A busy 2015, which has continued into the early months of 2016, confirms a trend towards further growth in the asset finance field. Growth in the global market has pushed an increasing number of firms to strengthen their international coverage, and, in addition, the market generally continues to diversify. The aviation sector remains the main focus for most firms - with Macquarie Group’s $4bn purchase of a 90-aircraft portfolio from AWAS representing the largest transaction of 2015 - but asset finance advice in the rail and maritime sectors has also increased in importance in the US market.
Investment grade deals remained relatively stable, with well-established issuers continuing to access the market for their regular financing requirements. This of course included the financing of acquisitions, which, given the bumper year for M&A deals, was a key driver of debt issuances. Indeed, most of the largest bond deals of 2015 were used to fund major takeovers.
The economic slowdown in China and the drop in energy prices contributed to a significant drop in equity capital markets activity throughout 2015, particularly within the energy sector. Hi-tech growth companies accounted for most of the IPOs done in the market, and life sciences companies were also highly active, with a number of successful IPOs being completed in the healthcare and pharmaceuticals sectors. Among the largest successful debuts of 2015 were the IPOs of wearable technology company Fitbit and payment technology solutions company First Data.
In 2015, the international capital markets saw a continuation of trends seen in 2014, with fluctuating levels of activity across the different products. The first half of the year saw a thriving international debt market, but the second part of the year proved difficult for both issuers and underwriters.
Given its susceptibility to market jitters, the high-yield market was an altogether different story to the investment grade space, particularly in the second half of the year. New issuances more or less dried up, so the bulk of the work in this space revolved around refinancing and restructuring.
There was a noticeable drop-off in sponsor activity and deal size in the commercial lending market, which was evident from the third quarter of 2015 onwards. As a result of this, there has been a considerable drop-off in big-ticket transactions, as bank lenders have taken a more cautious approach. On the flip side, middle-market deals remain largely unaffected, which is partly attributed to the number of alternative lenders in the market. The market share of non-traditional lenders has continued to grow thanks to the less demanding regulatory requirements they face in comparison to the banks. This has been a boon to law firms that have focused their lending practice on this space, while others are keen to make up lost ground and expand into this area. Of note is the recent trend among direct lenders of ‘clubbing up’ to finance deals at the upper end of the market, where bank financing is not presently available.
Enacted in 2010, the Dodd-Frank Act was aimed at reining in the riskier practices that exposed banks and other lenders to huge losses and consequently led the government to step in and bail-out the banks using tax-payers money. While the majority of the provisions have come into force - as is probably to be expected in a document that runs to over 2,300 pages long - the ‘devil is in the detail’, and there is consequently still a huge amount of work for lawyers operating in the field, as clients seek to understand and comply with its regulations, many of which are still more than a little ambiguous. After a long gestation period, the Volcker Rule came into force in July 2015, and this continues to account for a significant amount of activity for law firms in the industry, in relation both to pure advisory work and to strategic and structural M&A, as banks seek to adapt to this transformative regulatory change. ‘Too big to fail’ considerations also continue to be a huge headache for so called systemically important financial institutions (SIFIs) - banks with assets in excess of $50bn - as regulators attempt to reduce the probability that these SIFIs will fail and, if they do, that their failure will be cushioned by orderly procedures put in place by resolution planning, thus having, at least in theory, a less contagious effect on the financial industry as a whole. With the Federal Reserve placing increased pressure on the largest banks in the industry to expand their capital buffers to better absorb losses and reduce their reliance on more volatile forms of lending, many continue to divest of non-performing divisions and look to the capital markets to raise capital. Firms at the top of the ranking will have a deep involvement in these key concerns, both from an advisory and regulatory-driven transactional perspective. Weight is also attached to the diversity of a firm’s client base, and while major investment banking mandates are headline grabbing and important, there are numerous other types of financial services entities that have been affected, from asset managers to insurers. The ranking also pays attention to cross-border capability, particularly in light of the increased tendencies for global regulators to collaborate.
Recent scandals in the not-for-profit (NFP) space have prompted NFP governing boards to focus more vigilantly on their obligations towards their institutions. Consequently, law firms are increasingly advising clients on their corporate structures, reviewing corporate bylaws, policies and procedures, and assisting with audits and internal compliance.
