Commercial Awareness - May 2018

[Coralin96]

Hi everyone, I thought I'd start a new thread for the May posts like before.

Thank you @Nicole and @Jaysen for helping me to explain/tidy these up! I think they will also be sending these out in the next newsletter.

Trump withdraws from Iran nuclear deal

• The story: Trump announced that the US is withdrawing from the 2015 nuclear deal, which saw Iran accept restrictions on its nuclear programme in return for the lifting of international sanctions.
• Impact on law firms and clients: When sanctions were lifted, many investors and international businesses entered Iran. France’s Total signed a $4.8bn deal to develop South Pars, the world’s largest gas field, whilst other European companies, including Airbus, Boeing, Peugeot and Renault, secured lucrative deals in the region. But unless these companies can seek an exemption, they’ll be forced to scale back their operations and find alternative trading partners, or they risk falling foul of US law. They’ll need legal advice regarding their exposure to US sanctions and their ability to exit contracts and exercise termination clauses over the next 3-6 months. For those companies that do not comply with the sanctions or choose to circumvent the restrictions, it remains to be seen whether they will be targeted by US penalties.

Strong US dollar

• The story: Confidence in the US economy has led to a rising US dollar, but this has had rippling effects throughout the global economy. Argentina has been forced to raise interest rates three times – to almost 40% - in the span of eight days to stabilise its falling currency, whilst Turkey has summoned an urgent meeting to save the tumbling lira.
• Impact on law firms and clients: Many emerging market countries and companies borrowed in US dollars during the record-low interest rates. Now, as the US dollar strengthens, it has become more expensive for these companies to pay the interest on their debt. Law firms operating in these regions can help clients prepare for defaults on emerging market debt. Banking and litigation teams may negotiate terms or proceed with enforcement to help lenders recoup their funds, or corporate, restructuring and banking teams could work with borrowers and devise plans to help them pay their debt.

All-time high for private equity

• The story: In January 2018, a record number of private equity funds were operating in the market, raising a total of $744bn, according to a report from the Boston Consulting Group.
• Impact on law firms and clients: It’s boom time for private equity firms at the moment. Money is pouring into funds as investors search for a better return on their investments. But some are warning about the state of the market. Lawyers have helped private equity firms negotiate aggressive deal terms in riskier ‘covenant-lite’ loans, which are now at record highs. These loans, which are used to fund many private equity acquisitions, offer few investor protections and allow private equity firms to load debt onto their target companies. If the market takes a wrong turn, many companies will be in trouble.

Trump tax cuts KKR

• The story: KKR, one of the biggest US investment firms, is converting from a partnership to a corporation in response to the new US tax code.
• Impact on law firms and clients: Private equity firms tend to be structured as a partnership for tax benefits, where tax is only paid on an individual level. But since Trump cut the US corporation tax rate from 35% to 21%, a corporation structure is now a viable option for private equity firms. It also opens the doors to new investors because corporations can be included in stock market indexes, which could potentially boost its value. Most big commercial law firms are also structured as partnerships, but with their growth in size, debt, technology and global reach, there may be a time when it’s better to be structured as a corporation.

 

[Sofia]

Hi everyone, I thought I'd start a new thread for the May posts like before.

Thank you @Nicole and @Jaysen for helping me to explain/tidy these up! I think they will also be sending these out in the next newsletter.

Trump withdraws from Iran nuclear deal

• The story: Trump announced that the US is withdrawing from the 2015 nuclear deal, which saw Iran accept restrictions on its nuclear programme in return for the lifting of international sanctions.
• Impact on law firms and clients: When sanctions were lifted, many investors and international businesses entered Iran. France’s Total signed a $4.8bn deal to develop South Pars, the world’s largest gas field, whilst other European companies, including Airbus, Boeing, Peugeot and Renault, secured lucrative deals in the region. But unless these companies can seek an exemption, they’ll be forced to scale back their operations and find alternative trading partners, or they risk falling foul of US law. They’ll need legal advice regarding their exposure to US sanctions and their ability to exit contracts and exercise termination clauses over the next 3-6 months. For those companies that do not comply with the sanctions or choose to circumvent the restrictions, it remains to be seen whether they will be targeted by US penalties.

