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In 2011, a new constitution in Hungary was passed. The Magyarország Alaptörvénye (Fundamental Law of Hungary), which comes into force on January 1 2012, undoubtedly carries symbolic importance as it marks a break from the communist past being adopted as it was by democratic process....

In 2011, a new constitution in Hungary was passed. The Magyarország Alaptörvénye (Fundamental Law of Hungary), which comes into force on January 1 2012, undoubtedly carries symbolic importance as it marks a break from the communist past being adopted as it was by democratic process.

However, the new constitution also carries practical import, It is fiscally conservative; the Constitutional Court's powers on budget and tax matters will be restricted until public debt falls below 50% of GDP. The President will be allowed to dissolve Parliament if a budget is not approved and only companies with transparent activities and ownership structures are allowed to bid for government contracts. Moreover, the powers of the head of the National Bank are also limited. Additionally, the modification of tax and pension laws will require a two-thirds majority.

"The constitution is not directly affecting business," says one partner, "there are some new laws but the theory is most important. It's more of a political document introducing new concepts with intent to deviate from the socialist past." The partner adds that "it will strengthen the economy by allowing it to develop and reduce the foreign deficit. I think it's on the right track... and the tax cuts are a very important thing they did".

Hungary is undergoing a transitional phase and picking up the pieces after the catastrophic economic situation that required an International Monetary Fund (IMF) bailout in October 2008. "We see a substantial pickup in business which means we're busy and it's a good sign with more transactional work and investors are coming back.... we're slowly coming out of the crisis," says one commentator.

Banks lost their traditional market when the real estate sector was landed a big blow by the lack of new credit and the economic recession. Nevertheless, while 2006 and 2007 saw significant lending from commercial banks, there has been improvement as compared to the intervening period. In the last 12 months, there has been activity despite larger projects being put on hold. Lawyers note that they have had success in closing deals and that the interest towards Hungary is improving with money gradually starting to flow in. "The market is improving, banks are more willing to lend and the sentiment is better," says one partner.

Retail banking has had its own fair share of disruption and the source of the problem lay with the Swiss franc. During the inflation of the housing bubble, ordinary Hungarians preferred to take out foreign currency loans as interest rates were significantly lower than domestic rates, which became more expensive when the national currency, the forint, floundered in the last year. Most home credit was in foreign currency and consumers thronged to the banks as interest rates were the lowest in Swiss francs. When the crisis hit it inevitably led to rising debt payments. "Instalments grew by 50%," says one partner, with another adding: "The government tried to tackle the issue and established a decree to fix the exchange rate to protect the population...there will not be many new home credits as the conditions for new credit are stringent and very cautious".

Capital markets transactions are happening in greater numbers than before. However, they are still not at pre-crisis levels. Bearing the above in mind, it has become apparent that bond issues and private placements are offering viable alternatives to straight up commercial financing. "There is more appetite and more willingness to go ahead as it's faster and easier because the covenants are less severe than facility agreements," says one partner, adding: "Capital market deals are quite a few. We are doing several on the equity and debt side".

According to another partner: "Bond issues are quite healthy but the question is what segment we are talking about? If it's bond issues by big corporations that's fine, but municipality bond issues are more and more problematic. It's a bit over financed."

With regard to the equity capital markets (ECM), IPOs are rare. "Most transactions we do are debt securities or capital increases," says one partner. Nevertheless, the Warsaw Stock Exchange is rapidly developing into the regional hub for ECM transactions which in turn is driving work. "It's emerging as an in between [Eastern and Western Europe]," says one partner, adding: "the market is developing equity tickets that wouldn't go public [in Hungary]."

For Hungary, the economic crisis was structurally more profound than for some of its regional neighbours. The poor shape of its national budget meant that those who would look to invest in countries like Poland or Czech Republic practiced restraint with regard to Hungary....

For Hungary, the economic crisis was structurally more profound than for some of its regional neighbours. The poor shape of its national budget meant that those who would look to invest in countries like Poland or Czech Republic practiced restraint with regard to Hungary. There were higher governmental taxes on business and consequently growth was slower.

Strategic investors are now looking at their investments and debating whether it is worth staying or engaging in "transformational" transactions to increase market share. "Exit or doubling down [gambling on a larger investment]," is the choice of investors according to one partner.

Nevertheless, the tide might be turning and firms have observed a pickup in M&A activity. "We believe that Hungary follows the regional trend with more M&A and private equity," says one partner, adding that, "it can be compared to Poland, the Czech Republic and Turkey. The transactions going through are definitely increasing in size". Another partner says: "We see that foreign investors have more and more confidence and trust that the environment will be good for them."

In an M&A market formerly dominated by real estate, confidence is now growing in the energy, TMT and pharmaceutical sectors. There have been wind farm and biomass plant acquisitions and firms are seeing power plant transactions in the pipeline. The TMT sector is also generating some noteworthy deals. "According to market trends TMT is another growing area", says a partner.

The pharmaceutical sector has always been heavily regulated but new laws will oblige current owners to sell and so partners also predict activity in the sector. Additionally, one partner felt that the state would like to encourage domestic M&A and is taking nascent steps to this end.

A regional trend sees private equity making a return to the market. This is also true in Hungary, but on a smaller scale, with private equity investing in startup ventures. "Funds are reaching the natural time to sell investments," says one partner, who adds that "private equity sellers are desperate to sell and buyers are desperate to buy". The market has also seen financially distressed transactions, where holding companies are under distress or local oligarchs borrowed too much and are now compelled to sell good assets in order to retain their empires . Furthermore, banks are trying to get rid of assets in order to clean their banking portfolios.

One partner sets the scene neatly: "It's not a golden age but its better. The market is back to 2005. We're looking to get back to 2007 in value and volume".

Project finance is not an area that is generating much work for law firms. "There are some project finance deals but it's much slower....

Project finance is not an area that is generating much work for law firms. "There are some project finance deals but it's much slower. The appetite to finance projects is less and banks are very, very choosy and the amount they lend is much lower than before," one partner says.

Nevertheless, it is clear that in the long term there will be an appetite for energy funding, especially in renewable energy, and although "Hungarian legislation is pointing in the opposite way", according to one local partner and has "scared away investors", firms in general are seeing changes in the government's attitude. It has recently been promising further renewable incentives and firms are hopeful looking ahead for biomass and wind projects, and maybe even in hydropower. At the moment however, it's the traditional power sources that dominate the landscape when put in contrast to renewable sources.

Hungary is about 80% dependant on Russian gas and the government is committed to nuclear power to serve its future needs. "Everything which can replace gas; the government decreed on the expansion of the only Hungarian [Nuclear] power plant [and] one serious alternative is nuclear energy," says a partner. "The new government is definitely declaring [energy] independence from the Russians...but the former government realised the problem with Ukraine," the partner adds pointing out that breaking away completely from such a resource rich neighbour is hard to do.

Infrastructure is an area in need. The national airport is one example as it is "not connected to the city properly" says a partner. But the sector will be held back by the government's attitude to public-private partnerships (PPP). "The government does not support PPPs. They've started to buy back their projects [and the] big PPP projects will be bought back," says another. The government has reviewed and revised the current projects and this has made market commentators pessimistic about future mandates. "The government is in a quandary. The current government, they don't like to see key infrastructure assets in foreign ownership. On the other hand, they see the dire need to brave new infrastructure and bring in new money. It's a difficult situation and they're looking at all different types of alternatives," one partner states. The current government is also reticent with regard to privatisation.

The real estate sector has been described as "the deadest of all". Banks are tighter with their funds but are becoming more aggressive because of their country targets. There is hope that this sector will become more active but it will not be as active as energy.