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When it comes to lending recently the approach taken by banks has been one of qualified caution. There have been shades of conservatism, but the banks take a principled approach to any deal....

When it comes to lending recently the approach taken by banks has been one of qualified caution. There have been shades of conservatism, but the banks take a principled approach to any deal. "At the start of the crisis they had their hands tied, but they proceeded with caution and if the underlying asset is strong, they'll go for it," says one partner, adding: "Czech banks are in good condition. They kept their banking model simple and the Czech Republic benefited." Nevertheless, a lot of Czech banks are owned by other entities and parent entities have not been lending.

In the last year, as had been expected, credit committees eased their hesitancy in providing new funding to anyone other than the highest quality of borrower requiring the minimum of leverage. On refinancings, which has seen a large increase, banks sought to reduce their exposures and on prevailing facilities, rollovers became increasingly common. Where loans were made, there was greater caution being shown by the lenders in relation to documentation and the approach taken to the covenant package. Institutions such as the European Investment Bank (EIB) and the European Bank for Reconstruction & Development (EBRD), whose integration work had seemed to have been completed, became a critical source of liquidity again. On the other hand, increased pressure on bank margins was observed, and in some cases there was a return to pre-crisis levels.

Furthermore, up until the end of 2010, owing to the generous tariff guaranteed by the government, solar financing was by far the dominant activity, to the bewilderment of some: "Czech Republic is not known for its sunny beaches so I doubted this made sense," says one partner. Nevertheless, the incentives marked the drive to a "solar boom". However, this has been slowed by the realisation that the subsidies didn't match the start-up investment. Hence, the government imposed a type of withholding payment (in essence a de facto tax) on investors. "What they gave with their left hand they took with their right hand," says one partner.

Solar aside, banks are also looking actively into biomass, wind power and even hydropower, with biomass seen as the most sustainable.

In other areas of project finance, real estate finance has been subdued. However, some feel that this could be the trend for the near future. "Real estate is dramatic. Clients were begging banks three years ago and then this reversed 24 months ago and now there is a big upswing," says one partner, adding: "Real estate finance might be the flavour of the next one to two years".

Capital markets have recently seen a recovery, and even in the relatively slow Czech market, there are encouraging signs, although the crisis in Greece slightly curtailed this. Now with the demand for funds increasing attention has switched to the capital markets....

Capital markets have recently seen a recovery, and even in the relatively slow Czech market, there are encouraging signs, although the crisis in Greece slightly curtailed this. Now with the demand for funds increasing attention has switched to the capital markets.

Practitioners have also noted a move towards more exotic products as the market matures: "People are working on products like securitisations. The mere fact of this after two-three years of relative quietness says something," notes one partner. This is seen across the CEE (Central & Eastern Europe) region as state and state-owned corporates look to the capital markets for finance. Many projects, for example, include a project bond element in the financing package and the market expects to see an increasing amount of this form of activity over the next two to three years. "The bond market dominates the capital markets," says one partner. "We will see higher activity in the next 12 months in debt," agrees another partner, adding: "It's definitely more active than equity, which is in line with the global economy. Some of the issuers are in financial trouble and so we'll see a lot of work around it." The market has also seen some activity with regard to Eurobond issues.

The equity market in contrast remains quiet. "The Czech republic has never been very active in the equity market. There are only a small number of companies listed but there will be more activity," says one partner. This means that in relative terms, equity is picking up. "Realistically, two or three IPOs would be a significant leap forward," the same partner says, adding: "There will never be tens of IPOs in Czech in a year".

Such activity manifests itself in the excitement which has surrounded the prospective listing of CSOB on the Prague Stock Exchange (PSE). Partly due to the volatile markets, this listing has stalled and its owner, KBC Bank, has yet to decide whether it will float 30 or 40% of CSOB. Nevertheless, it is the largest planned IPO ever in the Czech Republic.

One rare entry onto the PSE this year was the listing of Fortuna Entertainment Group at €78 Million. This was the first IPO in the Czech Republic since 2008 and one of only two listings on the PSE in 2010. There is also a trend for Czech companies to list elsewhere, with AVG Technologies and solar energy company Photon Energy expressing interest to list on the Warsaw Stock Exchange.

