Laterally Latin – a sideways year for a hot market

After so much talk of the rise of Latin America since the 2008 banking crisis gripped Western economies, there is no doubt that 2012 felt like something of a disappointment.

The region’s powerhouse economy, Brazil, saw growth slow considerably, cooling the market that has by far the greatest regional pulling power for multinationals and international law firms. The result, in relative terms against a 2010 and 2011 dominated by record levels of inward investment and a string of big-ticket deals, was a low-key year for advisers.

And if South America’s leader had a quiet 12 months, there were gloomier signs in other major regional economies like Venezuela and Argentina, which continue to suffer the impact of stifling bureaucracy and political interference.

Yet it speaks volumes of the extent to which expectations have risen regarding the Latin American region that such developments have done little to dent long-term optimism. As political stability and the rule of law spreads across more economies and global trade continues to grow, a relative lull in Brazil has allowed attention to move to countries like Mexico, Colombia, Chile and Peru that have achieved strong growth and rising interest from international investors.

For many, talk of ‘Latin America’s decade’, a phrase popularised by the Inter-American Development Bank several years back, is as valid as ever as Western economies remain weighed down with creaking public finances, wounded banking sectors and slow growth. In most Latin jurisdictions, legal markets are booming.

And if there are any remaining doubts regarding the rise of Central and South America, the upcoming 2014 World Cup and 2016 Olympics – both of which will be held in Brazil – will bring the world’s gaze emphatically to the continent. It’s a striking turnaround for a region that, as far as the global business community was concerned, was largely associated with corruption, poverty and instability as recently as the late 1990s.

Sleeping giant

For Brazil, 2012 may have been a subdued year but there is no questioning the huge influence the country has gained in the global economy. Even with growth estimated at around 1% during 2012, Brazil overtook the UK to become the world’s sixth-largest economy with GDP of around $2.5trn.

The country has made huge economic advances in the last decade, including forging in the BM&FBovespa a genuinely global stock exchange, making Brazil a major capital markets hub and providing a huge boost to corporate advisers.

Powered by a population approaching 200 million and a large and fast-expanding middle class, Brazil’s economy has likewise modernised hugely over recent years. This track record has led to major inflows of direct investment over the last five years, with the commodity-rich country becoming a major trading partner of resource-hungry China, building on its traditional trade links with the US and Latin American neighbours. Meanwhile a group of Brazilian multinationals like mining giant Vale, energy group Petrobras and aircraft manufacturer Embraer have been expanding confidently across the region.

‘Debt capital markets picked up a little last year in Brazil but the equity side was practically non-existent.’
Alexandre Bertoldi,Pinheiro Neto

Such conditions have proved a heady mix for leading Brazilian law firms such as Barbosa, Müssnich & Aragão, Machado, Meyer, Sendacz e Opice and Pinheiro Neto, which have grown dramatically in recent years.

This has been primarily demonstrated by growth in the key commercial hubs of São Paulo and Rio de Janeiro, though the country’s federal capital Brasília is also of rising importance to local advisers.

‘[Brazil’s] growth slowed to 1% last year but this year we hope it will rise again to about 3.5% to 4%,’ says Antonio Felix de Araujo Cintra, head of capital markets, banking and finance at TozziniFreire, another of Brazil’s leading independents.

But while the economy is widely expected to pick up this year, 2012 did see a considerable slowdown in the frenetic capital markets work that did much to drive leading law firms during 2010 and 2011. ‘Debt [capital markets] picked up a little last year [but] the equity side was practically non-existent. We had a boom three to four years ago on the equity side but this year so far nothing important has happened, last year was a disaster,’ confesses Alexandre Bertoldi, managing partner of Pinheiro Neto.

If the volatile securities sector has failed to deliver of late, in the wider corporate finance field there has been more positive news as a run of substantial M&A deals have continued. Pinheiro Neto advised on the $4.9bn acquisition of Amil Participações by UnitedHealth Group last October. The firm also last year closed one of the biggest Latin American deals, the merger of airlines LAN, a Chilean business, and TAM, based in Brazil. Bertoldi advised LAN on this deal, which created a $14bn airline.

According to mergermarket, Pinheiro Neto came second in Central and South America by deal volume last year, acting on 42 deals with a combined value of E11.2bn.

Other local firms to secure a top-three M&A ranking for 2012 were Machado, Meyer and Mattos Filho, Veiga Filho, Marrey Jr e Quiroga. Machado Meyer advised on 48 deals with a value of E8.16bn while Mattos Filho advised on 32 ranked matters with a combined value of E16.1bn. Barbosa Müssnich, Lefosse and TozziniFreire are among the law firms that traditionally rank strongly in M&A.

