Michael West assesses the impact of the ongoing rehabilitation of structured finance
Securitisation lawyers have been hard pressed since the financial crisis, diversifying their practices and often even ditching the S word. However, relief has been increasingly at hand in the last two years as the thinking of regulators and policy-makers has swung from seeing the financing tool as a cause of the banking crisis to key for getting more investment into the economy. Highlighting this shift at a speech to the Global ABS 2015 conference in Barcelona in June, the Bank of England’s executive director of prudential policy David Rule gave public backing to proposals to create EU-wide criteria for simple, standard and transparent (SST) products, a move he said would ‘play an essential role in de-stigmatising European securitisation, helping the market to develop on a sustainable track and attracting a broader investor base’.
The following month the European Banking Authority published its advice on what those criteria should be while the Basel Committee on Banking Supervision and the International Organization of Securities Commissions have also released their own ideas on creating a framework. Though not yet harmonised, these proposals promise better capital treatment for qualifying securitisations. For Clifford Chance’s Kevin Ingram the benefits of such initiatives will be twofold: ‘It will hopefully help level the playing field against other types of fixed-income assets. Secondly, it will reinforce that it is acceptable to have exposure to securitisation without running the risk of your chief risk officer saying we shouldn’t be touching this with a bargepole as there was someone in the EU parliament saying it is all evil.’
But while such programmes are designed to increase the size of the cake, the drawback for lawyers is that it will likely lead to greater commoditisation in what is already becoming a more standardised market. Vincent Keaveny at Baker & McKenzie observes: ‘There will be less scope for bells and whistles on deals. Overall, it will be good for the market as it will help generate interest among investors, the problem in Europe is that the investor base went away and never came back. These standards will reinforce the message that these are good, solid deals.’
But without the bells and whistles, law firms’ already tightened margins will be squeezed further says Michael Lorraine, securitisation head at Simmons & Simmons. ‘Securitisation is a very competitive marketplace for law firms. On the more esoteric deals it is still possible to bill in the way one might have done pre-financial crisis, but on the commoditised side there tends to be a market rate. A more standardised model will inevitably lead to a lower rate.’
The only reason for this not to happen is, as Weil, Gotshal & Manges partner Jacky Kelly believes, that pricing has already hit rock bottom, leading many of the leading teams to widen their focus into complementary disciplines. ‘The market is competitive anyway and in certain asset classes pricing probably couldn’t get much tighter. That is why the successful law firms are diversifying; if all you do is commoditised deals, you won’t be profitable or viable in the long term.’
‘A lot of firms are looking at the market tentatively. US firms who have a strong Stateside practice are looking to see if that will read across.’
Vincent Keaveny, Baker & McKenzie
Still, there are plenty of firms investing in the area, with Berwin Leighton Paisner and Simmons & Simmons among the firms cited as building their profiles in structured debt. And it is not only mid-tier players sizing up a rehabilitated securitisation market, with US brand names in structured debt like Sidley Austin investing in the City, alongside upwardly mobile operators like Ropes & Gray that have traditionally been heavier on leveraged finance.
True, as the more studious and down-to-earth nature of securitisation doesn’t lend itself to the star names and prima donnas of the LBO world, you don’t get the trend-busting pay packages offered for high-yield specialists. But there is still a healthy level of interest in recruiting partners with the right seasoning. Graham Penn at Sidley describes the thinking behind the firm’s recruitment of Weil partner Rupert Wall in July: ‘Clients increasingly focus on the reputation and expertise of individual lawyers and you obviously cannot develop that expertise and reputation overnight. We have a well-regarded CLO practice in the States but we were not a household name in Europe for post-credit crisis CLO work. Clients were instructing others because we didn’t have household names. Rupert has only been with us for just over two weeks but we have already been approached by a number of clients who have made clear that they would like to talk about using us on their next CLO deal.’
Even if they are not looking to make senior partner hires, many firms are looking to rebuild capability downsized in the post-Lehman years. Keaveny adds: ‘A lot of firms are looking at the market tentatively. US firms who have a strong Stateside practice are looking to see if that will read across.’
But an increasingly tricky balancing act remains for structured veterans. The trade-off of a widening investor base and expanding market with a simplified structure means securitisation lawyers will have to become even better at handling the dreary process and commoditisation that has always been a key factor. Yet the modern ABS lawyer has to be increasingly able to position their wares in a widening range of financing contexts if they want to move with credit trends and avoid being pushed to the bottom. It’s not apparent that any team has yet entirely cracked that.
michael.west@legalease.co.uk