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Portugal has had to deal with well-publicised problems in the last few years. Alongside Greece and Ireland it has been beaten down by economic woes, rating agency downgrades and weak forecasts, all of which have led to a situation where banks are not lending and the capital markets lie dormant....

Portugal has had to deal with well-publicised problems in the last few years. Alongside Greece and Ireland it has been beaten down by economic woes, rating agency downgrades and weak forecasts, all of which have led to a situation where banks are not lending and the capital markets lie dormant.

"The market has declined sharply, affected by the financial crisis. The transactions have been declining sharply. In terms of capital markets and banking transactions it has been decreasing," says one partner.

In terms of new lending, liquidity comes at a premium and a number of Portuguese banks have only been extending their capital to the best projects. "Lending is very very difficult now, banks have a huge problem with money, they have no money to lend to the economy," says one partner and another agrees: "They [the banks] try to avoid entering into new credit transactions, they will only do this if the risk is very good."

Although practitioners have been kept active in terms of giving more general advice transactions are few and far between. "Banking again, you have day to day advice on banking issues, you don't find a lot of transactions," says one partner. Capital raisings have led to a few mandates as banks try to comply with Basel III. "There are a few in the sense that the banks want to comply with the ratios and therefore they need to improve their balance sheet," says one partner.

In addition, Portuguese banks are also expected to comply with the Memorandum of Understanding on Specific Economic Policy Condition (MoU), a set of rules issued on May 17 2011 by the Portuguese State, in conjunction with the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF). Essentially the agreement is a pre-condition for Portugal to receive the rescue package from the other eurozone member states.

The MoU requires Portuguese banks to increase their core Tier I capital ratio up to 10% by 2012. "The Memorandum has higher capital requirements than those results from the Basel III framework," says one banking partner. "Basel III only imposes certain requirements by 2019, and Portuguese banks are being required to have 10% core Tier I by 2012, so this is the big difference."

The need for banks to consolidate their reserve capital has also led to a dearth of activity in the capital markets. "There is a difficulty of having access to funding and really companies see that this is not the good time to go to market," explains one partner.

Equity is the area hardest hit, with IPOs being absent since the notable listing of Cimpor last year. "The market has been mostly stopped, no IPOs, no public offers, there was one takeover last year on Cimpor," says one capital markets partner. "Basically what we have seen is that banks are very worried about liquidity, that is the main issue, the Portuguese banks have had a difficult time in financing in the capital markets," says another practitioner.

The debt and securitisation markets have not fared much better, although some work has been seen in regard to bond issuance mainly, once again, due to the lack of other available sources of capital. "Local companies have been issuing bonds to place them with private investors through private placements in order to overcome the difficulties of financing them with the local banks," says one partner.

Work related to asset-backed securities (ABS) has still been seen, though not at the levels seen in the last few years. "ABS is still available, and we see transactions coming out and banks are issuing some ABS, but ABS is no longer eligible for ECB." explains one partner. However, it is still possible for Portugal to issue single A-rated covered bonds to access ECB funding, which will lead to some mandates.

One intriguing new development has been the entry of Angolan institutions into the market. While sporadic activity from investors and corporates had been seen in the past, but financing has until now not been an area of activity. "Banks from Angola are growing in Portugal, and also their share in Portugal," says one partner. "You do not have new European or US banks. One of the new trends has seen banks from Angola have more activity."

Portuguese M&A has suffered as it has right across Europe because of the twin headed beast that is a lack of liquidity and a lack of confidence."The general trend is a sense of decrease, a sense of decrease in the number of transactions happening," says one partner....

Portuguese M&A has suffered as it has right across Europe because of the twin headed beast that is a lack of liquidity and a lack of confidence.

"The general trend is a sense of decrease, a sense of decrease in the number of transactions happening," says one partner. "Of course it was caused to a large extent, not only due to the economic and financial situation of the country, which became less attractive for foreign investors, but also due to the difficulties of financing the transactions."

Distressed acquisitions are still seen in certain sectors, but it is done on a case by case basis rather than being a wide-ranging trend. "They can take advantage of the crisis to make very simple acquisitions, they can try to expand their business, take advantage of the crisis and therefore buy for a lower price," explains one partner. "But even then, you have small acquisitions, you don't have large ones."

