Central and eastern Europe: CEE the light

The most recent global deal statistics have shown that the outlook remains pretty dark for the world’s emerging markets. According to figures published by mergermarket, the value of emerging markets deals plummeted by 24.1% in the first three quarters of a2012, down from $386.8bn in 2011 to $293.5bn. Significantly, it’s not simply a result of a drop in worldwide deals. Instead, it seems that investors are specifically turning away from these jurisdictions; emerging markets accounted for 23.5% of deals in 2011, but in the first three quarters of 2012 that fell to 15.8%.

However, this drop has not been reflected in the emerging markets of Central and Eastern Europe (CEE). In fact, the CEE (excluding Russia) is currently the most active M&A region in Europe, with mergermarket counting 789 deals in the first three quarters of 2012. To put those figures into perspective, the Germanic region was second with 691 deals and the UK and Ireland were third with 640.

Although it is inaccurate to suggest that all of the regional economies included under the banner of CEE would be considered emerging, there is no doubt that countries such as Slovenia, Croatia and Serbia are in a process of transition and economic development. However, it is a very scattered picture. In addition to the fact that there is some debate about which countries are even included under the umbrella ‘CEE’, there is also some variation between the health of the region’s economies. For example, in October 2012, the European Bank for Reconstruction and Development (EBRD) forecast that growth in the emerging Europe region would hit 2.7% for 2012. While that is down from 4.6% in 2011, it is expected to provide a strong foundation for 2013, when growth is projected to climb by 3.2%. The EBRD projected Slovakia to grow by 2.7% in 2012, while Serbia was expected to shrink by 0.7%. Overall though, the CEE landscape seems to be dotted with green shoots.

‘I’m more optimistic than I’ve been for four years. I think that the bottom has finally been reached and Central and South Eastern Europe in particular is in relatively good shape compared to Western Europe’

 Law firm Kinstellar is a brand firmly rooted in the CEE market. Formed in November 2008 from the Bratislava, Bucharest, Budapest and Prague offices of Linklaters, it also now fields offices in Belgrade and Istanbul, giving the firm an excellent platform to comment on local trends.

‘I’m more optimistic than I’ve been for four years,’ says Jason Mogg, managing partner of Kinstellar. ‘I think that the bottom has finally been reached and Central and South Eastern Europe in particular is in relatively good shape compared to Western Europe – and I think investors are recognising that.’ The firm’s familiarity with foreign investors is encapsulated by its recent participation in advice to US power management company, Eaton Corporation, on its $11.46bn acquisition of Cooper Industries, which involved a complex Hungarian holding and financing structure. Csilla Andrékó, managing partner of Kinstellar’s Budapest office, was the partner on the deal.

Significantly, this positive outlook is by no means limited to Mogg, but the varied nature of the CEE dictates that not every law firm is quite so convinced that the rough period is over.

Mapping it out

Pinpointing business trends is a tricky business when analysing the CEE, not least because the jurisdictions included under the term are open to interpretation. Generally speaking, the description encompasses former communist states in Europe following the collapse of the Iron Curtain in 1989-90. However, the term can also be widened to include eastern countries looking to obtain membership of the European Union such as Turkey. For major international firms, the offices included under the term CEE will vary according to internal policy, as US player Chadbourne & Parke points out.

‘Operationally, international law firms generally separate Balkan offices from Central European offices, and keep Turkey separate for the most part,’ says Ays¸e Yüksel, managing partner of the Istanbul office of Chadbourne & Parke. ‘At Chadbourne, we make a special effort to integrate our Turkish, Polish, Ukrainian and Russian practices (we have offices in each jurisdiction) by focusing on cross-border transactions between these countries, and by managing joint marketing efforts.’

Despite the lack of standardisation, firms largely agree that there is a distinct CEE market.

Harrisons Solicitors is an English law firm specialising in what it calls ‘New Europe’. The firm has offices in Belgrade, London and Podgorica, and it suggests that client strategy usually dictates a law firm’s approach to the region.

‘When a leading client looks to do business in the CEE it will see that as a separate market, distinct from the rest of Europe’

 ‘When a leading client looks to do business in the CEE it will see that as a separate market, distinct from the rest of Europe,’ says Mark Harrison, founder and principal of Harrisons Solicitors. Kinstellar’s Mogg agrees that ‘within the region there are different stories but they are interrelated, even some of the legal systems are quite similar’.