TozziniFreire executive committee chair José Luis de Salles Freire led on last year’s $1.5bn acquisition by Experian of a larger controlling stake in the Brazilian credit data provider Serasa, which is one of the largest credit bureaus in the world outside the US. The firm finished eighth in the mergermarket table for M&A deals by volume last year.

Elsewhere, Cíntia Vannucci Vaz Guimarães, partner in the real estate, timberland investment, corporate law and foreign Investment, mergers and acquisitions and private equity & venture capital practice groups at TozziniFreire, advised real estate company Coyote Trail on the acquisition by Banco Panamericano and Banco BTG Pactual of Brazilian Finance & Real Estate from Ourinvest Real Estate Holding, TPG-Axon BFRE Holding and Coyote Trail. This deal was worth R$1.21bn and closed in February last year.

The run of banking deals in part reflects that Brazil’s financial institutions generally weathered the global banking crisis well, a stark turnaround from the 1980s when Latin America was notoriously prone to debt crises.

‘We have a solid banking system which is why the 2008 banking crisis didn’t hit us so hard – our banking system is very sound,’ says Raymundo Enríquez, chair of the Latin America group for Baker & McKenzie.

Barriers to market

Attractive as the Brazilian market has proven to be to international businesses and foreign law firms, part of the strength of local firms is related to the restrictive Bar rules that show no signs of easing.

Indeed, recent years have seen several skirmishes between local Bars and foreign law firms with attitudes hardening against foreign advisers practising local law or working too closely with Brazilian counterparts.

Many attribute this tension to the recent influx of foreign advisers upsetting local sensibilities. The Bar rules were reconfirmed last October, when the Ordem dos Advogados do Brasil (OAB) chose to keep restrictions that mean a foreign lawyer can only act as a consultant but not join a Brazilian firm or practise Brazilian law.

The issue continues to divide opinion, though there is no doubt that the tougher enforcement stance has strengthened the hand of local advisers.

‘There has been a big mistake concerning the Bar rules – I would have taken a completely different approach,’ says Pinheiro Neto’s Bertoldi. ‘You can be an expert on foreign law, that’s not a problem.’

Some foreign firms that have tried to get into local work by going into associations with domestic practices have fallen foul of the recent OAB decision. Linklaters ended its longstanding association with Lefosse last year after the OAB issued its decision. Squire Sanders also called time on its partnership with Derraik. Although there are firms still in associations, they are facing increased oversight by the OAB.

Baker & McKenzie – unquestionably the most committed foreign firm in the Latin American region – has had a foothold in Brazil since 1959, with its association with Trench, Rossi e Watanabe. Bakers’ Enríquez thinks that his firm’s famously multi-polar approach to new markets works best for local clients.

‘We are different to the competition as we’re well routed to every jurisdiction, not run by foreign lawyers. Other firms send two or three lawyers from New York or London and just do outbound work,’ he says.

But tensions over Bar restrictions have to a considerable extent been eased by the buoyant market, which means that it is largely in the interests of local and foreign lawyers to have constructive links. ‘We have good relationships with foreign law firms as most cross-border work has US, UK and Brazilian law components, so we work together with foreign law firms,’ says de Araujo Cintra of TozziniFreire.

One advantage of the tougher Bar rules is that they have provided clarity on how international firms can structure their practices. ‘With the OAB restrictions, we don’t want them to change. Rules are there so we can’t have an association,’ says Anthony Oldfield, managing partner of Clifford Chance (CC) in São Paulo.

‘For people like us, major New York law firms and Magic Circle firms, given our cost base it is not important for us to enter those markets and practise law. Only do it if you have to, perhaps to maintain market position,’ observes Jorge Juantorena, a corporate partner at New York’s Cleary Gottlieb Steen & Hamilton.

Such comments reflect relief that an equilibrium has now been achieved after fears that hard-liners in the Brazilian Bar would respond to aggressively structured associations by attempting an India-style lock-out of foreign law firms. But for now at least, the lure of associations with local firms has faded for many leading foreign practices.

Top ten Legal Advisers on Central and South America M&A in 2012 by volume

Rank	Firm	Value (€m)	No. of deals
1	Machado, Meyer, Sendacz e Opice	8,161	48
2	Pinheiro Neto	11,292	42
3	Mattos Filho, Veiga Filho, Marrey Jr e Quiroga	16,092	32
4	Barbosa, Müssnich & Aragão	4,585	31
5	Souza, Cescon, Barrieu & Flesch	6,591	27
6	Lefosse	11,619	21
7	Baker & McKenzie	5,044	20
8	TozziniFreire	1,880	20
9	Veirano	1,261	18
10	Linklaters	10,404	16

Source: mergermarket

If international law firms have faced much wrangling over Bar restrictions, there has been plenty of work to console them, with many leading US firms focusing on capital markets work, much of it aimed at tapping North American investors.