Furthermore, ongoing scrutiny by the IRS, state attorneys general and local taxing authorities of the charitable and tax-exempt status of organizations, together with legislation such as the Affordable Care Act and New York’s Nonprofit Revitalization Act (which took effect in July 2014 and marks the first major overhaul of New York’s nonprofit laws in over 40 years) also continue to supply NFP legal practices with steady streams of compliance work.
Key moves in the NFP legal market saw Loeb & Loeb LLP hire Washington DC-based Diara Holmes and Marcus Owens (a former director of the IRS Exempt Organizations Division) from Caplin & Drysdale, Chartered. Davis Wright Tremaine LLP also grew its practice with the recruitment of former New York State assistant attorney general in charge of the New York Charities Bureau Daniel Kurtz; and San Francisco and New York-based Jean Tom joined from Patterson Belknap Webb & Tyler LLP.
Despite low commodity prices, the US project finance market remains fairly strong. Oil and gas companies have been soliciting alternative financing sources, such as mezzanine funds, but traditional lenders such as BNP Paribas, Société Générale and Deutsche Bank continue to fund projects.
The year’s most exciting story was the rise and fall of the yieldco. Formed by energy giants such as SunEdison and Abengoa, they initially returned stable, burgeoning yields and, along with tax equity investors, constituted the major driver of market activity. In late 2015, however, yieldcos saw a decline in fortunes, due largely to their inability to acquire assets and development projects at a rapid enough rate. They were also rendered less profitable thanks to the 0.25% increase in interest rates, the first in nearly a decade. In light of yieldcos being overvalued and over-paying for projects, warehouse transactions are becoming increasingly prominent.
Renewables financing continues apace. December 2015 saw the extension of investment tax credits and production tax credits; the federal budget is fairly renewables-friendly considering the uncertain state of the US’ oil and gas sector. Coal-fired power plants are slowly but steadily being usurped by gas-fired power plants. Moreover, the WIFIA (Water Infrastructure Finance and Innovation Act) is attempting to do for water and wastewater infrastructure projects what the Transportation Infrastructure Finance and Innovation Act (TIFIA) did for transportation infrastructure.
The other major event of December 2015 was the relaxation of decades-long restrictions on exporting crude oil, although low commodity prices are likely to continue causing problems for the US’ LNG sector.
Though yet to see an uptick in distressed debt work, following a marked drop in major roles for successive years, the Chapter 11s of Caesars Entertainment Operating Company and Energy Future Holdings (EFH) - which held a combined total of $58bn in liabilities - provided a flood of instructions for New York and Chicago restructuring teams. The trophy lead debtor roles in both went to Kirkland & Ellis LLP’s powerhouse company-side group (Sidley Austin LLP secured a lucrative co-counsel role in EFH), with keynote creditor roles obtained by firms as diverse as Jones Day, O’Melveny & Myers LLP, and Fried, Frank, Harris, Shriver & Jacobson LLP, which belied its relatively compact size by acting for the holder of one of the largest pieces of EFH debt. EFH aside, the anticipated energy mega-bankruptcies, particularly in Texas oil and gas, are yet to come. Accordingly, it is firms that can leverage their reputation in the energy sector that may be best placed to gain roles in the next major bankruptcy. Vinson & Elkins LLP and Norton Rose Fulbright US LLP are obvious examples, but it is only Akin Gump Strauss Hauer & Feld LLP that combines globally renowned energy expertise with substantial restructuring footprints in both New York and Texas. In a high-profile lateral hire, Jenner & Block LLP hired Richard Levin from Cravath, Swaine & Moore LLP.
In the municipal restructuring and bankruptcy space, work on headline cases such Jefferson County, the City of Stockton and the City of Detroit is drawing to a close, so it has been more recent cases that have kept lawyers busy. As Congress seeks a solution to Puerto Rico’s $70bn debt crisis, San Bernardino’s fiscal recovery plan is underway. Alongside bankruptcy expertise, firms require public sector knowledge to advise on restructurings in the municipal space, as investors and bondholders are often subject to challenges by public sector workers and pension funds. Settlements resulting in redundancies, or reductions in public services or the pensions of public sector workers, inevitably attract public attention, so political considerations are an important aspect of this type of work.
The perception among legal professionals is that activity within the structured finance market is steadily increasing and that this trend is likely to continue. The appetite for less risky innovative transactions continues, despite the enactment of legislation implementing more stringent regulations (e.g. Dodd-Frank Act and the Volcker Rules). A renewed but cautious interest in new financial products is steadily increasing. There is also a higher demand for innovative esoteric assets.