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

As the dust settles from the 2007-08 market crash, regulatory lawyers are finding themselves in the enviable position of having more work than they can handle. As enforcement of existing rules becomes more stringent and clients scramble to prepare for the provisions of Dodd-Frank, firms are beefing up their regulatory practices with lateral hires and recruits from high-level positions in the industry....

As the dust settles from the 2007-08 market crash, regulatory lawyers are finding themselves in the enviable position of having more work than they can handle. As enforcement of existing rules becomes more stringent and clients scramble to prepare for the provisions of Dodd-Frank, firms are beefing up their regulatory practices with lateral hires and recruits from high-level positions in the industry. Some have even shipped back partners from offices abroad in an effort to meet the demand for regulatory expertise in the US. "As the old bromide says, change is good for lawyers - and there's a lot of change going on right now," remarks one partner.

Firms which anticipated the push for tighter controls on the financial markets are starting to reap dividends. Much of the work involves drafting comment letters on new legislation and providing bespoke advice on how the new laws are likely to affect individual organisations. "Initially with Dodd-Frank, we were getting up to speed with the regulations and helping the clients to do that," says one lawyer. "A lot of that was on our own dime. Now that the regulatory process has begun in earnest we are seeing many more clients paying for that kind of tailored advice, so things are extremely busy now."

Amongst other things, Dodd-Frank establishes the Financial Stability Oversight Council (FSOC), a new governing body charged with identifying and responding to threats to US financial stability. Critics of the agency - which has been the subject of extended debate in Congress and the media - say that it has been given too much power .and lacks sufficient expertise in the insurance industry, on which it has a significant impact. In the wake of the Madoff scandal, which one attorney describes as "one of the worst things that has happened for the private sector", governing bodies are also applying existing regulation more stringently than ever before. "Things they used to ask clients to fix next time they come in, they are issuing civil money orders or cease-and-desist notices for," says another partner.

Other controversial aspects of the bill include the last-minute Durbin Amendment, which was designed to take effect in July 2011 but has been pushed back to October. The amendment caps debit card interchange fees at 12 cents plus 0.05% of the transaction - a decline of around 80% from previous takings. Banks stand to lose billions of dollars per year under the amendment, and many have already begun to apply fees and charges elsewhere to compensate for the loss of income.

Banks are also unhappy about the Volcker Rule, which restricts them from making certain kinds of speculative investments. In particular, the rule bans banks from proprietary trading that is not in the best interests of their clients, and from owning or investing in a hedge or private equity fund. It also limits the liabilities that the largest banks, known as systemically significant institutions, can hold. "If you take our large financial services clients, what's most worrying to them is that they might be designated as systemically significant organisations," says one practitioner. As to what constitutes systemically significant, another partner remarks, "That's the $64,000 question in this country."

The climate of uncertainty has created problems in itself. "There's a lot of anxiety," says one partner. "Some banks have been trying to restructure their operations for legislation which might not go ahead." According to a July 2011 report by Davis Polk & Wardwell, 80% of the 160 regulations that were supposed to be completed at that time remained unfinished, and almost 90% of all rules were incomplete.

Many lawyers also criticise the way the bill has been written. "It's badly drafted by people who have no clue how the financial industry works," says another practitioner. "It will be impossible to implement." A lot of partners believe that the act may have unintended consequences, such as forcing medium-sized banks to merge because of the cost of compliance.

While transactions are taking a backseat to regulatory work, most firms report that activity is up. Low interest rates and increased liquidity, helped by the Federal Reserve's quantitative easing program, have made traditional mezzanine financing more difficult. However, the 2014 'debt cliff' has not caused as many problems as expected. Lawyers have been busy with amend and extends, and a lot of the debt has been refinanced to 2015 and beyond. Nevertheless, some lawyers are concerned that if interest rates rise or the lending markets contract because of inflation, this could cause problems down the line.

With investors grabbing at speculative opportunities in desperation, banking lawyers have seen a re-emergence in acquisitions and hostile transactions. Many high-risk, high-yield products, which investors shied away from after the economic crisis, are coming back. Arrangements which many attorneys thought they would never see again, such as covenant-lite and PIK toggle deals, sometimes derisively referred to as PIYC ("pay if you can"), are now enjoying a revival. "It's such a fickle market now that a cool breeze comes and everyone grabs a jacket," remarks one partner. "The memory and the cycles seem to keep getting shorter."

