M&A and capital markets are now the standard for firms either establishing themselves in the market or for competitors redefining their historic market territories.

The lack of financing that forced many companies into restructurings or Chapter 11 filings this year is one of the components leading to their need for a more broadly capable law firm. Securing debtor-in-possession (DIP) financing in this market has proved to be only one piece of the greater deleveraging puzzle as creditors compare lending risks with the losses inherent to a liquidation.

"The biggest challenge right now is the lack of capital," says one partner. "For a restructuring guy, if you don't have capital, all you're doing is sculpting air." The international reach of so many newly-filed debtors also places a demand for firms with offices abroad and significant experience in cross-border work.

Because of this sudden need of expertise, talented restructuring partners have become a commodity. A number of US firms have witnessed the departure of practice heads in the face of other competitors building inroads into the market. But despite this build-up in the marketplace and everyone suddenly becoming a restructuring expert, many believe that the stratification between the most capable firms and the rest of the pack is greater than it has been at any time before.