Strong US dollar

• The story: Confidence in the US economy has led to a rising US dollar, but this has had rippling effects throughout the global economy. Argentina has been forced to raise interest rates three times – to almost 40% - in the span of eight days to stabilise its falling currency, whilst Turkey has summoned an urgent meeting to save the tumbling lira.
• Impact on law firms and clients: Many emerging market countries and companies borrowed in US dollars during the record-low interest rates. Now, as the US dollar strengthens, it has become more expensive for these companies to pay the interest on their debt. Law firms operating in these regions can help clients prepare for defaults on emerging market debt. Banking and litigation teams may negotiate terms or proceed with enforcement to help lenders recoup their funds, or corporate, restructuring and banking teams could work with borrowers and devise plans to help them pay their debt.

All-time high for private equity

• The story: In January 2018, a record number of private equity funds were operating in the market, raising a total of $744bn, according to a report from the Boston Consulting Group.
• Impact on law firms and clients: It’s boom time for private equity firms at the moment. Money is pouring into funds as investors search for a better return on their investments. But some are warning about the state of the market. Lawyers have helped private equity firms negotiate aggressive deal terms in riskier ‘covenant-lite’ loans, which are now at record highs. These loans, which are used to fund many private equity acquisitions, offer few investor protections and allow private equity firms to load debt onto their target companies. If the market takes a wrong turn, many companies will be in trouble.

Trump tax cuts KKR

• The story: KKR, one of the biggest US investment firms, is converting from a partnership to a corporation in response to the new US tax code.
• Impact on law firms and clients: Private equity firms tend to be structured as a partnership for tax benefits, where tax is only paid on an individual level. But since Trump cut the US corporation tax rate from 35% to 21%, a corporation structure is now a viable option for private equity firms. It also opens the doors to new investors because corporations can be included in stock market indexes, which could potentially boost its value. Most big commercial law firms are also structured as partnerships, but with their growth in size, debt, technology and global reach, there may be a time when it’s better to be structured as a corporation.

Thank youu. I was missing your posts for a while haha!

 

[FreddyS]

Really helpful, thanks Coralin.

 

[Jai C.]

Guys - just had a small query regarding commercial awareness -

In your opinion - is it worth subscribing to the Economist - as it has a promotional offer of 12 pounds for 12 weeks and I can actually afford this ...rather the FT which is ridiculously expensive.

Any opinions on this?

 

[JoshMason]

Guys - just had a small query regarding commercial awareness -

In your opinion - is it worth subscribing to the Economist - as it has a promotional offer of 12 pounds for 12 weeks and I can actually afford this ...rather the FT which is ridiculously expensive.

Any opinions on this?

That's what I do, I've found it to be a really good summary of the week and they explain things in a way that makes sense. I don't really know how people can afford the FT unless it's offered by their university.

 

[Coralin96]

That's what I do, I've found it to be a really good summary of the week and they explain things in a way that makes sense. I don't really know how people can afford the FT unless it's offered by their university.

I may or may not be using my flatmates subscription

 

[NAremu]

That's what I do, I've found it to be a really good summary of the week and they explain things in a way that makes sense. I don't really know how people can afford the FT unless it's offered by their university.

Would you say its helped improve your commercial awareness? Like are the stories relevant or is it more broader/big picture stuff?

 

[JoshMason]

Would you say its helped improve your commercial awareness? Like are the stories relevant or is it more broader/big picture stuff?

Yeah definitely. There's a whole company section which summarises the company news and then there's usually more in-depth pieces, although that can get quite specific at times. Might as well go for the offer Jai mentioned and see if you like it - that's what I did.

 

[Coralin96]

Btw I'm going to get back on the briefing tomorrow guys

In the meantime, a good read (sorry from the FT I know): https://www.ft.com/content/2faa2420-581d-11e8-b8b2-d6ceb45fa9d0

 

[Nicole]

Btw I'm going to get back on the briefing tomorrow guys

In the meantime, a good read (sorry from the FT I know): https://www.ft.com/content/2faa2420-581d-11e8-b8b2-d6ceb45fa9d0

Thanks Coralin, I will add this to the list!

