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

It has been an interesting year for legal practitioners in Hungary. The Eurozone crisis, the social crisis and the prevailing political conditions have conspired against the economic environment and added to tough government measures created a negative environment for investors....

It has been an interesting year for legal practitioners in Hungary. The Eurozone crisis, the social crisis and the prevailing political conditions have conspired against the economic environment and added to tough government measures created a negative environment for investors. Without a doubt, the legal market has felt the impact of the legal uncertainty. Nevertheless, the poor market situation doesn't necessarily translate negatively for law firms as opportunities tend to present themselves. For example, some mandates have been created by the exit of foreign investors with Hungarian subsidiaries. Additionally, work comes from various refinancings, restructurings and recapitalisations and in the context of Malev's insolvency, repossessions and leasings. This is not to say that it has been an easy year as the market has become very competitive as has pricing. "We've experienced a race to the bottom," one partner says, while another adds that firms are "fighting for survival in a small market". All in all, it is becoming increasingly clear that firms are forced to become more creative just to stay afloat.

When Hungary joined the EU in 2004, it was believed that the country would become a regional hub. However, it soon lost its competitive advantage and it is claimed that this was due to the "fight between socialists and the rightwing for voters" and "the high state spending". Consequentally, magic circle firms such as Clifford Chance and Linklaters realised that the market was not as profitable as expected and made a swift exit. Furthermore, as the context slowly shifts, another phenomenon has been spinoffs from the larger firms. "An important driver is that in many larger firms, especially the international firms, the conditions to become a partner became difficult and so, many senior associates saw their chances of becoming a partner as harder," one commentator says.

Finally, in light of the current uncertainty, deals have become protracted and struggle to close. "Deals can stop at any point," one partner says. "It can stop either at the term sheet phase, the due diligence phase or even at the sale and purchase agreement." Also, in some practice areas, there is a dearth in mandates. "Real estate and project finance lawyers are having a break; but it is a factual break," one commentator states. Furthermore, for all parties concerned, pricing has become an issue. "In different market conditions, clients have become more price sensitive," one partner says.

CONTEXT AND TRENDS The Magyarország Alaptörvénye, Hungary's new constitution, came into force on January 1 2012. It was the country's first constitution adopted under a democratic framework and succeeded the heavily amended 1949 constitution....

CONTEXT AND TRENDS

The Magyarország Alaptörvénye, Hungary's new constitution, came into force on January 1 2012. It was the country's first constitution adopted under a democratic framework and succeeded the heavily amended 1949 constitution. However, the 2010 election victory of right-wing nationalist Fidesz Party brought Viktor Orbán into power and his vision has caused much social consternation since. The country is deeply polarised on the national front and – for an EU country – is increasingly isolated on the international scene. "The political issues here impact foreign investors' confidence on a psychological level," one partner says.

Moreover, the country is on the brink of financial ruin and was, at the time of writing, negotiating a €15 billion credit line deal with the IMF and EU. "If there's a deal with the IMF, it'll open up the debt sector and there will be more bond transactions from the government," one commentator states. Indeed, the government hopes that it may then be able to access the bond market at much better rates than current ones. In fact, apart from this, the capital markets have been expectedly quiet. "There has been no IPO for ages in the Hungarian market and some are looking abroad towards Warsaw and Vienna," one partner says. On the debt side, apart from sovereign potential, corporate issuances are few and far between. Nevertheless, in light of banking problems, the bond market could be considered safer and faster. There is a secondary capital market instituted by municipalities and its bonds are being restructured. "These aren't true capital markets deals. It's a zombie capital market. They look like bonds, taste like bonds, but are not bonds, just debt," one partner says.

It must be remembered that political problems and IMF negotiations occupy a distinct space in the overall picture. "It's a safety net. It's in the backdrop and not the sort of substantial issue the market reacts to," one partner says, adding that, "the fact of an IMF agreement would still not mean that banks are out of trouble." In fact, banks are very cautious; conditions for new loans are strict and scarce as there is a lot of bad debt. Also, because most banks are foreign owned and in need of a capital injection, they are unable and unwilling to finance. "There is lending into existing borrowers but it's very sporadic and they'll not lend new money. So there's only really restructuring," one partner says. Furthermore, as a result of current market conditions, there is a trend where banks sell their loan portfolios and even exit the market. Also, investment banks have put Hungary, along with Ukraine on a blacklist "because the government risk is perceived so high".

MAJOR LATERAL HIRES

Gábor Felsen
From: Gide Loyrette Nouel
To: Felsen Katona Law firm

György Katona
From: Gide Loyrette Nouel
To: Felsen Katona Law firm

CONTEXT AND TRENDS
It has been a difficult year for Hungary on the M&A front. It is all too apparent that investors do not see Hungary as a stable place and the country is lagging behind....

