Law firm of the year: Linklaters

Linklaters wins for its work on CRD IV-compliant CoCo securities, its advisory role in the recapitalisation of the Co-Operative Bank and the launch of an innovative platform looking at CCP rulebooks

Carson Welsh, Linklaters

Bank capital instruments are difficult to structure at the best of times, having to be tailored to domestic listing rules, individual bank needs and the shifting appetite of investors, but the changing regulatory environment has presented issuers and their advisers with an unprecedented challenge by dramatically redrawing the boundaries.

Linklaters has become one of the go-to law firms on the topic, landing a host of roles in the issuance of still-evolving contingent convertible (CoCo) bonds, and playing a key part in the initial recapitalisation of the UK's Co-operative Bank after its dramatic implosion. It was also a source of advice for the derivatives industry as it moves to mandatory clearing, helping compile a compendium of central counterparty (CCP) rulebooks so market participants are better able to keep up with their obligations.

Some of the UK firm's most eye-catching work involved Barclays, for which it structured CoCos qualifying as additional Tier I capital under Europe's Basel III rules, the Capital Requirements Regulation (CRR).

Conceptually, these are simple instruments – if a bank hits a pre-defined trigger, for instance a certain Tier I capital ratio, the bondholders become exposed to losses in the form of a write-down of the principal or a conversion into equity.

Following the successful issuance of CoCos that convert debt into equity by European institutions such as Credit Suisse – and for which Linklaters also served as legal counsel – Barclays looked to follow suit and was the first UK bank to issue such instruments under the terms of the CRR. As Linklaters had already been involved in the bank's 2012 issuance of a $3 billion write-down contingent capital note and a $1 billion write-down contingent capital notes in April 2013, it was in a strong position to secure a role on the new issuance.

The work they have executed on our behalf is impressive considering that it’s a new structure and that we have issued those securities in multi-currencies

"In the UK, although permanent write-down CoCos are acceptable, the regulator has expressed a preference for convertible instruments, and banks have gone down that route because they are more appealing to investors and less expensive for banks to issue," says Carson Welsh, a partner at Linklaters in London.

The first convertible bond was issued in November 2013 – a $2 billion fixed-rate resetting perpetual subordinated CoCo. The bonds convert into ordinary shares if Barclays' common equity Tier I ratio dips below 8.25%. Linklaters helped devise the conversion ratio – that is, the number of ordinary shares a bondholder would be entitled to receive – and the mechanism for the delivery of the shares after a trigger event.

Linklaters followed this up by acting for the lead managers on another Barclays' fixed-rate resetting perpetual subordinated CoCo. The €1 billion deal, which has a trigger at 8%, was closed at the end of 2013.

A source within the bank praises the firm: "The work they have executed on our behalf is impressive considering it's a new structure and that we have issued those securities in multiple currencies."

Following on from the Barclays success, Linklaters has now advised four other banks on the issuance of CRR-compliant CoCos that convert into equity: Lloyds Banking Group, Nationwide, Coventry Building Society and Aldermore Bank.

The firm also advised dealer managers HSBC and UBS during the restructuring of the Co-Operative Bank's subordinated capital instruments in late 2013.

The UK bank hit trouble in mid-2013, forcing it to completely restructure its debt profile to stay afloat. The plan required existing subordinated bondholders to exchange around £940 million in debt for a combination of new subordinated bonds and a 70% equity stake in the bank. A portion of the debt was exchanged via a series of offers below face value, while the rest was done via a UK scheme of arrangement. This was the first time a UK bank's bondholders have been bailed-in without government assistance, which was a key goal of the post-2008 financial crisis regulatory agenda.

Linklaters was active outside the bank capital arena as well, being one of the key advisers for a variety of firms – mainly large clearing members, but also tier-two banks – as the move to mandatory clearing gathers speed. Of particular note was its work last year to create a new platform that brings together 80 CCP rulebooks in one place, allowing a comparison of regulations across different clearing houses, and saving the industry a lot of money in the process.

This is because international principles on the supervision of clearing houses require member firms to understand the "rules, procedures and risks" of each CCP they use. In practice, banks have chosen to satisfy this requirement by engaging law firms to compile a survey on the rules of each clearing house. This translated into large legal bills – according to Linklaters, the price per survey varied between £15,000 and £25,000, which can quickly add up for a large bank.

"I thought if we did a gold-standard report, then everyone could save money because they wouldn't have to pay to have their own particular survey commissioned. The key thing though was to make sure we would be able to cover all the questions everyone was asking," says Michael Voisin, a partner at Linklaters in London.

After testing industry demand, Linklaters teamed up with US law firm Milbank in March 2014 to create the service, which launched in September.