However, outside the band of law firms with broad networks in the region, there is a reluctance to view the CEE as a single market. For example, S¸tefan Damian, the deputy managing partner of independent Romanian heavyweight T¸uca Zbârcea & Asociat¸ii, believes that firms should approach the CEE from a more individualist perspective.

‘I do not see one market: if it was one market, the mentality and the language would be the same,’ says Damian. ‘There are some synergies between former communist countries but even between countries with a shared history you cannot say there is a shared culture – just as much as you can’t say the EU is one market, the differences are too marked.’

Nevertheless, there are a handful of CEE countries which are generally considered to be central to a CEE strategy and, among these, Croatia, the Czech Republic, Hungary, Poland and Romania have been historically attractive to investors. As a strong sign of how interconnected these countries are, recent financial statistics have shown strong similarities in terms of their economic growth. The EBRD predicted that growth across the CEE region would hit 2.7% for 2012, with Croatia expected to see growth fall by 1.9%, while the economy of the Czech Republic should grow by 0.7%, Hungary is predicted to see its economy shrink by 1.5%, Poland is expected to hit 2.5% growth, while Romania is projected to suffer a stagnant 0.5% climb in GDP (all figures are from EBRD projections except for the Czech Republic, which is provided by Eurostat). Only Poland then seems to be immune from regional difficulties. Of course, each country has specific reasons for its slow recovery from the recession. Most notably, Hungary’s troubled political backdrop has seen investors shy away from the country.

‘Foreign investors have been displeased with some moves and policies of the current government in Hungary,’ says Mogg. ‘But that crested over a year ago, and seems to be dissipating now.’

The consensus was that 2012 was a year of transition for the emerging Europe region, with the EBRD having predicted that growth would have expanded to 3.2% in 2013, a rise of 0.5% on its 2012 forecast. As the outlook starts to improve modestly, law firms are eager to discuss the potential opportunities that will afford clients.

Building foundations

As the global drive to secure energy needs continues apace, it remains by far the most active business sector across emerging Europe. Despite the weak economic outlook, outdated power plants need to be renovated and new sources of electricity need to be invested in.

Fiebinger Polak Leon & Partner Rechtsanwälte (FPLP) is a Vienna-based firm with a strong track record in the CEE and a renowned energy practice. ‘The overall feeling is that the CEE is currently slow and difficult. There is some geographical difference across the region but there are no sensational markets,’ says Peter Polak, a name partner of FPLP. ‘However, the most active industry is undoubtedly energy – the life sciences sector is also ticking along.’

‘I do not see one market: if the CEE was one market, the mentality and the language would be the same’

Rudolf Fiebinger, head of litigation and international arbitration at FPLP, recently advised the state-owned Slovenian energy company in arbitration against an Italian energy company relating to the validity of certificates of origin. The firm also points to projects such as the Nabucco pipeline (a proposed EC-backed natural gas pipeline, which intends to export gas from Turkey to Austria to reduce European dependence on Russian gas) as further evidence of the investment opportunities currently being promoted to bolster Eastern Europe’s energy ambitions.

Every country seems to be reporting exactly the same trends in energy and natural resources work. In Romania, T¸uca scored a major coup with an instruction from Canadian player Gabriel Resources and Rosia Montana Gold on a $4bn gold mine project. The project is significant for being the largest foreign direct investment into Romania. Damian was involved in the project and points to it as being very representative of the deals coming through the door.

‘Energy is booming and not just renewable energy as some may expect, but also copper, gold and shale gas and exploration,’ he says.

In a highlight example of a recent shale gas deal, CMS Cameron McKenna advised Eni on its purchase of a 50.01% stake in Westgasinvest, which holds nine shale gas licences, covering 3,800 sq km in the Lviv Basin in Ukraine. Graham Conlon, head of corporate and M&A in CMS’s Ukraine office, led the deal alongside energy and projects counsel Vitaliy Radchenko. CMS is particularly well placed to comment on energy trends in the region; in addition to its strong energy practice, the CMS brand has an extensive network in the CEE, including offices in Poland, Romania, Bulgaria, the Czech Republic, Slovakia and Ukraine, among many others.