CONTEXT AND TRENDS

It has been a difficult year for Hungary on the M&A front. It is all too apparent that investors do not see Hungary as a stable place and the country is lagging behind. "There is a dividing line between North and South CEE (Central & Eastern Europe)," one partner says, adding: "Poland, Czech and Slovak perform much better then Hungary, Romania, Bulgaria and Serbia whose markets are underperforming." Despite being in the first wave of the eastern accession states to the EU, Hungary's competitive advantage has slowed down. "In part it is because of the uncertainty and politically unstable environment but it's more of a European worldwide trend of financial problems," one commentator states.

In general, the prevailing uncertainty has left investors insecure and deals tend to be drawn out or aborted. "Deals stop because people get spooked a lot more easily," one partner says, while another adds: "Ongoing transactions are aborted. It's a long process. There is disagreement between sellers and purchasers. Sellers still think that they can sell at a price that was only realistic before." What is clear, however, is that strategic investors look to either make an exit or wait for better conditions. On the one hand, long-term investors feel that they cannot continue to pump money in and decide to leave. On the other, there are those who decide to double down and acquire competitors.

Despite this, there are still larger multinational transactions where a new buyer appears on the horizon. Indeed, there has been interest from non-traditional investors who have been active of late, for example, China and Gulf based investors. Recently, the Dubai based Al Habtoor Group acquired Budapest's Le Meridien Hotel from the Hungarian subsidiary of the Israeli CEE Group and of course, there was the high profile acquisition in recent years of BorsodChem by the Chinese investor, Yantai Wanhua. "We expect investments from two areas: the Middle East and China," one partner says. "Five years ago, we would hardly believe that we'd work for a Chinese investor in our submission." In fact now further Chinese investment is expected and it is becoming increasingly clear that China is interested in the region. As a consequence of high-level visits strengthening relations between the countries, China and Hungary, on May 1 2012, signed a series of investment and cooperative agreements covering agriculture, telecommunications, infrastructure and finance. "Chinese investors may use Hungary as a platform in the region," one commentator states. Furthermore, Middle Eastern sovereign wealth funds have started to display interest in Hungary as have Turkish investors and Russian investors who "try to acquire businesses that are not interesting for Western investors."

Finally, while there hasn't been a spate of transactions in private equity, it is definitely an area of interest. "Private equity investors don't see the picture so dark," one partner says. "Private equity is looking into sectors for profit in the short term. These are the retail sector, renewable energy, technology and TMT." In fact, a real role for private equity may be enlarged if investors take advantage of market displacement and snap up assets at favourable prices.

MAJOR LATERAL HIRES

István Kovári
From: Gide Loyrette Nouel
To: In-House

CONTEXT AND TRENDS
In the previous edition of IFLR1000, we saw that there wasn't much appetite to finance projects. In the last 12 months, if anything, there was even less appetite....

CONTEXT AND TRENDS

In the previous edition of IFLR1000, we saw that there wasn't much appetite to finance projects. In the last 12 months, if anything, there was even less appetite. "On the micro and macro level, Hungary did very little to improve the situation. The fiscal policy and nationalisation endeavours have obviously put Hungary behind in the region," one partner says. Furthermore, while there is low volume in project finance transactions, there is higher volume in project related transactions.

Nevertheless, hydropower has been a much-debated topic in Hungary and as one partner says, "sponsors expectations are for more hydropower plants in the future." In fact, in Hungary, there is no clear-cut legislation for renewable energy; yet, the country is bound to meet EU targets. "We have a commitment to the EU to enhance renewable energy," one partner says. "It's just the financing that's missing from the plan and private investors are afraid of entering the market." Nonetheless, there have been some wind, solar and biomass projects prompting one source to label the energy sector as "the flavour of the year". With regard to traditional energy, the Hungarian government, on June 18 2012, ranked Paks's (the first and only operating nuclear power station in Hungary) expansion as a high priority. "It's a cheap source of electricity and it's fairly safe despite Chernobyl and Fukushima," one partner says.

The story is not dissimilar when it comes to projects in infrastructure. So, for example, there is very little support from the government for PPP (public-private partnerships) projects and there is a tendency to preclude the foreign ownership of key infrastructure assets. "They're [PPPs] not favoured because people don't think it is a viable solution," one partner says. "The argument is that you're indebting your grandchildren with it over the long run and it's very expensive. But, there is the counter-argument of the allocation of risk to the private sector. But if you look at how long it takes for a road to be built without the private sector you'll see."

Finally, despite some refinancing and acquisition financing in real estate, the sector remains thoroughly unattractive. "Developments are put on ice," one partner says, while another adds: "Commercial banks are already overexposed to real estate. It's not something they'd want to do." However, the optimistic hint at the possible return of developers to restart projects. "It might be a market niche for the next five years," one partner says.

MAJOR LATERAL HIRES

Gábor Felsen
From: Gide Loyrette Nouel
To: Felsen Katona Law firm

György Katona
From: Gide Loyrette Nouel
To: Felsen Katona Law firm