After a slow recovery from the crisis, the US capital markets are starting to gain momentum. Whilst transactions are skewed towards the mid-market for many firms, most report that the volume of deals has picked up over the last year....

After a slow recovery from the crisis, the US capital markets are starting to gain momentum. Whilst transactions are skewed towards the mid-market for many firms, most report that the volume of deals has picked up over the last year. Low interest rates have made it an attractive time for companies to borrow, and as a result of high liquidity, there is no shortage of lenders. However, the markets have been hit by several curveballs, in the form of US deficit discussions, the European debt crisis, disruptions in the Middle East and the earthquake, tsunami and subsequent nuclear spill in Japan. As a result, it has been a bumpy ride for capital markets lawyers. "It was a tough year last year, but there's been a lot of excitement," says one partner.

The surge in liquidity was partly due to the Federal Reserve's quantitative easing programs, which kept cash flowing through the markets for most of 2010 and the first half of 2011. QE1, which ran from November 2008 to March 2010, involved the Fed purchasing $175 billion of agency debt securities and $1.25 trillion of mortgage-backed securities, in addition to purchases of Treasuries. It was followed by QE2, which started in August 2010, when the Fed began reinvesting principal payments it had acquired during QE1 in longer-term Treasury securities. By November 2010, the central bank had decided to purchase $600 billion of long-term US Treasury bonds. QE2 came to an end in June 2010, and with no plans announced for QE3 at the time of going to press, there has been widespread speculation about the effects this will have on the markets. By increasing demand, QE2 also contributed to the vibrancy of the bond market, which has been flourishing. "I think the bond market will continue to be strong for the next couple of years," says one attorney.

Despite Standard & Poor's downgrade of the US credit rating in August 2011, demand for long- and medium-term Treasury bonds unexpectedly rose in the days following the demotion. With the stock market in turmoil, investors flocked to the relative safety of Treasury notes. The reduction from impeccable AAA status to AA+ followed months of political debate over how to fix the country's budget deficit, and a last-minute compromise which was unsatisfactory to many parties on all sides of the debate. The downgrade was met with outrage from politicians and businesspeople, who pointed to a $2 trillion error in Standard & Poor's initial calculations of the country's projected debt-to-GDP ratio. With interest rates kept artificially low, yield-hungry investors have also turned to the stock market for greater returns. Although conditions have been volatile, multiples have been rising, and some lawyers express surprise at the return of dividend deals. "Interest rates are low - that's driving the multiples above where they should be because people have nowhere to put their money," says one practitioner.

The IPO market has also become more active, although lawyers report some fits and starts. Deal flow has been hampered in some cases by what buyers perceive as unrealistic asking prices. Whilst stocks have risen, most have not yet returned to pre-2007 levels. This has caused tension between sellers, who believe their companies are undervalued in relation to earning potential, and buyers, who believe asking prices are steep in view of current market conditions.

Unsurprisingly, lawyers report that the high-yield market is "as hot as it's ever been". "It's very difficult to find a good return, so there's a lot of money flowing into the high-yield market," says one attorney. "High-yield transactions started to come back late 2009, early 2010. Everyone assumed that when the banking market got hot that would take some of the steam out of the high-yield market, but that hasn't happened. A lot of bond holders got money from refinancing and they pumped it back into the system."

As borrowers sought to take advantage of low interest rates, attorneys enjoyed what one describes as "an enormous wave" of recapitalisation and refinancing work. Companies which were starved for capital during and immediately after the economic crisis began fundraising frantically as the markets opened up over the last year. "Some issuers have anticipated future funding issues and so have funded themselves," says one partner. "That's going to provide a lot of companies with a cushion in case rates start to rise." Lawyers note that they are also seeing more LBOs, although these have not yet returned to pre-crisis peaks.

Going forward, attorneys cite uncertainty as the biggest issue. "People are worried that interest rates are going to rise, and about problems in the world causing problems in the capital markets," says one lawyer. "Every deal is a race to get it done as quickly as possible." With debt still hanging over the real estate sector, rising interest rates could push some borrowers into default, which may put pressure on portfolio estates and have far-reaching ramifications. "Volatility in the market and the fear about a double-dip recession and housing issues are going to continue to be the biggest challenges," says another partner. "I think there's going to be a real flight back to quality as a result of the instability."