‘Energy, oil and gas sectors were particularly active over the past year [in the CEE], along with telecoms and real estate, which is finally an active sector again,’ says Andrew Kozlowski, managing partner of CMS’s Warsaw office. ‘Traditionally investors used to come from large European markets and the US, but nowadays more and more investors are coming from new directions – China, India, Russia.’

Interestingly, the boom in the oil and gas sectors has seen interest in renewable energy projects plummet in many CEE countries. Although Europe’s determination to diversify its energy sources saw EU leaders set out the ‘20-20-20’ plan in 2007, which committed Europe to reducing greenhouse gas emissions by 20% from 1990s’ levels through raising the share of EU energy consumption produced from renewable resources to 20% and improving the EU’s energy efficiency by 20% by 2020, the downturn has combined with state aid concerns to slash subsidies in this area. The result is that renewable energy is the exception to the energy boom in several jurisdictions.

Austrian firm Eisenberger & Herzog is known for its experience in the regulated industries and it has a well-established reputation for advising on CEE deals. The firm has recently recorded a noticeable drop-off in alternative energy schemes.

‘New developments of renewable energy projects have experienced a sharp decline in some of the CEE countries,’ says Michael Strenitz, head of Eisenberger & Herzog’s CEE practice. ‘This is mainly due to adverse changes in regulation (a prominent example being Bulgaria) and to some extent due to a re-shaping of investors’ risk profiles.’

However, this is not the case in all countries. Romania, for instance, seems heavily invested in the sector and the EBRD recently lent VS Wind Farm E50m to finance the operation of the 24MW Vutcani wind farm and 33MW Sarichioi wind farm – the third investment and project financing by EBRD to an EDP Renewables-operated project in the renewable energy sector in Romania.

Leading Eastern and European law firm Wolf Theiss is benefitting from the trend. The firm has seen an increase in activity across the board in renewable deals, including wind, solar, biomass and hydro projects. ‘The Bucharest office has been very heavily involved in advising on renewable energy projects in 2012,’ says Bryan Jardine, local managing partner of the firm’s Bucharest office. ‘This has been driven primarily by increased legislative certainty in the green certificate support scheme. In particular, the number of solar photovoltaic projects we have advised on (including on the developer, investor and EPC [engineering, procurement and construction] contractor side) has increased dramatically in the second half of 2012.’

Of course, although projects are still going on, the main trend is one of decreased market liquidity. Firms are predominantly keeping busy advising on counter-cyclical work and debt matters.

Regional squeeze

As most of the CEE’s privatisation programmes have been completed, or delayed due to tough conditions, M&A remains significantly down across the region. The lack of deal activity has naturally translated into an increase in refinancing, restructurings and contentious work.

‘Serbia says that 20% of its banks’ loans are non-performing,’ says Harrison. ‘This situation is reflected across the region and banks are instructing us to go in and foreclose on loans.’

In addition, countries are desperate to boost cash reserves and are looking to borrow to secure liquidity. Harrisons Solicitors was recently involved in advising on eurobond issues by two different governments. In 2012, Aleksandar Preradovic and Ines Matijevic Papulin led advice to J.P. Morgan Securities and Deutsche Bank as joint lead managers on Serbia’s first-ever eurobond issue, worth $2bn. The same partners also acted as local counsel to HSBC and J.P. Morgan as lead managers in Montenegro’s eurobond issue in 2011.

‘Greece had a substantial amount of investment in Serbia and Macedonia, so the fact that Greece is in a crisis has had a massive knock-on effect,’ says Harrison.

Cyprus is an interesting market to look at in this context. The island is a major financial offshore centre for the CEE and Russian markets, and its proximity and connectedness to Greece has hit it hard.

Andreas Neocleous & Co is a major Cypriot law firm that has made an asset out of its position at the crossroads of Europe, Asia and the Middle East and it is very active in the CEE.

‘The current economic difficulties have created a substantial amount of activity for us. We cannot discuss specific assignments due to confidentiality agreements but we have already advised on substantial potential mergers of financial institutions,’ says firm founder Andreas Neocleous. ‘One of the major issues in the bailout negotiations is the extent to which the banks require recapitalisation. That will depend on the extent of their non-performing debt, which in turn is influenced by the security held for the debt. In due course, when credit institutions are restructured, both lenders and borrowers will require extensive legal support in negotiating and documenting the terms.’

