The scene outside Lehman Brothers’ European headquarters in London on September 15, 2008 © AFP
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The 10th anniversary of the collapse on September 15 2008 of US bank Lehman Brothers stirred painful memories for many bankers, traders and investors — particularly those who lost their job, their savings or their peace of mind in the ensuing chaos.

The date has different connotations for the many lawyers who remember the bank’s collapse as the start of a boom that endures to this day — one that has arisen from the demands of governments, investors and banks themselves on the best way to navigate the fallout from the crisis.

With dizzyingly high sums, and so many first-of-a-kind answers to Europe’s banking problems, it is not hard to see why the past 10 years have been fertile ground for innovative approaches by corporate lawyers.

The past year has been no exception, although predictably the work has centred on how best to deal with the legacy of crisis-period actions, such as bank nationalisations, promised divestments and asset sales, rather than new initiatives.

The UK, whose bank bailout bill was topped only by that of the US and Germany, was home to some of the most notable recent action. The disposal of Royal Bank of Scotland’s Williams & Glyn retail and small and medium-sized enterprise book is one of the most prominent examples of a crisis hangover finally being dealt with in the past year.

Nilufer von Bismarck, head of financial institutions at law firm Slaughter and May, explains that after several failed efforts to sell or float Williams & Glyn, the firm had to find and implement an answer with “the same effect” as the disposal demanded by the EU as a condition of RBS’s 2008 bailout. That solution was to pay other banks to take the Williams & Glyn smaller-business customers. “We set up a fund making offers to Clydesdale, Santander, Virgin Money [and others],” she says. As well as offering grants to challenger banks and fintech companies that wanted to build SME servicing capabilities, RBS will also fund “incentives” to entice smaller-business customers to move.

Paying a competitor to take your clients had not been done before in a state aid divestment, possibly because it sounds like a crazy idea that most companies would resist. “By then RBS had spent so much money trying to get rid of this business one way or another and hadn’t managed to do it that they thought, well if we give this money now, we will solve the state aid issue and we could spend the money at some point one way or the other,” says Ms von Bismarck.

There is another route: the bailed-out Bank of Ireland repeatedly failed to fulfil the EU’s demand that it sell its life insurance arm; Brussels ultimately gave up. But RBS did not fancy running that gauntlet and had its eye on a bigger prize. It knew selling Williams & Glyn would “bring lots of other benefits”, Ms von Bismarck says, including lifting restrictions on dividend payments and enabling the government to begin selling its stake.

£11.8bn

Disposal of a loan portfolio from collapsed bank Bradford & Bingley to Prudential and Blackstone

The UK passed another big post-crisis milestone last year by pulling off one of Europe’s largest government asset sales with the £11.8bn disposal of a loan portfolio from collapsed bank Bradford & Bingley to insurer Prudential and private equity firm Blackstone. Bradford & Bingley had been on the UK balance sheet since its 2008 implosion. The country’s top six banks had been paying for its rescue through an annual levy to the Financial Services Compensation Scheme (FSCS).

Adam Fogarty, finance partner at law firm Linklaters, who advised the six banks on the deal, said its size led the Treasury to believe it could not sell the portfolio without also offering financing to its buyer.

The UK sold a £13bn portfolio of collapsed bank Northern Rock to private equity house Cerberus in 2015 without staple financing, but since the £11.8bn Bradford & Bingley sale was to be followed swiftly by a £6bn disposal of similar assets, the Treasury did not think bidders could finance the deals independently. Instead, the six banks were called on to provide “staple financing”, or pre-packaged funding, for the loans’ buyers.

“The mere use of staple finance for a transaction of this size was, at the time, almost unheard of,” says Mr Fogarty, adding that banks had an incentive to participate because they were “on the hook to pay the cost” of the Treasury/Bradford & Bingley debt via the FSCS levy.

Mr Fogarty is aware of “another very large transaction, in Cyprus” where a vendor staple is being used. But, he adds, the mix of “size and scale, the incentive of the FSCS levy for banks to participate and provide the staple, and the presence of a government seller with the ability to influence the banks and persuade them to be involved, are hard to replicate”.

A race against time in Portugal

VdA helped pick up the pieces after Banco Espírito Santo’s collapse © Mario Proenca/Bloomberg

Lawyers in Portugal have had to deal with a more recent banking problem than Lehman Brothers, and to a tighter timeframe.

Banco Espírito Santo, one of Portugal’s oldest and biggest banks, collapsed in 2014. To contain the fallout, the Bank of Portugal, the country’s central bank, created a “bridge bank”, Novo Banco, to take over the “good” assets. The European Commission required the sale of Novo Banco by 2017. Chinese insurer Anbang eventually became the preferred bidder, but the sale collapsed at a crucial point in negotiations.

Jorge Bleck and his team at law firm VdA, which advised the Bank of Portugal, kicked off another process. By the time private equity firm Lone Star became the preferred bidder in January 2017, Novo Banco was in better shape, but there was still significant disagreement between buyer and seller on loan valuations.

Mr Bleck says there had been a “huge fight against time” to create Novo Banco when Banco Espírito Santo crumbled. As a result “there were certain assets transferred to the good bank which should never have been transferred because they were not good”.

Lone Star said Novo Banco’s assets were worth €3.9bn less than the Bank of Portugal’s figure. In a normal commercial transaction, Mr Bleck says, the seller would have pumped in the additional capital. Portugal, which had just exited an EU-International Monetary Fund bailout, could not afford to do that. Nor could it guarantee €3.9bn of losses, since Eurostat, the statistical office of the EU, would have added the guarantee amount to Portugal’s deficit, exceeding targets agreed with the EU.

Instead, lawyers came up with an innovative contingency structure that required Portugal to put more money into the bridge bank only if losses from bad loans pushed its capital ratios below an agreed level. “This allowed the accounting treatment to be completely different,” says Mr Bleck, adding that Eurostat did not consider the contingency to be part of Portugal’s deficit.

The structure also cut potential payments by Portugal, since any loss on the bad loans would first be offset against profits on loans that perform better than expected, before crystallising into a hit to the bank’s capital ratio that Portugal would have to make up. For Lone Star’s part, Mr Bleck believes it accepted the contingency to get the deal done.


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