Banking and Finance

In a nutshell

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Banking and finance lawyers may work in any one of the specialist areas described below, but all deal with the lending and borrowing of money, the management of financial liabilities, and the buying and selling of, or the raising of capital by, banks and other financial institutions. Their task is to help structure their clients’ transactions, to protect their clients’ best legal and commercial interests, and to negotiate and document the contractual relationship between lenders and borrowers. It’s a hugely technical, ever-evolving and jargon-heavy area of law.

Straightforward bank lending: a bank or other financial institution lends money to a borrower on documented repayment terms. Bank loans may be bilateral (made by one bank to the borrower) or syndicated (arranged by one or more financial institutions and made by a group of lenders). Acquisition finance: a loan made to a corporate borrower or private equity sponsor for the purpose of acquiring another company. This includes leveraged finance, where the borrower finances the cost of an acquisition by borrowing most of the purchase price without committing a lot of its own capital (as typically done in leveraged buyouts).

Debt capital markets: this generic category covers many types of debt instruments, but generally speaking it deals with a borrower raising capital by selling tradable bonds to investors, who expect the full amount lent to be paid back to them with interest. Securitization: this term covers a broad array of transactions, but generally involves a company bundling together a pool of loans and selling them to a special purpose vehicle (SPV), which may then issue bonds to the markets. Lenders securitize their loan portfolios this way to create liquidity. Bond investors get paid from the cash flow (e.g. the interest and principal on the securitized loans) of the SPV.

Structured finance: a service offered by many large financial institutions for companies with unique financing needs that traditional loans cannot satisfy. Structured finance generally involves highly complex customized financial transactions. Derivatives: at its most basic, a derivative is a financial instrument used by banks and businesses to hedge risks to which they are exposed from factors outside of their control. They can also be used for speculative purposes by betting on the fluctuation of just about anything, from currency exchange rates to the number of sunny days in a particular region. Futures, forwards, options and swaps are the most common types of derivatives.

Real estate finance: a loan made to enable a borrower to acquire a property or finance the development of land, commonly secured by way of a mortgage on the acquired land/buildings. Project finance: the financing of long-term infrastructure (e.g. roads or power plants) and public services projects (e.g. hospitals) where the amounts borrowed to complete the project are paid back with the cash flow generated by the project. Asset finance: this enables the purchase and operation of large assets such as ships, aircraft and machinery. The lender normally takes security over the assets in question.

Islamic finance: Muslim borrowers, lenders and investors must abide by Shari'a law, which prohibits the collection and payment of interest on a loan. Islamic finance specialists ensure that finance deals are structured in a Shari'a-compliant manner. Financial services regulation: lawyers advise financial and other businesses on everything that they might need to know about the legal limits of their financial and investment activities. They focus especially on new and complex federal and state regulations. Major clients are usually banks, hedge funds, private equity firms, broker-dealers and insurance firms. Post-recession there has been a multifold increase in the volume of legislation governing the financial sector.

What banking and finance lawyers do

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  • Meet with clients to establish their specific requirements and the commercial context of a deal.
  • Carry out due diligence – an investigation exercise to verify the accuracy of information passed from the borrower to the lender or from the underwriter of securities to potential investors. This can involve on-site meetings with the company’s management, discussions with the company’s auditors and outside counsel, and review of material agreements and other documents. In the context of a US securities offering, a due diligence investigation by the underwriter’s counsel may help in establishing a ‘due diligence defense’ to investor lawsuits claiming a violation of the US securities laws.
  • Negotiate with the opposite party to agree the terms of the deal and record them accurately in the facility documentation. Lenders’ lawyers usually produce initial documents (often based on a standard form or an agreed precedent) and borrowers’ lawyers try to negotiate more favorable terms for their clients. Lawyers on both sides must know when to compromise and when to hold out.
  • Assist with the structuring of complicated or groundbreaking financing models, and ensure innovative solutions comply with all relevant laws.
  • Gather all parties to complete the transaction, ensuring all agreed terms are reflected in the loan documents, all documents have been properly signed and delivered and all conditions to closing have been met.
  • In a secured loan (most bank loans to below investment-grade borrowers require collateral), ensure that the agreed-upon collateral has been properly granted and that all filings, registrations and other procedures necessary to ‘perfect’ the security have been or will be made.

Realities of the job

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  • Some firms act for investment or commercial banks on highly complex and often cross-border financings, whereas the work of others generally involves more mainstream domestic finance deals.
  • A good working knowledge of the bankruptcy laws is critical for lawyers practicing in the area of leveraged finance. Banking lawyers advise for the worst-case scenario, which is often a bankruptcy filing by the borrower. Understanding how the rules change once that filing is made is critically important, even for lawyers who never expect to set foot in a bankruptcy courtroom.
  • Lawyers need to appreciate the internal policies and sensitivities of their clients in order to deliver pertinent advice and warn of the legal (and reputational) risks involved in the transactions. Deals may involve the movement of money across borders and through different currencies and financial products. International deals have an additional layer of difficulty: political changes in transitional economies can render a previously sound investment risky.
  • Banking clients are ultra-demanding and the hours can be long. On the plus side, clients will be smart and dynamic. It is possible to build up long-term relationships with investment bank clients, even as a junior associate.
  • Working on deals can be exciting. The team and the other side are all working to a common goal, often under significant time and other pressures. Deal closings bring adrenaline highs and a sense of satisfaction.
  • You need to become absorbed in the finance world. Start reading the Wall Street Journal, the various deal-related trade publications or other good business-oriented websites.

