‘This is not your vanilla banking’; Borderless cash, multiple jurisdictions, rapid pace and a new risk factor have juiced up bank servicing: [National Edition]
Czarnecka, Marzena. National Post [Don Mills, Ont] 04 Apr 2007: FP16.
“The pace and rapidity with which we are expected to react to deals and to close deals is much faster,” says Peter Murphy, a partner with the Toronto office of Fraser Milner Casgrain. “Our banking clients are under tremendous time pressure from their clients, and that of course translates into pressure on lawyers. The whole marketplace is expecting quick turn around and quick time frames.”
“From a lawyer’s perspective, the proponents who are paying lender’s costs are looking for law firms to be relatively creative, or to partner in saying that they will not necessarily be paid their full fees if their proponent is not successful,” says Ms. [Carol Pennycook]. “That’s been quite common in M&A transactions for a number of years, but it is fairly new in the banking world.”
Banking is to law firms what flower pollen is to bees. To be a law firm of a certain stripe — especially a law firm of a certain stripe on Bay Street — you’ve got to have a strong banking and financial services practices. Indeed, the way you got to be a law firm of a certain stripe, five out of seven times, was via a historic relationship with a grand Canadian bank. Banking is core, banking is steady fees, banking is life.
But also just a little bit bland, no? It’s never been among the various practice areas that periodically get branded as sexy and exciting — like M&A when deals are coming fast and hard, technology when the Internet was making overnight millionaires and even tax (if not necessarily tax lawyers), which got an image make-over as cross- border and international deals became tax-driven.
But banking? Vanilla. Sure, everyone got excited when it looked like the banks were going to merge, but then that fizzled — and the glory would have gone to the M&A, not banking, lawyers anyway –and banking went back into its critical but boring slot. Or did it?
Can a core practice area concerned with moving billions of dollars of cash around the world ever be boring?
Consider this: Canada’s highways and hospitals are currently being financed by European and international banks, often via their New York offices. The amounts of cash involved are staggering. The detail and complexity in the “paper” around these deals — astounding.
“This is not your vanilla banking,” says Carol Pennycook, a partner with Davies Ward Philips & Vineberg in Toronto. “The way these big infrastructure projects are financed is one of the big things spicing up the practice area right now.”
In more ways than one. There’s the obvious appeal of (and complexity inherent in) borderless cash, multiple jurisdictions and international teams. But there’s more.
“With infrastructure projects, even the banking portion of these has become more transactional in nature,” says Ms. Pennycook.
That has affected lawyers in several ways. “The pace and rapidity with which we are expected to react to deals and to close deals is much faster,” says Peter Murphy, a partner with the Toronto office of Fraser Milner Casgrain. “Our banking clients are under tremendous time pressure from their clients, and that of course translates into pressure on lawyers. The whole marketplace is expecting quick turn around and quick time frames.”
But that’s a change everyone’s taking in stride, with a little help from the office coffee machine. Here’s the more important impact of banking, transaction-style: It now has risk. Including, for law firms, the risk of not being paid.
“In the traditional practice of banking, you acted for a borrower or a lender, there was going to be a financial transaction done, you did the work, closed it, billed the account and it was paid,” says Ms. Pennycook. Now, there is “an element of uncertainty.”
The infrastructure projects — most done as public-private partnerships — begin with an initial bid process, and then an intensive detailed bid process for the short list of qualified bidders. Each of the qualified bidders, as well as its lenders and its lawyers, has to do a great deal of work during this stage, at the end of which there will be just one winner. And three or more losers who, at the end of a very labour-intensive process, don’t see a penny of the money involved.
“From a lawyer’s perspective, the proponents who are paying lender’s costs are looking for law firms to be relatively creative, or to partner in saying that they will not necessarily be paid their full fees if their proponent is not successful,” says Ms. Pennycook. “That’s been quite common in M&A transactions for a number of years, but it is fairly new in the banking world.”
Another defining factor of M&A transactions that has also come to define banking is multidisciplinary teams.
“The new complicated financings require us to pull in other specialty areas, pulling together multidisciplinary teams of eight, 10 or even 20 lawyers, ” notes Mr. Murphy.
Competitive pressures on banks have turned certain types of banking into relatively low-cost and low-margin commodities. Banks and other financial institution clients have brought much of that commodity work in-house, and sent other types to smaller — cheaper — law firms. They’ve spread both the low-end and high-end work among several law firms, forcing their lawyers to stay on their competitive toes.
“Part of the challenge for us as law firms is to keep up with our clients and to be strategic in our choice as to what type of work we want to focus on,” says Mr. Murphy.
It’s the same challenge their clients face. Be they Canadian banks or international financial institutions that lend to Canadian companies, banking clients operate in a hyper-competitive, crowded global environment, anxious to find new frontiers and unexploited niches. The dominance of U.K. banks in Canadian infrastructure projects is an apt illustration.
But no niche stays unexploited and uncrowded for long.
“I am seeing some of Canadian banks signaling they are prepared to look at these long-term project finance transactions, which three of five years ago not the case,” says Michael Harquail, a partner with the Toronto office of Blake Cassels & Graydon.
Traditionally, Canadian banks have been loathe to lend for the 30-year-plus terms required by the massive infrastructure projects – – a hole foreign competitors have been happy to fill.
“The Canadian marketplace continues to be a very crowded competitive place for financial institutions,” says Mr. Murphy. “The biggest factor for lenders coming into Canada continues to be how can they come in to a small and crowded marketplace. Most do so with specialty niche areas or developing areas.”
But, as their increasing interest in infrastructure projects shows, Canadian banks have also been very good at recognizing lucrative new products. Especially when they see more competition and price pressure in older products.
Courtesy of this month’s federal budget, they may face more competition in the already crowded short-term loan market. Current withholding tax rules effectively make financings with terms shorter than five years the sole purview of Canadian institutions and those foreign institutions with offices in Canada or Canadian subs.
The changes proposed in the budget effectively eliminate the penalizing withholding tax on these loans when made by foreign institutions.
That’s a “nuclear change,” says Mr. Harquail. “It will radically change the Canadian marketplace. It will greatly increase the pool of capital available to Canadian borrowers, and allow financial institutions that are not presently in Canada to be able to lend into Canada on the same tax basis as Canadian financial institutions or foreign institutions presently in Canada.”
For Mr. Murphy, the change in withholding tax rules has “European, Asian and U.S. law firms that send us work breathing a sigh of relief that withholding tax is not going to be an issue anymore when we structure financings.”
But it is unlikely to “open the flood gates,” he says, or rework the Canadian lending landscape. Rather, it is another recognition of the borderless nature of the flow of money. And the highly competitive environment in which banking clients, and their legal providers, operate.
Boring? They wish.
Black & White Photo : Peter J. Thompson, National Post / Carol Pennycook says working with banking is getting spicier.;
(Copyright National Post 2007)