The meltdown of the subprime mortgage crisis, and subsequent regulatory reforms, have dramatically changed the landscape of securitisation. High-volume, cookie-cutter work in mortgage-backed securities, which was previously the bread and butter of many leading firms, has been the biggest casualty – but other sectors have suffered as well....

The meltdown of the subprime mortgage crisis, and subsequent regulatory reforms, have dramatically changed the landscape of securitisation. High-volume, cookie-cutter work in mortgage-backed securities, which was previously the bread and butter of many leading firms, has been the biggest casualty – but other sectors have suffered as well. "Before the economic crisis, there were very large slews of auto deals, credit cards deals etc." says one partner. "Those have all got hammered."

Demand for Collateral Loan Obligations (CLOs) has been seriously hampered by impending regulation, world events, and perceptions of their role in the collapse of the economy. Some financial institutions had hoped that Japanese banks would become big buyers of CLO papers, but following the earthquake, tsunami and nuclear crisis on their shores, many are reportedly putting their money elsewhere. Meanwhile, European buyers are constricted by legislation, which limits investors from buying into securitisations which do not offer 5% risk retention. At present, it is uncertain how US retention guidelines will affect CLOs, and the rules will not go into effect for two years. Whilst some firms report a short-term upswing in demand, which they attribute to a rush to beat the deadline, the future of CLOs looks bleak.

Though most securitisation lawyers feel the hey-day of the mortgage-backed assets machine is behind them, some report that work on complex, one-of-a-kind transactions is starting to emerge. "I think that as people try to cope with new layers of regulation and risk retention and people try to deal with the regulatory regimes, each deal is going to be much more customised," says one partner.

New legislation has also created more work on the regulatory side. With clients concerned over Regulation AB, and SPVs in danger of being treated as swap participants, financial institutions have recruited lawyers to help them draft comment letters in response to the new rules.

Dodd-Frank also includes a mandatory requirement that all eligible derivatives be cleared through a clearinghouse. This is designed to reduce systematic risk, but some lawyers say it will increase the expenses associated with derivatives. "I think derivatives still have a valuable role to play so people will adjust," says one partner. "It may be that they are used for different purposes or used in a different way. I don't think people are going to go out of business - all the major players are restructuring to comply with the regulations."

Lawyers were also confident that securitisation would survive in one form or another. "You are talking about trillions of dollars," says one attorney. "So either there's going to be a lot less people owning mortgages, or there's going to be some kind of securitisation."

As regulatory reforms begin to take effect, the landscape of investment funds is undergoing dramatic changes. One attorney notes that hedge fund managers, who were previously subject to relatively lax governance, are "struggling to cope" with the new requirements....

As regulatory reforms begin to take effect, the landscape of investment funds is undergoing dramatic changes. One attorney notes that hedge fund managers, who were previously subject to relatively lax governance, are "struggling to cope" with the new requirements. "We very definitely have a lot more regulation proposed in just 12 months than I have seen in the past 20 years," says another partner.

Under Dodd-Frank, US hedge funds with assets of over $150 million will have to register with the Securities and Exchange Commission. Registered hedge fund managers will be subject to regular inspections and will have to provide greater disclosures about their business operations. The deadline for registration, which was originally set for July 2011, has now been extended to March 2012. The costs of compliance will barely make a dent in the profits of multi-billion dollar funds, but some lawyers worry that smaller start-ups may no longer be a viable business proposition. "The chances of two guys in their garage starting a hedge fund are very low these days, compared to what they were three years ago," says one attorney. While some see the registration requirement as detrimental to a free market, others believe they may ultimately be good for investors. "We are seeing a better quality of manager," says another lawyer.

With derivatives used by investment funds as a portfolio management tool, regulations which authorise the SEC to demand greater transparency about short-selling and securities lending will also impact funds. Outside of the US, derivatives are often used as a means of gaining exposure to an underlying hedge fund. "The Volcker Rule is going to have a dramatic effect on private funds," says one attorney. "We have got to see if those are viable businesses in the next few years."

