America’s blue chip companies issued record amounts of debt in March and April, powering a renaissance for the often overlooked Big Law practice that helps companies issue bonds, and helping some law firms avoid layoffs and pay cuts.
Capital markets lawyers tend to fly under the radar, and they have not been the primary driver of law firm profits in many years. That designation has more often gone to partners with strong ties to private equity firms who clock countless billable hours that those deals require.
But M&A levels in April hit lows not seen since 2004, according to data compiled by Bloomberg, and some predictions envision a depressed deal market through 2022.
The volume of investment-grade debt issued through April this year is almost twice the level issued in the same period last year, buoyed by the U.S. Federal Reserve’s intervention to buy those bonds. The Fed’s pledge to buy junk bonds has similarly spurred a surge in high-yield debt issuance since mid-April. For some capital markets practices, that activity has been enough to offset a nearly frozen market for initial public offerings, which are often the biggest fee drivers for these Wall Street lawyers.
Combined, it’s enough for a group of select New York firms with long ties to Wall Street’s banking business to have a rare moment on center stage. Even if nobody expects the boom to last forever, the lending practice’s success is helping some firms avoid the furloughs and pay cuts that have spread across the legal profession.
“Very early on we made it very clear to our staff and our attorneys that there would be no such cutbacks,” William Hartnett, managing partner of Cahill Gordon & Reindel, which leads the practice representing managers in high-yield debt issues, said in an interview. “We remain busy, so I see no reason for those types of moves.”
Blue Chip Deal Flow
Creditworthy companies have been tapping debt markets to plug holes in their balance sheets ripped open by an economy largely shuttered to combat the coronavirus.
More than $800 billion in investment-grade debt had been issued through April by U.S. companies. The average amount issued during that span from 2009 to 2019 was about $430 billion, according to data compiled by Bloomberg.
“Unless capital markets lawyers are working on one of the year’s biggest IPOs, they tend not to be in the public spotlight,” said Ed Petrosky, who leads Sidley Austin’s global capital markets practice, which saw its billings this March increase 27% in March compared last year. “And I think for capital markets lawyers, that’s just fine.”
Davis Polk & Wardwell’s investment grade bond issue practice has been the busiest in the area, according to the Bloomberg compiled data. Between the firm’s practice representing managers of debt issues and the companies issuing debt, Davis Polk handled a total of 190 deals worth around $195 billion through April, the data showed. That represents close to a doubling in the firm’s work compared to the same point last year.
Michael Kaplan, a member of Davis Polk’s three-member management committee, said the firm’s capital markets lawyers have put in a lot of work, but they’re not necessarily pulling all-nighters at their remote desks. The firm can often close those deals within a week, he said.
“Hopefully sooner rather than later the virus eases up on us,” Kaplan said in an interview. “And, ideally, we can go back to doing IPOs for new growth companies, and established companies can do their debt issues when they need to and not in a rush to market.”
Simpson Thacher & Bartlett has also seen an increase in deal flow. The firm handled the second most deals between managers and issuers, 102 worth nearly $115 billion, through April, according to the firm-specific data.
“Our job is to respond as helpfully, constructively, and as quickly as we can,” Roxane Reardon, a Simpson Thacher capital markets partner, said in an interview. “So it has been quite a process since the first week of March.”
Junk Bonds Surge
High yield debt markets have also taken off after being virtually closed for four weeks from mid-March to early April. Through April, riskier companies had issued about 20% more debt than during the same period last year.
New issuance has picked up particularly since the U.S. Federal Reserve promised on April 9 that it would buy junk bonds, which it was slated to start in May.
At Cahill, whose level of dominance in the high-yield and leveraged loan markets is rare for a law firm in any financial market, business has continued to flow. The firm had represented managers on 30 high-yield bond issuances through April, which was more than twice the number of its closest competitor, Cravath Swaine & Moore, data compiled by Bloomberg showed.
Its practice representing lenders in leveraged loan deals, which provide financing to already highly indebted companies, handled more than half of all deals issued through April.
Cahill’s Hartnett said that moments of extreme volatility have in the past bolstered the fortunes of the best-known law firms in various financial markets. It’s a law firm clients’ version of a rush to safety during times of panic. That is one reason it has been difficult for outsider firms to develop practices in this area, Hartnett said.
It has also allowed Hartnett to assure his firm’s lawyers and staff that there will not be pay cuts or layoffs.
“I certainly don’t see that changing at this point,” Hartnett said in early May.
Reversal of Fortune
While no Wall Street firms have gone hungry over the past decade, their growth rates have not kept up with firms that have been powered by the success of private equity markets.
Private equity has flourished over the past decade and now owns more than 8,000 businesses, more than double the number of publicly traded companies, according to data compiled by Bloomberg.
“Banking and debt-issuance were the lifeblood for a lot of law firms 20 or 30 years ago when the non-bank banking sector was not a big deal,” said Bruce MacEwen, principal at law firm consultancy Adam Smith Esq. “And since Sarbanes-Oxley, and since the 2008 meltdown, it has become a really big deal. Private equity, hedge funds, you name it. That was rocket fuel to Kirkland and Latham and some firms like that.”
Kirkland & Ellis and Latham & Watkins, the two largest U.S. law firms by revenue, are among the top advisers to private equity firms. Founded in Chicago and Los Angeles, respectively, the two have been outsiders to the Wall Street practice that burnished the bona fides of firms like Cravath, Swaine & Moore or Sullivan & Cromwell. Still, they each have strong capital markets practices, often advising companies issuing debt.
But deals overall, including those driven by private equity, are down.
Through the first quarter, private equity deal activity fell nearly a quarter compared to the first quarter of 2019.
Last April, Simpson Thacher handled more than $25.6 billion worth of M&A, leading the way among law firm advisers for all M&A activity, Bloomberg data show. This April, the leading firm, Davis Polk, advised on about one-fifth of that total—$5.8 billion. There were roughly 2,750 total deals last month, compared to about 4,100 in April 2019.
A Mergermarket analysis predicted U.S. M&A deal counts could fall by as much as 50% in the second quarter compared to the same period last year. In its best-case scenario, Mergermarket predicted M&A deal counts could return to pre-crisis levels in early 2022. In its worst, deals languish through 2022 at lows not seen for years.
“At this very moment, capital markets groups in many firms are outperforming private equity,” said Kent Zimmermann, a principal at law firm consultancy Zeughauser Group. “And that is a reversal of what many firms saw before the crisis. I don’t think it will be long before private equity comes back. It’s just a question of when.”
But for now at least, capital markets groups are doing the heavy lifting—and billing.
Sidley’s Petrosky said his firm’s practice, which includes 34 partners, had seen the value of its billings grow 22% through March compared to a year ago. He has been providing financial updates to lawyers who are concerned about salary cuts announced at other firms.
“We are dealing with people and anxiety and so forth, and we need to give our lawyers whatever comfort, objectively, that we can by laying out the current state of our business for them,” he said in an interview. “Nobody knows what two months or five months will bring. But we can say that right now our group has done as well as we could have hoped for from a business perspective during this crisis.”