Cleary Gottlieb – which hit the headlines in 2010 when it acted on Petrobras’ record-breaking $75bn rights issue – has done a very substantial amount of work in Brazil. The firm advised biotech giant Amgen on its $221m acquisition of Laboratório Químico Farmacêutico Bergamo. This was Amgen’s first foray into Brazil’s fast-growing healthcare market. The deal was led by Francesca Odell, a corporate partner working out of New York, and closed in 2011.

Baker & McKenzie has also been highly active in the region. In Brazil, its M&A practice group advised US buyout house Kohlberg Kravis Roberts & Co on local aspects of its acquisition of UK-based Capital Safety Group from Arle Capital Partners. The total value of the deal was $1.12bn.

While there was a lull in major rights issues and public floats, many large Brazilian corporates are still tapping debt markets. Cleary Gottlieb, for example, acted as counsel to Petrobras and Petrobras Global Finance in a US-registered E1.3bn bond last year. This deal was led by capital markets partner Nicolas Grabar.

CC has been in the region for over 40 years and is heavily involved in the capital markets space. The firm advised Banco do Brasil on its $1bn subordinated bond issue, which was structured to help the bank comply with upcoming Basel III capital rules. Partners Jon Zonis and Avrohom Gelber in New York and Isabel Carvalho in São Paulo advised on the transaction, which closed on 20 January 2012.

CC was involved in the seventh biggest deal of 2012 according to mergermarket, advising J.P. Morgan on the acquisition of a 60% stake in motorway infrastructure company Obrascón Huarte Lain Brazil by Abertis Infraestructuras and Brookfield Infrastructure Partners. The firm also came third in mergermarket’s Central and South American M&A table by value last year, acting on 13 deals valued at a total of E23.7bn.

Mergermarket’s value ranking for Central and South American M&A shows Sullivan & Cromwell and Skadden, Arps, Slate, Meagher & Flom also handling significant amounts of high-end corporate work in the region.

If we build it…

If there is widespread confidence regarding Brazil’s corporate sector, there is more unease regarding faltering attempts to upgrade the country’s infrastructure. The issue has been brought to the fore by preparations for the World Cup and Olympics amid expectations that the country’s ambitious plans will fail to deliver the needed infrastructure or provide a sustainable legacy. Concerns have been aggravated in the case of the World Cup by the decision to have 12 host cities, a huge undertaking.

Many advisers believe that the country has been held back by political resistance to tapping private finance for major projects.

‘Debt capital markets picked up a little last year in Brazil but the equity side was practically non-existent.’
Alexandre Bertoldi,Pinheiro Neto

‘One thing that is lagging behind is project finance; we do need a lot of infrastructure. I’m sure that most of the infrastructure that needs to be done can only be done via project finance. We have the World Cup coming, everyone thought it would trigger a boom in project finance but it hasn’t happened,’ says Pinheiro Neto’s Bertoldi.

But some partners think that the government is ready to seek private funding for its infrastructure programme. ‘The government has an ambitious programme to increase infrastructure and it’s seeking to get private capital like public private partnership toll roads, ports, railways and subways,’ says de Araujo Cintra.

CC’s Oldfield says that Brazil has a very large development bank and still strives to fund all of its needs through the bank but doesn’t have enough capital. ‘Where [the bank] can’t fund it, there’s work for us.’

Still, there is a clear desire to improve the infrastructure of Brazil as it serves a growing middle class. ‘Once we have the infrastructure in place, the country will grow even stronger and faster once the conditions improve,’ says de Araujo Cintra. The hope among advisers in this regard is that the administration of president Dilma Rousseff will make good on promises to implement new contracts to bring in additional private investment.

If there are concerns about the implementation of the World Cup, the event has given a further boost to intellectual property (IP) law in the country. As such advisers are waiting to see the impact of the recent split of IP leader Momsen, Leonardos & Cia, which created two firms: Kasznar Leonardos and Luiz Leonardos & Cia.

Unsurprisingly for a country that is the tenth largest energy consumer in the world and itself a major oil producer, the energy sector has become increasingly important. The 2011 merger of oil and gas specialist LO Baptista and Schmidt, Valois, Miranda, Ferreira e Agel created a major rival in the energy sector to traditional leader Tauil & Chequer, Mayer Brown’s associated firm.

In short, despite concerns about how Brazil will continue to modernise, it is clear that the country has a broad-based economy generating activity on a number of fronts for advisers.

The Andean three

If Brazil continues to cast a long shadow over the region, 2012 did much to mark the global emergence of other regional economies, with the Andean countries of Chile, Peru and Colombia all enjoying economic revival.

‘We’ve seen an increase in capital markets work in Chile, Colombia and Peru, which is more to do with the macro-economic situation and the political stability in those countries,’ says Juan Giráldez, a partner based in the São Paulo arm of Cleary Gottlieb. ‘Those are the countries who have done their homework, others in the region have been delinquent and made up excuses.’