Investors are also demanding greater transparency and pushing for reductions in fees. The financial crisis exposed issues relating to operational risk, for hedge funds in particular. Attorneys report that their clients are experiencing an increase in due diligence requests. In addition, the increasing crossover between the pension market and money management has resulted in pressure to drive down fees and reduce unnecessary risks. Although pension plans traditionally stuck with conservative investments, low interest rates and existing commitments to retirees with defined benefit plans have them towards more speculative funds in desperation for yield. "There's a little bit of pressure on pricing in the US, which is causing more arrangements between money management firms and providers of servicing pension-related assets," says one attorney. "The competition is very big. Employers have got leverage and are using it to drive down prices."

With stiff competition domestically, some funds are looking to expand into international markets. "I think quite a few fund families are looking to expand internally and set up operations in Europe or Asia," says one attorney. "We have got a relatively mature, regulated fund industry in the US, and for expansion there are opportunities in Europe and Asia."

Another trend is the increasing launch of exchange-traded funds (ETFs), which are one of the fastest-growing investment products around. Assets in ETFs have now surpassed $1 trillion, and several big firms are moving towards launching their own ETFs. Although ETFs have the advantage of being less expensive for investors than their more actively-managed rivals, it remains to be seen whether they will steal a significant chunk of the mutual fund market. However, some lawyers have suggested that this cheaper competition may generally force fees down. "I think the ETF market is going to continue to expand," says one partner. "This part of the business cycle tends to be the part where there's more acquisition activity and I see some of that in the pipeline already."

After a tough period following the economic crisis, business is booming for M&A lawyers. According to a report by deal-tracking firm Dealogic, global M&A activity hit $1....

After a tough period following the economic crisis, business is booming for M&A lawyers. According to a report by deal-tracking firm Dealogic, global M&A activity hit $1.5 trillion in the first half of 2011 - up by 22% compared to 2010 levels. "After the financial crisis, non-assisted M&A essentially came to a halt," says one attorney. "There was a period of over a year where there was no M&A other than distressed activity." However, what some in the industry refer to as "the dark days" are now just a bleak memory. "There's optimism and a lot of activity," says another lawyer. "There's a lot of available liquidity, which is a major driver of the M&A market."

The widespread availability of cash, helped by corporate downsizing during the downturn, has resulted in higher asking prices. According to research by Standard & Poor's, the top 50 publicly-traded companies were collectively sitting on over $1 trillion by January 2011. Low interest rates have created additional competition from private equity firms, which can borrow cheaply to finance speculative investments. "Sellers have an inflated idea of what their company is worth, and buyers don't want to pay it," says one lawyer. Another remarks, "It's a matter of waiting out some of the sellers and that's what people are doing."

Relatively high corporate profits have been another factor driving prices. "There's the sense that the proceeds of a lot of companies are high considering the recession, so there's a lot of restructuring to the pricing models that are out there," says one attorney. With good deals difficult to find, yesterday's underdogs of real estate and technology are now prime targets for bargain-hunters. However, activity was spread across a variety of sectors, which M&A lawyers interpret as a good sign.

Several firms report that deals are taking longer to complete. Some buyers are utilising a combination of cash and stock, and transactions are increasingly cross-border propositions. "That adds a whole new element," says one partner. "You can't move as quickly because a tender offer isn't as practical. Also, so many transactions are multi-national - you end up with questions of where are the shares going to trade, are they going to trade in the US, what knowledge of liquidity are they going to provide?" The Americas was the top target for M&A during the first half of 2011. While European activity was still high, optimism was dampened somewhat by the debt problems of countries such as Greece, Portugal, and Ireland. In Asia, China was the biggest focus of M&A activity.

Lawyers see market volatility as the biggest obstacle to doing deals over the coming year. Upheavals such as the nuclear crisis in Japan and uprisings in the Middle East have rocked the markets, and with roadblocks such as the US budget deficit and European debt ahead, attorneys report an increased focus on due diligence. Additionally, the provisions of Dodd-Frank and other regulatory measures have focused many clients on getting their own houses in order. "A number of buyers are pretty occupied with improving their own situation, either by improving compliance or increasing capital levels or improving their own business," says one partner. The increased scrutiny of the financial markets may also have effects in terms of the types of deals that can get done. "Generally speaking, I think anti-trust enforcement will be much tougher than it has been in the Bush years," says another partner.

