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With the Hong Kong stock exchange losing almost 15 percent of its value in the last month, fears are growing among global law firms that the Asian capital markets boom may be running out of gas.
Following the previous market troughs in 2008 and 2009, Asia startled the world with the rate of its recovery. In early March 2009, Hong Kong's Hang Seng Index were languishing at 11,344; six months later it had almost doubled in value.
That buoyant market made Hong Kong the No. 1 destination for initial public offerings for the past two years, according to Ernst & Young, and law firms have been rapidly expanding their practices to get a piece of the action. Kirkland & Ellis' recent recruitment of eight Hong Kong corporate and capital markets partners from Skadden, Arps, Slate, Meagher & Flom; Latham & Watkins; and Allen & Overy was just the latest in a string of aggressive lateral moves by firms in the region.
But with Asian stocks now following global markets into turmoil over U.S. and European recession fears, all those new hires may soon be idle. Reuters reported earlier this month that China Everbright Bank postponed its planned $6 billion Hong Kong IPO due to market conditions. Likewise, China Guangfa Bank has also put its $5.5 billion Hong Kong-Shanghai dual listing plans on ice, according to the news service. A host of other, smaller issuers have followed suit.
Neil Torpey, the chair of Paul Hastings' Hong Kong office, says that his firm has seen Asia deals rescheduled. "Clearly between the things that are going on in Europe, the U.S. and China, there are a lot of cross-border currents that make it difficult to predict which way the wind will blow," says Torpey.
But Paul Hastings and other firms that have invested heavily in Asia corporate practices are not about to reverse course.
In the event of a prolonged downturn, capital markets lawyers could shift some of their practice to other kinds of deals. John Hartley, the executive partner of White & Case's Hong Kong office, says that partners at the firm rode out the last capital markets downturn advising on transactions like consent solicitations, in which an issuer of securities asks investors for a change in terms, and private placements.
Likewise, Torpey says he is confident that the diverse practices of Paul Hastings' lawyers in Asia can adapt to a short-term slide. All of the firm's 13 Hong Kong partners have M&A experience in addition to their capital markets work. In fact, he says, a change in the profile of deals would be a welcome opportunity for younger lawyers to broaden their experience. In the meantime, he doesn't anticipate any change of plan, Torpey says.
New York firms that tend to have a greater focus on capital markets are also defiant. "Market uncertainty for capital markets transactions affects our workflow activity level only to a certain extent," says Leiming Chen, a Hong Kong partner with Simpson Thacher & Bartlett. "It doesn't mean people stop executing deals."
Simpson Thacher was one of several Wall Street stalwarts to recently expand its capital markets practice to take in Hong Kong law transactions. The firm, which previously only practiced U.S. law in the region, announced in April that it had recruited Linklaters partner Celia Lam and Freshfields Bruckhaus Deringer partner Christophe Wong to launch a Hong Kong practice for Simpson in the fall.
Over the long haul, Torpey says there's not much for firms to worry about. What's happening now is not a bursting bubble. Asian companies -- particularly Chinese ones -- are part of rapidly growing economies, and that growth needs capital, he says.
Michelle Taylor, head of the China practice for Orrick, Herrington & Sutcliffe, agrees that firms need to take a long view in the region.
"Law firms are not companies that are just run for their year-end profits. There's a strategic element to everything," she says. Her own firm sees Asia as an investment, too: "We're looking to really deepen our relationships with corporate China. Equity capital markets is only one facet of that."
Taylor acknowledges that some deals in the market have been postponed -- Orrick has seen a couple of renminbi-denominated bond issuances held back, for example -- but she sees the current turmoil as a blip. "I think it'll be a pause, and not a collapse, in the market."
In fact, she predicts a busier than usual fourth quarter for capital markets lawyers. Today's would-be issuers have based their plans on financial results from June, which are rapidly becoming stale. Taylor believes the publication of fresh figures in September should herald a rush to market, both in equity and debt.
But for now, there is plenty of non-capital markets activity going on across the Asia-Pacific region -- from project finance to intellectual property litigation -- to keep lawyers occupied, says Taylor. "There are pockets of volatility," she says, "but everything else is go."
And, of course, Asia could brush past a new downturn just as quickly as it did the last one. The seeds of a rebound may have already been sown. Some economists are pointing to the sharp appreciation of the Chinese yuan as a key to recovery. Once again, it seems, China's gigantic spending power could be about to pull the world's economies out of the gloom.
Michael Gisser, the head of Skadden's Asia-Pacific practice, counts himself an optimist. "Hope has triumphed so many times," he says of the region's now-familiar economic resilience.
In the meantime, Gisser says, lawyers overstretched by the boom should enjoy the respite.