‘We have good relationships with foreign law firms as most cross-border work has US, UK and Brazilian law components.’
Antonio Felix de Araujo Cintra, TozziniFreire

Baker & McKenzie last year strengthened its profile in Peru – set to be the fastest growing major regional economy in 2013 – after adding local practice Estudio Echecopar to its network.

Chile, meanwhile, has seen an upsurge in foreign direct investment (FDI) in the natural resources area, specifically mining, renewables and energy. With nearly 18 million people and an average economic growth rate of 3.8% between 2005 and 2010, confidence is high.

Carey is Chile’s largest law firm and boasts an impressive roster of clients. The firm represented Enersis, the main business unit in Latin America of Spanish power giant Endesa, in a $5.9bn rights issue, the largest to ever take place in Chile. This deal closed in March this year.

According to Néstor Humberto Martínez Neira, managing partner of Martínez Neira, the strongest practice areas in the Chilean legal market are infrastructure, public services and natural resources.

‘This is due to our government’s actual commitment to infrastructure development, that as a third world country is still undeveloped, as well as its special interest to implement policies of exploration for the exploitation of natural resources, such as oil, gas, mines and energy,’ he comments.

Perhaps more surprisingly even jurisdictions like Colombia – which were once a byword for political instability and soaring crime rates – have achieved a renaissance in recent years. With a much-touted trade agreement with the US enacted in 2012, Colombia has seen heavy investment in infrastructure and energy and modernisation of its industries. The country – which has a population of nearly 50 million – has achieved some of the best growth rates and most inward investment in the region over the last three years.

Such conditions have proved a huge boost to Colombia’s market-leaders like Brigard & Urrutia and Gómez-Pinzón Zuleta, but a wider band of challengers – and international rivals like Baker & McKenzie and Norton Rose – are active locally.

Aside from the ‘Andean three’, 2012 was a strong year for Mexico, the wider region’s second-largest economy, where reformist president Enrique Peña Nieto has attracted plaudits since sweeping to power last year. Peña Nieto’s Institutional Revolutionary Party has sought to bolster security in the region, improve trade links and secure a wave of private investment into Mexico’s energy and natural resources sectors.

This backdrop has been ideal for the local legal market, which has typically been defined by a fluid pattern of spin-off and splits among major national practices. DLA Piper’s high-profile launch in the market in 2012 – secured via a Mexico City team recruited from Thompson & Knight – also attests to the rising appeal of the jurisdiction to foreign firms. Other US players to enter the market in recent years include Florida giant Greenberg Traurig and US labour leader Littler Mendelson. Baker & McKenzie, of course, has long been established in the country and White & Case also has a substantial practice.

‘As a result of NAFTA [North American Free Trade Agreement] and further free trade agreements, the Mexican market has become more sophisticated, which means that people are better prepared to enter into deals,’ says Daniel Del Río Loaiza, managing partner of Basham, Ringe y Correa.

Del Río is also expecting an increase in labour law work after recent reforms and has high expectations for telecoms and energy. He adds: ‘As a result of “pacto por México” [an agreement written by the three main parties in Mexico] we expect to have major reforms in these fields.’

‘As a result of NAFTA and further free trade agreements, the Mexican market has become more sophisticated.’
Daniel Del Río Loaiza, Basham, Ringe y Correa

With such success stories, it should be remembered that Latin America has had notable reverses in recent years. In particular, in Argentina and Venezuela state interference and a lack of reform have hit confidence of late, having a major impact on two of Latin America’s top five economies.

This has been particularly hard on advisers in Argentina, historically one of the region’s leading economies and a country with a tradition of internationally minded and sophisticated lawyers.

Moves like last year’s nationalisation of energy company YPF – which was previously owned by Spanish group Repsol – have damaged business confidence in the country. The hard-line administration of Cristina Fernández de Kirchner has failed to get the support of international business, seeing some international companies quit the country altogether.

Commercial advisers will be warily watching to see if Kirchner succeeds in her expected bid to set aside Argentina’s constitution to allow her a third term in power.

With transactional work badly hit, the major consolation for local firms has been the upturn in disputes and arbitration generated in part by the difficult political climate. Rafael Espinosa, an associate at Argentinian leader Marval O’Farrell & Mairal, says that his firm is seeing a lot of commercial litigation. The firm’s client base is mostly international, including global bluechips like Shell, Microsoft, Monsanto and Philip Morris.

It’s a similar story in Venezuela, and the death in March of firebrand leader Hugo Chávez has done little to indicate that the country will shift towards a more business-friendly climate.

But if the continuing struggles in Argentina and Venezuela are a reminder of the region’s troubled post-war development, it is telling that they have become an exception to an increasingly optimistic rule. A slow year aside, much of the region looks set to make good on that promise of a golden decade. LB

david.stevenson@legalease.co.uk