Allen & Overy's 'Life after Lehman' Report Reveals Changes in Global Financial Market Practice

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Allen & Overy reports on how the global financial markets are taking a 'back to basics' approach one year on from the collapse of Lehman Brothers.

As to restructurings and reorganisations of companies in dire straits, there are obviously more of them. That means that many more people are now facing all the complications, mess and time that restructurings entail. Our report reviews the market trends in relation to prepackagings, debt-equity conversions and whether the presence of credit default swaps complicates restructurings.

One year on from the collapse of Lehman Brothers the global financial markets are taking a back-to-basics approach of cautious deal making and risk analysis, according to a report published today by Allen & Overy.

The report, which surveys Allen & Overy partners in 20 countries around the world on changes in market practices in their jurisdictions, indicates:

o    a tightening of covenants in lending documentation;
o    significant firming up of legal risk management practices both in banks and by regulators;
o    increased emphasis on counterparty risk in capital markets structures, but with the preservation of sound market conventions; and
o    that in restructurings there has been an increase in the use of pre-packs and debt-for-equity conversions, as well as disputes over valuation models.

In essence, people are negotiating harder and prudently assessing and managing their risks in a still uncertain market environment.

The full report is available to download here

The report was compiled by Allen & Overy Special Global Counsel Philip R. Wood QC (Hon) and shows that while regulators and politicians continue to debate reform of the financial system, the market has responded to recent events and is conducting business with a far more cautious approach to transactions and deals - albeit with a greatly reduced flow of deals in some areas.

Commenting, Philip Wood said: "Our report indicates that, in addition to higher pricing and reduced leverage, there has been a significant tightening up of the terms of legal documents. But recent events have not resulted in a revolution in the coverage of the documents for syndicated credits or bond issues or a fundamental reappraisal of non-financial terms.

"Legal risk management by banks in relation to their dealings with counterparties in the market and by their regulators has intensified, as one would expect. Aside from much nervousness in credit analysis, the focus has been on the three major risk mitigants: set-off (and its companion close-out netting), security interests and trusts (usually in the form of custodianship of securities).

"As to restructurings and reorganisations of companies in dire straits, there are obviously more of them. That means that many more people are now facing all the complications, mess and time that restructurings entail. Our report reviews the market trends in relation to prepackagings, debt-equity conversions and whether the presence of credit default swaps complicates restructurings."

The key findings of the analysis, broken down by Lending, Risk Management, Capital Markets, and Restructuring, are as follows:


  •     Financial covenants tightened: The responses to our survey indicate a much more intense interest in these covenants. The scope of the debt which is caught is wider. The exemptions are narrowed and headroom is reduced. The thresholds or levels are being re-calibrated in many cases. The overall approach is tougher.
  •     More guarantees and security sought: The research reveals that there has been a search for better security in the form of guarantees and collateral and more focus in some countries on the effectiveness of security packages in loan documentation.
  •     Restrictions on where third party debt is taken: New structured finance deals have been few and far between. Our survey shows that, in the few structured deals that there have been and in plain vanilla bank financings, there is more interest in the structure and location of debt but not a fundamental shift to some other architecture. Senior lenders have become even more preoccupied with ensuring that subordination of junior creditors means what it says.

Risk management:

  •     Greater threat of regulatory enforcement: The overwhelming majority of countries report an overall trend toward more intrusive surveillance, more requests for data, more quizzing and visits, more punitive enforcement. This reflects increased activity from regulators around the world following criticism in the wake of the financial crisis.
  •     Increase in investor or counterparty litigation: Nearly all our correspondents report increases in litigation by disgruntled investors. Probably the bulk of the litigation has centred on two scandals - the Madoff fraud and the alleged misselling of structured products relating to Lehman.
  •     Change in risk management practices: Almost universally there has been greater scrutiny of such matters as the validity and monitoring of collateral, the need for the mutualisation of criss-cross claims so that set-offs and close-out netting (which require mutuality instead of being split amongst a group) can be effective on the insolvency of a counterparty, whether custodianship of securities stands up on insolvency, and the like.

Capital markets:

  •     Reasons for issuing securitisations haven't changed: In virtually all countries the underlying reasons for securitisations have not changed, although there are various regulatory and accounting threats on the table. In drafting documents, there has been a keener attention to counterparty risk. The degree of credit enhancement provided by the originator has been increased. Disclosure documents have grown longer by reason of more detailed information.
  •     Limited tightening of the terms for bond issues: There has been some tightening of terms in a few countries, mainly in relation to the introduction of change of control clauses. If an issuer has slipped from investment grade, then high yield-type covenants have been proposed. Some arrangers have enquired whether collective action clauses do their job but the enquiry has been as far as it goes. Otherwise bond markets have appeared to continue to adhere to their traditional practices. Convention matters in the bond markets.
  •     Environment for issuing structured products to retail investors has changed: The majority of countries have clamped down on the issuing of structured products to retail investors. This is probably a reaction to the large losses suffered on structured products related to the credit of Lehman. As regards documentation, those arranging these deals have given more attention to the credit strength of the counterparties and to the providers.


  •     Increase in debt-for-equity swaps: Our survey reveals, somewhat unsurprisingly, that there has been a sharp increase in most countries in debt-equity swaps.
  •     CDS holders are not distorting restructurings: Our survey seems to indicate that this situation has been less common than perhaps is currently thought. One reason may be that many restructurings have involved highly leveraged transactions which have not enjoyed CDS protection. Another reason is that sometimes the reorganisation has been pitched so that the CDS protection is technically triggered with the result that the CDS holder is happy. A third reason appears to be that sometimes the CDS holder has got other unprotected exposures which it wishes to rescue by participating in the reorganisation.
  •     Increased use of pre-packs: On the whole there has been an increase in the use of pre-packs in the countries which allow them. The dominance of private deals out of court as a method of resolving financial problems seems to be confirmed.

Download the report in full as a PDF

Visit our website for more information on 'Life after Lehman'

For further information, please contact Campbell McIlroy on +44 (0)20 3088 2783.

Notes for Editors:

1.     Allen & Overy asked market leading partners in its offices around the world for their opinion on what has and what has not changed in terms of market practice over the past year since the collapse of Lehman Brothers on 15 September 2008. The opinions were gathered via a survey asking partners for a Yes, No or Not Applicable answer to a series of questions about market practice in their jurisdiction.

Based on the responses to the survey, Allen & Overy Special Global Counsel Philip Wood has produced the comment and analysis that form the report. Philip's commentary is aimed to provide an overview of what we see as the major changes in market practice and the issues our clients are facing in getting deals done in the market today.

In many markets deal flow has slowed to a trickle over the passed year. Therefore, the views expressed in this report are the opinions of A&O partners based on what they have seen in their jurisdiction.

2.     Allen & Overy is a global law firm with approximately 5,000 staff, including some 450 partners, working in 31 major centres worldwide.

3.     In this press release 'Allen & Overy' means Allen & Overy LLP and/or its affiliated undertakings.

4.     The term 'partner' is used to refer to a member of Allen & Overy LLP or to an employee or consultant with equivalent standing and qualifications or to an individual with equivalent status in one of Allen & Overy LLP's affiliated undertakings.

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