Current issues

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  • In 2008 and 2009 many major financial institutions had to write off billions of dollars as a result of their exposure to toxic debt, and needed extraordinary government support to avoid collapse. The collapse of Lehman Brothers brought home the vulnerability of major financial institutions and the effects such a collapse can have on the broader world of finance. It symbolized the need for more regulation to reduce the vulnerability of the financial system to failure and the need for taxpayer-funded rescues.
  • As lenders and borrowers tried to manage their excessive debt loads, banking lawyers became busy advising clients on refinancing, recapitalization and restructuring. Particularly noticeable was the trend for borrowers to buy back their own loans at a significant discount. In addition, as credit dried up, innovative borrowers’ lawyers devised structures to ‘amend and extend’, rather than refinance, existing loans.
  • The debt and equity markets picked up in 2010, but lost their footing somewhat in 2011 – there were 338 IPOs globally in 2011, a drop of 29 percent from the previous year. The US managed to weather this storm relatively well, however. Despite its own national market volatility, European debt issues and the downgrade of US treasury bonds, the number of US IPOs fell only 20 percent in 2011, to 134 – still higher than its record lows back in 2008.
  • Highly structured financial instruments, covenant light packages – which virtually disappeared during the financial crisis – are back in the picture for finance lawyers. More risky instruments like ‘PIK toggles’ (loans on which no payment is made until their maturity date) have also made a return, suggesting that confidence has been restored in the market.
  • In July 2010 the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law. According to Randall Guynn, head of Davis Polk’s financial institutions group, it is “fundamentally reshaping the regulation of financial institutions.” Better known as ‘Dodd-Frank’, this mammoth piece of legislation is approximately 900 pages long (it is estimated that regulators will provide further details which will run into the tens of thousands of pages). It’s focused on identifying and increasing regulation upon large financial institutions – and the derivatives they use to manage risk – which constitute a systemic risk. This is to say that their collapse could trigger the collapse of an entire financial system or market.
  • It’s been estimated that Dodd-Frank will require 243 new rulemakings by 11 federal agencies. The agencies affected include the Securities and Exchange Commission (SEC), the (new) Bureau of Consumer Financial Protection and the new Financial Stability Oversight Council.
  • There is controversy over several provisions of Dodd-Frank, for example those related to derivatives. Legislation may be passed to correct this and any controversies or changes will require lawyers’ regulatory and litigation expertise.
  • The Volcker Rule – a specific part of the Dodd-Frank Act – bans banks and other institutions from making particular types of speculative investments that don't benefit their customers. It is argued that this type of activity played a key role in the recent financial crisis, and the new law substantially curtails banks' authority to invest in hedge funds and private equity funds. In response, financial institutions – commercial banks in particular – may need to shut down certain parts of their businesses. Citigroup closed its equity principal strategies desk in January 2012.
  • The potential reform or abolition of Fannie Mae and Freddie Mac is still on the horizon. Changes here could have a legal effect on the entire financial industry.
  • Another trend that may continue is the merger and acquisition of banks themselves – e.g. Bank of America’s purchase of Merrill Lynch. Buying and selling banks and other financial institutions is more complicated than buying and selling other companies because of the regulatory approval required, not to mention the fact that a bank’s assets are its depositors who can walk out at any time.
  • The convergence of the leveraged loan market (largely unregulated) and the high-yield bond market (subject to securities regulation) has raised other interesting issues for bank lawyers and clients.

What top banking and finance lawyers say

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Michael Goldman, banking practice leader, Cravath, Swaine & Moore

“Bank deals take on a life of their own after closing, as borrowers generally have to comply with maintenance and other ongoing covenants. If a mistake was made in documenting the deal, it will most likely be found out after the fact, so our work requires a tremendous attention to detail. That puts great responsibility on our associates.”

“Bank lawyers need a deft hand; the people who are good at it are often more like bankers than fierce adversaries. We have to protect our client’s interest, all the while recognizing that our client views the borrower as its client.”

Laura Palma, partner, Simpson Thacher & Bartlett

“Representing investment banks is enjoyable. These are sophisticated clients who are adept at what they do. You have to know as much as they know and they see a lot more than we do so that’s challenging. For associates it’s also a challenge to understand the insider language… it takes time.”

Randall Guynn, head of financial institutions group, Davis Polk & Wardwell

“Creating innovative ways to deliver legal advice so clients can comply with financial regulatory reform – it’s a bit like being Steve Jobs. You say, ‘Here’s the iPad’– or in our case, ‘Here’s a new, internet-based legal product that is more efficient at a lower cost’– you didn’t know you needed it, but as soon as you see it you know you do.”

“What comes as a surprise to a lot of people who begin as a financial regulation lawyer, is that the skills they have learnt in law school in terms of looking at statutes and regulations are immediately useful. We tend to focus more on traditional legal analysis.”