As one would expect, the lack of liquidity has also led to an uptick in dispute resolution cases and Andreas Neocleous & Co is seeing a good proportion of those cases.

‘There is no doubt that as conditions become more difficult people are more concerned to hold on to what they have, and we have seen a significant increase in litigation work involving businesses operating in Central and Eastern Europe,’ says Neocleous. ‘Most have their holding structures in Cyprus and disputes frequently spill over into the Cyprus court. Many are simple straightforward applications for freezing orders and other orders in support of proceedings elsewhere, but the sums involved are always substantial, and others are much more complex.’

This is not a situation limited to Cyprus. Across the CEE firms are reporting that litigation has become the mainstay of their practices and it is not just civil law-related – criminal work is also on the increase, which in turn is driving changes in regulation.

Crime and adjustment

As corruption issues climb up the corporate agenda in the wake of the UK Bribery Act 2010 and increased enforcement of the US Foreign Corrupt Practices Act, clients have stepped up their vigilance in terms of internal policing methods, which has created work for law firms in terms of drafting staff policies and other precautionary issues. However, that has not stopped the increase in illegal activities.

‘Fraudsters have also stepped up their activities across Central and Eastern Europe over the past few years and the proceeds of their crimes frequently end up in Cyprus,’ says Neocleous. ‘Our specialist asset recovery team has assisted numerous overseas clients, law firms and banks in recovering fraudulently transferred funds.’

The increase in suspected fraud is encouraging countries throughout the region to tighten-up legislation in the transparency and corporate governance areas. In addition to these regulatory changes, countries are looking to modernise legal frameworks to encourage investment and more user-friendly legal regimes.

In the Czech Republic for example, private law is undergoing some transformational reforms, which local lawyers say will result in the most substantial changes to its legal regime since the fall of communism in 1989.

Kocián olc Balatík is one of the Czech Republic’s leading players and fields a Legal 500 top-tier ranking practice in corporate and M&A. The firm has been actively involved in the drafting process of the recodification of the country’s private law, with company law expert Jan Dedic providing assistance on the proposed changes.

‘From January 2014, there will be an entirely new Civil Code and Companies Act, which have been adopted and are now being commented upon and studied by lawyers,’ says Dagmar Dubecká, managing partner at Kocián olc Balatík. ‘These acts will completely replace the existing civil and commercial codes. This is not just a formalistic amendment, however, as a number of legal concepts will be totally reworked, for example, liability for damages.’

Among the changes Dubecká highlights as being most positive for clients are the possibility of a monistic system for the management of joint stock companies (alongside the current dualistic system), the possibility to issue various types of shares (for example also tracking shares) and payment of deposits on dividends.

The Czech Republic’s overhaul of its legislation is not a unique case. Among the other main countries committed to reforming their investment regimes, Turkey also stands out for the sheer scale of changes. Chadbourne & Parke’s Yüksel highlights the adoption of the new Renewable Energy law in 2011; changes to the Turkish Commercial code that aim to raise standards of transparency and simplify the incorporation process; and the new Turkish Code of Civil Procedure, which will introduce new important elements into the litigation process. In short, regulation has become a crucial tool in the hands of governments looking to lure investment away from neighbouring states. So which countries are lining up as the most attractive investment opportunities?

Eastern promises

Vienna-headquartered Schoenherr boasts excellent coverage of the CEE market, with offices in 11 CEE jurisdictions and desks dedicated to four others. In a strong symbol of its future intent, in October 2012 Schoenherr merged with its local co-operation partner in Turkey, Türkog?lu & Celepçi, cementing a formal alliance that the firms have enjoyed since 2010.

‘We are convinced of the unique potential that Turkey offers,’ says Christoph Lindinger, managing partner of Schoenherr. ‘Not least because of its ever-growing role in both inbound and outbound investment within the broader region.’

Schoenherr is not the only Austrian firm to spot Turkey’s potential.

‘With a certain slowdown in the general CEE business over the past few years, interest in Turkey has certainly increased,’ says Martin Brodey, a partner at major Austrian law firm Dorda Brugger Jordis. ‘Our firm has also entered into a “best friends” co-operation with a Turkish law firm and has contacts with several others firms in Istanbul and Ankara. We do not anticipate a lot of mergers between foreign and domestic firms in the CEE region over the next couple of months, apart from Turkey.’