There is still intermittent interest coming in the form of Brazilian and Angolan investment. In the case of the former, putting aside the historical links, investors see Portugal as a way to enter the European market and enter cheaply by buying distressed assets. "I mean Brazil is in a very good situation, they can take advantage of the crisis and try to buy assets in European countries much more cheaply," says one partner. Some practitioners also point out though that investment is in general still going in the opposite direction. "You see more Portuguese companies trying to invest in Brazil than the other way round. Because this makes more sense, obviously," explains one partner. "They are trying to escape from the Portuguese crisis and they are trying to invest, as everybody says that Brazil in the forthcoming year will be expanding dramatically."

In Angola, the trend is still for a few cash rich investors to take stakes in specific targets rather than enacting full takeovers. "They have lots of money, so what they are doing is they buy stakes in large Portuguese companies," says one practitioner.

Firms are still hopeful of seeing mandates arise from the government's privatisation plan, but things remain unclear in regard to timetabling. However with the Government needing to find funds to escape from its budgetary deficit, plans may soon be sped up. "There is also an aggressive plan from the government to sell companies which are state owned, which are state funded from the government, as a way to cover the current deficit," says one practitioner.

"The funding problem is affecting project finance, basically there is no money."As the above quote from one projects partner suggests, the source of the country's problems is simple....

"The funding problem is affecting project finance, basically there is no money."

As the above quote from one projects partner suggests, the source of the country's problems is simple. Unfortunately finding a solution is much trickier.

"The project finance is mostly difficult, the public sector/infrastructure projects are very depend on that, with the fiscal problems we have had in Portugal, there is a serious reduction on these type of activities," another partner adds.

A lot of projects that had been on the cards have been put on hold indefinitely and with little capital flowing in the market this is unlikely to change any time soon. "The big public infrastructure projects in Portugal, which include the airport, the railway, everything has been suspended," says another partner. "Public investment is gone, with the exception of the ISP railway to Madrid, but that also has a bit of an initial quarrel."

In light of the government's well-publicised budgetary problems and a general lack of liquidity in the banking market, what few projects there are are having to be funded using other forms of finance. Project bonds may well be one solution although this type of work has not really been seen yet. "People are trying to find new investment sources, basically banks have no money. Outside the banking sector, hedge funds and other investors would be alternative investors for this type of financing," says one partner.

PPP (public-private partnership) and PFI (private finance initiative) projects may well be another solution, of sorts, requiring as they do less upfront commitment from the government itself. "We feel that there is something to say in the market, project finance with a lot of investment through PPP and PFI," says another practitioner. "The fact remains that the Portuguese government cannot increase their deficit."

The main theme that restructuring and insolvency practitioners have noted in the last year has been a substantial increase in insolvency proceedings. "There is a lot of work and many judicial insolvencies and pre-insolvency matters in 2010....

The main theme that restructuring and insolvency practitioners have noted in the last year has been a substantial increase in insolvency proceedings. "There is a lot of work and many judicial insolvencies and pre-insolvency matters in 2010. There were much more insolvency filings than in the previous years," says one partner.

The wider European trend has seen a concerted effort to keep cases out of court and find a way to reach an agreement with creditors, but in Portugal this does not seem to be quite so prevalent. "There isn't that much restructuring work unfortunately, but there's more insolvency work in the last 12 months," says another practitioner.

One aspect, which is proving to be a source of great annoyance to practitioners, is the failings of the commercial courts. "They're very slow, they are very very slow. The main problem is we did not have enough specialised courts," explains one partner.

While it can be argued that the sheer number of cases emerging from the financial crash could not have been predicted far in advance and thus expansion of the courts was not possible, partners also point to more simple practical issues which should have been addressed. "Lack of administrators, they are not very well prepared, it's a problem because the court appoints the same person. The criteria is not very clear, the criteria of the court to appoint the administrator," says one insolvency practitioner.

There have also been voices of dissent raised against the insolvency law. Now almost a decade old, the law was introduced before the financial crash and thus has been found wanting in certain areas now it is being more rigorously tested. However the main shift from the old law has seen a greater importance put on creditors rights and has generally been seen as a good thing. "Our former law is quite different; our former law was in favour of the company," one partner explains. "The Spanish [law] is very similar to Portuguese law. The creditors have a lot of power, all the law is to defend the interest of the lenders instead of the debtors."