After a difficult few years following the economic crash, private equity is making a comeback. Funds which tightened their purse strings during the downturn are now looking to acquire assets....

After a difficult few years following the economic crash, private equity is making a comeback. Funds which tightened their purse strings during the downturn are now looking to acquire assets. Liquidity is high, and low interest rates are prompting investors to take more risks. Though fundraising was slow during the first quarter of 2011, it had picked up by the middle of the year. With money cheap, plentiful, and available on good terms, activity has soared. "I think the economy is clearly turning a corner - or at least people think it is," says one attorney.

Banks, bonds, and high-yield financing have been popular sources of funding for deals. "The good news is that if you want to do a deal there's financing," says another partner. "The bad news is that financing is so readily available that it is creating unrealistic price expectations." Multiples are up, and companies that have already been trading at multi-year highs are selling at a premium. "The companies are doing just fine," says a third practitioner. "They are willing to sell if they get the right price, but they are not desperate."

Competition from strategic acquirers may become a problem for private equity firms over the next year. As a result of downsizing during the economic crisis and a prolonged period of cheap borrowing, corporations are now in the enviable position of having an overabundance of cash. In January 2011, the top 50 publicly-traded companies were collectively sitting on over $1 trillion, according to research by Standard & Poor's. As a result, M&A activity increased, as corporations struggled to find ways to empty their piggybanks. Since buying outright is less expensive than even cheap debt, strategic acquirers are almost always able to outbid a private equity firm. "I think the pace will slow down because of unrealistic price expectations," says one partner. "I think some of our clients are choking on some of the prices."

Firms report that most of the activity has been in upper-middle market buyout transactions. "I think there are more middle market deals, depending on how you define middle market," says another partner. "Certainly, the billion dollars and below are more the norm than the billion dollar and above." Hot sectors include energy, technology, health care and distressed real estate. Investments in emerging markets were also a focus of 2010. According to 2010 year-end statistics from the Emerging Market Private Equity Association, Asia captured a 61% share of those investments. However, Brazil has now overtaken China as the top destination for private equity investment, according to research released by the same organisation in April 2011.

Challenges ahead include managing potential increases in costs brought about from increased competition, regulation and the possibility of rising interest rates. In a recent survey of fund managers by global professional services firm Rothstein Kass, nearly 86% agreed that compliance costs will increase for private equity funds under the provisions of Dodd-Frank and the Consumer Protection Act. When interest rates eventually go up, this may result in what one lawyer describes as "a damper on the ability to close deals going forward". For the moment, however, transactions show no sign of slowing down. "It's a pretty robust time for private equity," says one attorney.

After a few difficult years following the financial crisis, business is once again booming for project finance lawyers. An increased interest in renewable energy, prompted by rising fuel prices and promoted by the Obama administration, has provided opportunities domestically....

After a few difficult years following the financial crisis, business is once again booming for project finance lawyers. An increased interest in renewable energy, prompted by rising fuel prices and promoted by the Obama administration, has provided opportunities domestically. Developments in emerging markets, such as Asia, Latin America and the Caribbean, have created international transactions requiring expertise from US lawyers. "The market is much better this year," says one attorney. "People have crawled out of their shells and are a lot more active in developing new projects." Another partner remarks, "Now is a great time to be in the business."

Firms report an upswing in alternative energy transactions, particularly in the wind sector and in solar projects, where technology is getting cheaper due to competition. "It's not like you're building a gas turbine, where there are only a few manufacturers in the world," one partner notes. However, pressures on the US treasury have created some uncertainty over the future of such projects, which are largely government-funded in the US. One attorney describes the future of renewable energy as "the gentle victim of a violent struggle between budget concerns and those who want to find a solution to our environmental needs."

The deadline for the Department of Energy's Loan Guarantee Program resulted in what one attorney describes as a "sprint to the finish" through most of 2011, as clients scrambled to close deals before the September 30 cut-off. The controversial program, which assures funding for eligible clean energy projects, has been the subject of heated debates between Democrats and Republicans in light of recent budgetary pressures. Lawyers battled against the clock and the program's bureaucratic requirements to get projects approved for their clients. "A friend of mine once said that project finance starts with a dream and then you try to express it in less than 10,000 pages," comments one attorney. "I think there's a lot of truth in that."