‘We are convinced of the unique potential that Turkey offers. Not least because of its ever-growing role in both inbound and outbound investment within the broader region’

 There is no doubt that Turkey is a bright light in the southern European region (see ‘Bright spot: Turkey’, page 58). While it is not traditionally seen as a CEE country due to its close links to the Middle East, its ambitions to join the EU show that it is perfectly positioned to straddle both markets. Indeed, Germany may be the country’s main trading partner but Turkey also retains important relationships with Saudi Arabia, the UAE, Iran, Egypt and Iraq.

Istanbul-based full-service firm Mehmet Gün & Partners has an excellent pedigree in the Turkish legal market and is optimistic about the opportunities going forward.

‘The government is determined to progress the Istanbul Financial Center project and construction is expected to start soon. Also, the long-desired ambition to establish an international arbitration centre in Istanbul is also gaining momentum,’ says Ug?ur Aktekin, partner at Mehmet Gün & Partners. ‘The government is also promoting a very ambitious target for the year 2023 – the centennial of our Republic – which is to increase exports from $140bn to $500bn and facilitate all avenues for international business.’

In addition, Aktekin believes that efforts towards judicial reform, coupled with full membership of the EU, will specifically increase the country’s need for legal services.

‘I expect that the legal market will grow at a very high percentage, around 40% to 50% every year,’ he adds.

Other jurisdictions that look strong going into 2013 include Poland and Slovakia. To ensure that they are positioned to take advantage of any future upward trends, international firms are consolidating to cover wider swathes of the region. In May 2012, Taylor Wessing entered the CEE market through a merger with Austria-headquartered e|n|w|c, a move which awarded the firm platforms in six new countries, including Austria, Poland and Ukraine.

‘Before we merged with Taylor Wessing, the main stream of our international clients came from German-speaking countries, such as Austria, Germany and Switzerland,’ says Raimund Cancola, managing partner of Taylor Wessing e|n|w|c Attorneys at Law. ‘Now Taylor Wessing has given us good access to international clients from the English-speaking world as well as offices in Shanghai and Beijing (significantly, China is playing an increasing role in the CEE). In addition, Taylor Wessing’s London and Dubai offices provide us with links to the Arab market.’ The union has paid off and Cancola says the firm will record a 10% rise in revenues in 2012.

There is no doubt that size and international access is becoming an increasingly valuable asset for firms in the region, as the tough times encourage some names to downsize and retrench. Firms that can offer clients extensive regional resources will be more likely to secure the dwindling mandates.

Raposo Bernardo is a full-service Portuguese law firm with a strong international outlook. In addition to its extensive domestic operations, the firm counts offices in several emerging market countries throughout Africa and the CEE, including Bucharest and Warsaw and it believes that its international diversification has proved a useful hedge against the current challenging climate.

‘We have assisted in more strategic M&A deals, namely seeing an increase in the acquisition of assets by companies in countries that are “immune” to the global downturn, including Canada, China and Australia,’ says Nelson Raposo Bernardo, managing partner of Raposo Bernardo. ‘This conjuncture has been determinative for the firm’s growth in the region, which has made use of the strong will of CEE investors to turn to other regions to diversify risk. This has been accomplished by investing in the regions of Latin America, Brazil and Africa.’

No wonder then that an increasing number of firms are looking for new ways to tackle the CEE market.

‘The end of 2012 brought decisions about three important mergers of international law firms present in CEE: Norton Rose and Fulbright & Jaworski; K&L Gates and Australian law firm Middletons; and the biggest merger, which will see a tie-up between Salans, SNR Denton and Fraser Milner Casgrain,’ says CMS’ Kozlowski. ‘We think it is a trend and that we will see more of these mergers between international firms, as well as between international and leading domestic firms. In the climate of global economic slowdown, clients cut down their panels and huge international organisations have better chances to stay on those lists.’

As global growth continues to be weak, it makes sense for firms to combine forces to tap into specific geographical regions. However, it could spell bad news for domestic firms. Certainly, it doesn’t take a crystal ball to see that the CEE will remain a tricky market to navigate for some time to come. LB

maria.jackson@legalease.co.uk