The last six months have seen a significant upswing in terms of M&A work which has resulted in two of the largest transactions in the Czech market closing in the space of a fortnight in January. The first was the acquisition of Ceské Radiokomunikace by Macquarie European Infrastructure Fund and the second was the 50% acquisition of Czech Coal by Cyprus based Indoverse Czech Coal Investments....

The last six months have seen a significant upswing in terms of M&A work which has resulted in two of the largest transactions in the Czech market closing in the space of a fortnight in January. The first was the acquisition of Ceské Radiokomunikace by Macquarie European Infrastructure Fund and the second was the 50% acquisition of Czech Coal by Cyprus based Indoverse Czech Coal Investments.

The last few years have seen numerous transactions failing to close, with the majority of work relating to distressed sales, sales of non-core assets by multinationals and disposals by financial institutions following receipt of state aid. However the forecast for 2011 is more optimistic. Budget deficits are driving the sale of government assets by the newly elected centre right government. Most activity has been seen in the energy and utilities sector, which has seen privatisations, significant asset swaps and a lot of activity around renewables. Confidence in the market is returning, as the economy recovers and financing conditions ease in consonance with the upturn in M&A activity. "Solar exploded because of the state," says one partner, adding: "Last year was pretty much driven by solar acquisition. There were favourable tariff rates. This year there is a strong consolidation trend and the acquisition of smaller projects." Industry driven areas like banking and TMT and consistent sectors such as manufacturing, healthcare and food & beverage are all proving popular.

Another trend that showed the changing market conditions was the shift towards private transactions. "In private seller cases, after two years of unwillingness to sell as prices were lower, they're no longer scared," says one partner. "A good sign is the return of private equity houses," says another adding: "We see activity across various sectors." Practitioners are also seeing strategic investors competing with private equity houses on much more equal terms. "There is much more optimism in private equity. A lot of investments are secondary. Also strategics have come into play," says a market commentator.

The mid-market has also continued to grow. In "succession driven transactions", the entrepreneurs of the 1990s, having built up their companies are selling out. "There was the de-merger of a family owned group with assets all over CEE (Central Eastern Europe). It was very publicised. It was noticed by the man on the street. It was very complex," says one partner.

There hasn't quite been the wave of insolvencies that had been anticipated for the last couple of years. "The peak is over, regardless of the fact we [Czech Republic] have two of the most high profile cases," says one partner....

There hasn't quite been the wave of insolvencies that had been anticipated for the last couple of years. "The peak is over, regardless of the fact we [Czech Republic] have two of the most high profile cases," says one partner.

It was expected that companies and their creditors would use the recently available "rescue-driven" procedures in order to act early and recover the healthy parts of a business, rather than waiting until the whole business descended into an insolvent winding-up. However this has not materialised and a lot of firm's time is still taken up by insolvency proceedings.

The insolvency law is still relatively new and has been thrust into the limelight. "Almost incidentally the Czech economy was undergoing a significant recession. So the law became very relevant, very quickly," says one partner, adding: "There are some big names, big, complicated complex deals; a lot of legal work".

Even though one might say the situation has stabilised; there is still a large number of major insolvency or restructuring cases in the works involving large Czech companies, such as the lottery company, Sazka, the real estate developer, ECM and the bioethanol producer, PLP. There is no doubt that the new law is generating much excitement in the market. "The market is quite vibrant, we're testing new grounds," one animated partner comments, adding: "There's lots of new things, it's interesting. It's an exciting time for lawyers, everything is new." Another adds: "It's interesting, uncharted territory. The unpredictable decisions of Czech courts make for an explosive mix. Concepts are being tested for the first time."

All this shows a maturing market and a new confidence in the system: "There have also been some success stories," says one partner, "which show that through the court process, one can get more value for creditors. This is important for a maturing system like Czech."

Apart from insolvencies, there have also been a lot of small-scale restructurings with companies looking to slim down. "Solvent companies went through cost cutting. It occurs. Companies that had to restructure, restructured. But, it is still happening," says one partner.