Uncertainty over the future of the program has forced lawyers to consider other options for their clients. Although turning to the capital markets for funding is a possibility, particularly to finance international projects, it is a difficult proposition in many cases. "Capital markets don't baby deals like banks do," says one partner. "You can only use the capital markets for projects where you are very confident in your ability to close on time." Additionally, the liquidity of the past year is threatened by the end of QE2, and the fact that there are no immediate plans for a third round of quantitative easing. Some attorneys also expect that world events, such as upheavals in the Middle East and the earthquake, tsunami and nuclear crisis in Japan, may redirect international investment.

The Japanese disaster, which took place in March 2011, has "definitely fuelled the debate over nuclear energy in the US," according to one lawyer. "Six months ago, everyone was gung-ho about nuclear expansion," laments another partner. Whilst existing transactions are generally going ahead, some firms report that the public perception of nuclear power, combined with fiscal limitations, has slowed down the flow of new deals in the sector. "I think there's still some push for nuclear being a source of energy that's relatively clean, but it's almost being pushed off the pages by the deficit discussions here," says a third practitioner.

For restructuring and insolvency lawyers, who make their living from a counter-cyclical market, the gradual recovery of the US economy has been bad for business. Whilst there is still some activity in the middle market, the past year has been characterised by what one partner describes as "a dearth of the very large filings"....

For restructuring and insolvency lawyers, who make their living from a counter-cyclical market, the gradual recovery of the US economy has been bad for business. Whilst there is still some activity in the middle market, the past year has been characterised by what one partner describes as "a dearth of the very large filings". Cheap and plentiful credit has resulted in a wave of amend and extends, but new mega-filings are now few and far between. According to one attorney, the market is "far from non-existent – but it's certainly past its heyday." Another laments, "There's little if any real restructuring."

The Federal Reserve's quantitative easing programs and decision to keep interest rates low have resulted in increased liquidity, and created ideal conditions for struggling companies to refinance. "We have got companies in denial, going through tough times, and we have got people willing to throw money at them," remarks one partner. With healthy companies selling at what some buyers see as unrealistic prices, bankruptcy as an M&A process - where lenders end up owning some or part of the company - has become popular.

However, there is still plenty of bad news for bankruptcy lawyers to smile about. "There's a lot of high-yield debt out there," says one partner. "If there's an uptick in interest rates, I think we will see the overall restructuring activity increase." Another attorney observes, "The default rate is currently low. I'm an optimist by nature – I think we are going to have more defaults."

Sectors which are generating a lot of restructuring work include real estate, financial services and retail. Though corporations are sitting on trillions in cash after trimming jobs during the downturn, this has not resulted in a marked upswing in job creation. As a result, the retail sector has struggled to entice consumer spending; by August 2011, sales expectations were at their lowest in over two years, according to the D&B National Business Expectations Survey. In the finance industry, the recession has led to an unwinding of what one practitioner describes as "these ridiculously over-structured products", many of which were constructed to support the mortgage market. According to the Case-Shiller Index, real estate prices in March 2011 were down by 37% from their 2006 high. "I think the real estate sector is definitely driving a lot of the restructuring right now," notes one partner.

With short-term state tax revenue tied to property values, some attorneys had hoped that municipal defaults would generate business this year. "You can't pick up the paper without reading about municipal defaults," says one attorney. "That's a problem which is looming on the horizon and may require some kind of congressional fix." Yet while the controversy over whether it is constitutional for states to file kept journalists busy, most bankruptcy attorneys were left twiddling their thumbs. "It was going to be the next big thing – but it wasn't," says another partner.

Large and complicated international transactions were also making headlines this year. Nortel, once one of North America's largest telecommunications companies, filed for insolvency protection in 2009. As part of the bankruptcy, the Toronto company completed the sale of its $4.5 billion patent portfolio in June 2011. With creditors led by bondholders in the US and pension trustees in the UK, resolving the cross-border legal issues was a complex proposition. The trend towards globalisation is likely to benefit firms with an international scope. "As the world becomes more and more closely knit together, companies become both larger and more integrated globally," says one practitioner. "This is going to be an increasing phenomenon. International firms are going to benefit from this completely, because involvement requires the ability to get an almost instant answer."