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Introduction: Life after Lehman report 2009


10 September 2009

We have asked market leading partners in our 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.

Based on the responses to the survey, Allen & Overy Special Global Counsel Philip Wood QC (Hon) has produced the comment and analysis that form this report. Philip’s commentary is aimed at providing 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.

The full report is available in PDF format where it is divided into the following sections:

  • Lending
  • Risk management
  • Capital markets
  • Restructuring

Foreword by Philip R. Wood QC (Hon)

This survey reviews whether, one year on, the failure of the investment bank Lehman Brothers and its affiliates on September 15, 2008 has or has not made a major impact on market practice in specific areas in the financial arena. These areas are mainly the documentation of syndicated bank credits and capital market issues, attitudes to risk management by financial firms and regulators, and the conduct of restructurings or workouts of companies in financial trouble.

The combination of the credit crunch in the summer of 2007 plus the dramatic bankruptcy of Lehman's ignited in many people a sense of apocalypse. The financial system, whatever that may be, seemed to have collapsed, inexplicably taking everybody with it. Great official bodies pronounced that the losses could equal world GDP. Things really did seem bad. It seemed all the worse because of the silence of the creeping plague, its invisibility and the fact that nobody could touch it or even see exactly what had crumbled. There was no rubble to pick over.

The survey is about market practice, an area generally inaccessible to outsiders. It does not review the regulatory or insolvency measures or proposals – which now number more than 100. Market participants are already inundated with papers about all that.

Our survey seems to indicate that, apart from higher pricing and less leverage, there has been a significant tightening of the terms of the documents reflecting the competition for credit. There is a return to the conventional cautious documentary practice typical of the era prior to the credit glut.

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 nonfinancial terms. In other words, whatever the failings of regulatory or insolvency regimes, the financial crisis has not, in the main, disclosed awful gaps in the legal protections in financial documents built up over so many years. It has not driven the international financial community to reconsider the basic balance of power between creditors and debtors in their documentation. This is because the documents have been here before. The documents emerged from the crisis with the odd cut or bruise, but otherwise are not bandaged up from head to foot in the hospital bed.

This contrasts with the defenestration of other canons of belief – the efficient market hypothesis, the predictive quality of mathematical models, the notion that it is fine to let bubbles bloom and pick up the pieces afterwards.

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 which enable banks to leap up the bankruptcy ladder of priorities:

  • 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 straights, there are obviously more of them. That means that many more people are now facing all the complications, mess and time that restructurings entail. Although very unexpected to some, there is nothing new there.

Our survey reviews the market trends in relation to prepackagings, debt-equity conversions and whether the presence of credit default swaps complicates restructurings.

Further Information

For more information about the report please contact Campbell McIlroy on +44 20 3088 2783.


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