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There’s a battle brewing in London — over junk. Yes, junk (or high-yield) bonds have come to Europe, and U.S. and U.K. firms are competing intensely to win the financing work. In one corner stand London’s two top banking firms, Allen & Overy and Clifford Chance. Facing off are New York’s Shearman & Sterling and Simpson Thacher & Bartlett, and Los Angeles-based Latham & Watkins. To strengthen its position, Allen & Overy hired high-yield specialist Adam Kupitz, a Sullivan & Cromwell senior associate from New York, as a partner last July. The U.K. firm wants to build on its senior debt practice and win more lucrative European high-yield work. Kupitz agreed to move to London because it is “the place to be” for a high-yield specialist, he says. Meanwhile, Latham is attempting to use its London high-yield practice to encroach on the U.K. firms’ senior debt work. In August it lured Weil, Gotshal & Manges’s London head of banking, James Chesterman, and Kevin Dunn, European general counsel at GE Capital, to join on as U.K. acquisition finance partners. Similarly, Simpson Thacher has been on the hunt for a U.K. banking partner to complement its U.S. capital markets practice. And Shearman & Sterling has offered bank bond advice in London since hiring a U.K. banking team from Ashurst Morris Crisp in 1998. The battle is shaping up because many investment banks prefer to have a single law firm advise on all aspects of leveraged finance deals. “A number of our clients have been saying they would like us to provide senior debt and high yield,” says Latham’s Chesterman. Goldman Sachs Group, Inc., J.P. Morgan & Co., Inc., and Barclays Capital are among the banks that are asking for one law firm to advise on all aspects of financings, say several lawyers who work on such deals. A director on the high-yield desk of one of the U.S. investment banks in London confirms that his bank prefers one law firm to advise on all aspects of finance transactions, because in theory it is easier to manage one set of lawyers. But in practice, this source says, there are often different contact partners for the senior and high-yield teams, even within one law firm, and these groups often fail to communicate with each other. “A true one-stop shop in European leveraged finance would be a huge value-add from our perspective,” he says. “There is an opportunity for someone to get it right.” He singles out Sullivan & Cromwell as a firm that could dominate the market if it hired a U.K. banking team to complement its U.S. law capability in Europe, but asserts that so far the firm remains unwilling to do so. “We don’t have a religion on these things,” responds William Plapinger, managing partner of Sullivan & Cromwell’s 51-lawyer London office. He points out that the firm’s six U.K.-qualified lawyers already advise on senior debt for project finance deals. “Our growth has been client-driven all along, and if clients tell us there are opportunities there, that’s clearly something we’d think about,” he adds. Still, not all banks favor the one-stop shop, because the interests of senior and high-yield investors can collide. Stephen Mostyn-Williams, head of European acquisition finance at Shearman, says that Deutsche Bank A.G. is one bank that remains opposed. Both the U.K. and U.S. firms are branching out for offensive reasons (there’s money to be made out there) and defensive ones (to protect their existing business). Mark Campbell, a banking and capital markets partner at Clifford Chance, says high-yield work is attractive because it’s lucrative and a key component of leveraged buyouts, which are already big business at the firm. “If there’s a new instrument that’s being used, we want to protect our position, so we have to do it,” he says. Leveraged deals in Europe are dominated by buyouts and telecom financings, comprising various forms of debt including senior debt and high-yield bonds. Senior debt for most European deals is issued under English law. Junk bonds, on the other hand, are a U.S. product typically covered by U.S. law. Campbell admits that the investment banks still favor the U.S. firms they use for high-yield work in New York, and that “we still have a job to persuade people.” But James Robinson, managing partner of the London office of New York’s Cahill Gordon & Reindel (which has a strong junk bond practice and opened in London in 2000 to cash in on the European market), believes the U.K. firms “will start to play a growing role in the market.” Confidence in the high-yield market in both Europe and the U.S. has taken a knock as investors have become wary of investing in telecom companies, the main issuers of these bonds. But the law firms still see considerable work in the pipeline. As Allen & Overy’s Kupitz notes, there are still a lot of deals in which the initial bank loan will be replaced by junk bonds. So there remains plenty to fight for. One partner at a U.S. firm says the market for these complex products in Europe is so new that many of the bankers don’t know what they are doing. Thus, everything’s up for grabs. “In the land of the blind, the one-eyed man is king,” this partner says. One-eyed or not, the firm that focuses first could find gold amid the junk.

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