How has 2003 been for you so far?
Cote: It's definitely improving. The first half of the year was very difficult for everyone. Importantly due to SARS, but also there was the war in Iraq, which created uncertainty. In China, the change of government in March delayed approvals in certain areas. In Hong Kong there were revisions to the listing rules, which also slowed down the deal process. It was a "perfect storm" of overlapping but unrelated events, which all seem to be behind us now. It is a much more optimistic business climate today.
So are we off to the races again?
I hope so. The historical experience of international law firms in Asia has been one of peaks and valleys. I'm hoping we will get a moderate but ever increasing activity level rather than a spike.
What areas are keeping you busy?
Capital raising, mainly. In this office it is IPOs, especially Hong Kong listings. We are also seeing a return of interest in companies doing US SEC registered and Nasdaq listings, which is something that has been largely absent for three years. We are also involved in the increasingly active debt markets here. The PRC sovereign will be launched next week.We've acted on every PRC sovereign deal since the first one in 1994. We are also doing some corporate debt issues from Indonesia and Taiwan. Other areas include NPL activity in China, which we are excited about.
You mentioned US listings coming back. There is a suggestion that Asian issuers have been put off from the US markets since the new laws such as Sarbanes-Oxley were introduced in the US and the SEC has become even more scrupulous. Is this the case?
It is hard to say that the US has a universal appeal as a listing venue, even absent Sarbanes-Oxley. But for issuers in certain industries - technology being one - there is a real incentive to go to the US. Technology is a globlized industry and there is US investor interest in those companies. Also large Asian companies, particularly PRC-based companies, with global ambitions but without much visibility in the US may choose to list.
One of the major themes of the past few years has been the localization of the capital markets in Asia - the markets have come onshore. How does that play to your strengths, especially given your local law practice that differentiates you from many US firms?
We have tried to leverage off both strengths - one stop shopping for clients that want to do a domestic financing with an offshore component - where we can act as both local and international counsel. We have tried to position ourselves as a full-service provider, whatever market our client may select.
That has proved to be a good bear market tactic, but will it hold in the upcoming bull market? Will the other Wall Street law firms that packed up shop in the last three years, come back and start stealing all the mandates again?
We would benefit from a return to the bull market as well, since the legacy Brown & Wood had its roots as a Wall Street firm. In recent years, we have tried to diversify our practice and not be totally dependent on US capital markets activity, as we were when I first came out here five years ago. However, nothing would please me more than to see a bull market for Wall Street firms, as that would play to our strengths.
Do you think that those very strong ties between certain US law firms and the investment banks have been broken?
It is different in Asia than in the US and London. Because there have not been enough deals for all the law firms, there has been a lot of price competition. This has tended to dilute the relationships between the major investment banks and their favorite law firms. The good news is that there is more fluidity in business relationships in Asia. The bad news is that you may acquire those new client relationships by sacrificing your margins.
Is the dearth of deals the biggest challenge you face here?
The lack of deals is an expression of other issues. There is excess liquidity in many major Asian companies so they do not need to raise new money. In securitization, the pace of development has been disappointing due to the way the laws have developed - or not developed - in different jurisdictions. There are also lingering concerns about currency exposure in various countries, with issuers being reluctant to bulk up on dollar denominated obligations due to the bad experience of the financial crisis. There is a whole range of issues, but if you stand back far enough, the future looks quite positive.
You mentioned securitization. You lost your main securitization partner Neil Campbell and his team to a rival firm earlier this year. What are you doing to regain your position in that market?
We previously focused on arranger representations in ABS transactions. Our current emphasis is more on CBOs, CDOs, synthetic securities and other structured products, although we continue to be active on ABS transactions. The firm as a whole has huge resources in the securitization area - we have more than one hundred securitization lawyers globally. In Asia, we recently brought in a securitization partner, Chris Lewis, to work with our securitization team based in Tokyo. When we have a good sense of how the market will develop in Asia, we will grow our resources as much as we need to.
Now that the less structured markets are coming roaring back, is there less demand for such products as securitization as other, easier sources of capital become available?
No. I think that historically, different types of issuers access those markets. Stronger credits can always favourably access the bond markets. Securitization has been a tool for companies that do not have a strong credit rating on a free standing basis, but rather want to use their assets to achieve lower funding rates. I think the increasing flows of capital to Asia will lift all these boats and generate additional securitization activity.
If you could wake up tomorrow and one thing would be different, one industry practice changed, what would that be?
We would like to see Asian countries open their legal markets to international law firms. Korea and China are probably the two at the top of my wish list. Even Japan, which is 10-15 years ahead of the rest, is still a very structured market for international lawyers to operate. I think this opening will eventually happen, but perhaps not before I reach retirement age.
Is being able to practice local law an absolute imperative for having a successful practice in the region?
Not necessarily. Some of the major Wall Street firms have not gone in that direction and they seem to be comfortable. I am not sure that there is any proven business model for law firms. Given the size and presence of our firm globally, we think having local law capability is the right thing to do. For other firms, maybe not. Our business model is probably more like the magic circle firms: we want to be local in certain, but not all, jurisdictions and cover all the important international financial centres.
How is it operating in a region where there are no dominant players and competition comes from every type of law firm?
The competitive environment here is certainly very different from what US firms experience at home. Here, there are 20-25 of the best law firms in the world in direct competition. In New York, there is a small number of established, home grown firms which lead the pack. In Asia, everyone can get in the game. These are outstanding law firms and all can get the job done. How do clients choose and how do firms differentiate themselves? Unfortunately, it seems to be based on price. The modus operandi here is to invite four or five law firms to make a proposal, ignore subjective differences and select the lowest bidder. The prices for transactional legal services in Asia are quite a bit below what they should be and what they are in other regions.
Will deals go wrong and services suffer as a result of this price competition?
It is my view that these firms are quality organizations and, in most cases, they will do a professional job regardless of the recovery rate. The resources which are applied to a particular transaction may be constrained due to this issue, but, in general,the firms that are here are world-class and they will do a good job.