 

[Coralin96]

Next update - thanks Nicole + Jaysen for helping me again! This one is a little late so I've looked at the big news stories over the last couple of weeks

17/05/2018

BT's radical restructuring

• The Story: In one of its biggest transformations in a decade, BT is cutting 13,000 jobs in a bid to reduce costs and improve investor confidence in the company. In early 2017, BT was fined the largest penalty ever imposed by Ofcom for breaching contracts with telecoms providers, and recently, Ofcom has warned BT that unless there is more investment into full fibre networks, it’ll be at risk of fading away. Later in 2017, BT was also fined £225m for an accounting scandal within its Italian operations.
• Impact on law firms and clients: BT dominates the UK broadband market through its subsidiary, Openreach, but for years the communications regulator, Ofcom, has been putting pressure on BT to adapt. Ofcom’s warning that BT should invest in new technology comes as a recent report revealed that the UK lags far behind Europe on broadband speed. The story sheds light on the competition and regulatory issues that businesses face when they are effectively monopolies and own large shares of their markets. BT will also need to be wary of employment legislation and appropriate consultations with unions to minimise any legal or reputational risks as the redundancies take place. It already has the second-worst funded pension scheme in the world, which is a significant liability for the business.

HSBC’s road to recovery

• The Story: From Mexican money laundering to failed acquisitions, HSBC has had its fair share of scandals over the last few years. Just recently, the firm put aside $897m to cover costs related to the mis-selling of mortgage products before the financial crisis. As a result, shares in HSBC fell in the first quarter of 2018.
• Impact on law firms and clients: Banks have had to spend billions to settle regulatory fines for their activities before, during and after the financial crisis, and then some more to overhaul their systems. This is likely to have squeezed the legal budgets for some banks forcing law firms to consider alternative fee arrangements, such as fixed fees, so they can keep their roles as legal advisers. On the flipside, these fines have led to a high volume of work for financial regulation and regulatory and investigation teams at law firms.

The US-China trade war

• The Story: There’s never a dull day when it comes to Trump’s negotiations with China. His demands call for, among other things, China to reduce their tariffs, narrow their trade surplus with the US, remove their state subsidies for certain industries, and lift their restrictions on foreign companies doing business in China. The two countries are currently in trade talks after Trump lifted US sanctions on Chinese telecoms company ZTE, allowing it to resume operations (despite the company pleading guilty to illegally shipping US goods to Iran).
• Impact on law firms and clients: If China concedes on these trade demands, it should be a good thing for foreign businesses and law firms. China has already announced it’ll open its market for financial services and the automobile sector, and there’s scope to allow foreign firms to do business in China without having to set up a joint venture with a Chinese partner. So far, these restrictions have limited a law firm’s ability to do business in the region so if they’re lifted, it opens up a variety of legal work both in and out of the country.

Takeda Pharmaceutical Co. to acquire rival Shire

• The Story: If it goes through, the $46bn deal will be the largest ever acquisition by a Japanese company and place Takeda among the top global pharmaceutical companies by revenue. It’ll also give the Japanese company entry into the lucrative US market, where much of Shire’s business takes place.
• Impact on law firms and clients: The healthcare sector is a huge market for M&A lawyers and it’s set to boom in 2018 thanks to US tax reform, the costs of bringing a new drug to market, existing drugs going off patent and competition from generic drug firms. M&A is seen as a fast growth strategy and a way to access an immediate pipeline of drugs.

Carillion report criticises accounting firms and legal advisers

• The Story: In a recent MP report, three magic circle law firms, several US firms and the big four accountancy firms were criticised for “squeezing fee income” out of Carillion, the recently collapsed government contractor. The big four were also criticised for turning a blind eye to what was going on at Carillion and pocketing large sums in the process.
• Impact on law firms and clients: The collapse of Carillion is one of the biggest British company failures in recent years and it has since created a host of work for restructuring, insolvency, employment and litigation lawyers. The report also made several critical suggestions. It asked the Insolvency Service to check whether the former directors at Carillion could be disqualified for breaching their duties under the Companies Act. It also called for the big four accountancy firms – KPMG, PWC, EY and Deloitte – to be referred to the UK regulator, the Competition and Markets Authority, to determine whether they should be broken up. This would be a radical shake-up in the industry and the accountancy firms have already begun to draft contingency plans.

 

[Sofia]

Hey - just came across this,

Linklaters is the first MC firm to get Chinese law capability - https://www.thelawyer.com/linklaters-strengthen-chinese-practice-with-tie-up/.

Nicely fits in with your comments about China opening up

 

[Coralin96]

Hey - just came across this,

Linklaters is the first MC firm to get Chinese law capability - https://www.thelawyer.com/linklaters-strengthen-chinese-practice-with-tie-up/.

Nicely fits in with your comments about China opening up

This is great stuff for a Links app