In a nutshell

Banking and finance lawyers may work in any one of the specialist areas described below, but all deal with the borrowing of money or the management of financial liabilities. Their task is to negotiate and document the contractual relationship between lenders and borrowers and ensure that their clients' best legal and commercial interests are reflected in the terms of loan agreements. It is a hugely technical, ever-evolving and jargon-heavy area of law.

Straightforward bank lending: a bank lends money to a borrower on documented repayment terms. Acquisition finance: a loan made to a corporate borrower or private equity sponsor for the purpose of acquiring another company. This includes leveraged finance, where the borrower uses a very large amount of borrowed money to meet the cost of a significant acquisition without committing a lot of its own capital (as typically done in leveraged buyouts (LBOs): read our corporate law section). Real estate finance: a loan made to enable a borrower to acquire a property or finance the development of land and commonly secured by way of a mortgage on the acquired property/land. Project finance: the financing of long-term infrastructure (eg roads) and public services projects (eg hospitals), where the amounts borrowed to complete the project are paid back with the cash flow generated by the project. Asset finance: this enables the purchase and operation of large assets such as ships, aircraft and machinery. The lender normally takes security over the assets in question. Islamic finance: Muslim borrowers, lenders and investors must abide by Shari’a law, which prohibits the collection and payment of interest on a loan. Islamic finance specialists ensure that finance deals are structured in a Shari’a-compliant manner. Debt capital markets: this generic category covers many types of debt instruments, but generally speaking it deals with a borrower raising capital by selling tradable bonds to investors, who expect the full amount lent to be paid back to them with interest. [We've written a beginners' guide to capital markets - read it on this page] Securitisation: essentially this is where a lender wants to sell its loans to create liquidity. It does so by selling them to a shell company, which then issues bonds to the markets. Bond investors get paid from the interest and principal on the loans owned by the shell company. Structured finance: a service offered by many large financial institutions for companies with unique financing needs that traditional loans cannot satisfy. Structured finance generally involves highly complex bespoke financial transactions. Derivatives: at its most basic, a derivative is a security used by banks and corporates to hedge risks to which they are exposed from factors outside of their control. They can also be used for speculative purposes by betting on the fluctuation of just about anything from currency exchange rates to the number of sunny days in a particular region. Futures, forwards, options and swaps are the most common types of derivatives. Financial services regulation: lawyers in this field ensure that their bank clients operate in compliance with the relevant financial legislation.

What lawyers do

• Meet with clients to establish their specific requirements and the commercial context of a deal.
• Carry out due diligence – an investigation exercise to verify the accuracy of information passed from the borrower to the lender or from the company raising finance to all parties investing in the deal. This can involve on-site meetings with the company’s management, so lawyers can verify the company’s credit profile. If financial instruments, such as bonds, are being offered to investors, the report will take the form of a prospectus, which must comply with the requirements of the EU prospectus and transparency directives.
• Negotiate with the opposite party to agree the terms of the deal and record them accurately in the facility documentation. Lenders’ lawyers usually produce initial documents (often a standard form) and borrowers’ lawyers try to negotiate more favourable terms for their clients. Lawyers on both sides must know when to compromise and when to hold out.
• Assist with the structuring of complicated or ground-breaking financing models and ensure innovative solutions comply with all relevant laws.
• Gather all parties to complete the transaction, ensuring all agreed terms are reflected in the loan and that all documents have been properly signed and witnessed. Just as in corporate deals, many decisions need to be made at properly convened board meetings and recorded in written resolutions.
• Finalise all post-completion registrations and procedures.

The realities of the job

• City firms act for investment banks on highly complex and often cross-border financings, whereas the work of regional firms generally involves acting for commercial banks on more mainstream domestic finance deals. If you want to be a hotshot in international finance, then it’s the City for you.
• Lawyers need to appreciate the needs and growth ambitions of their clients in order to deliver pertinent advice and warn of the legal risks involved in the transactions. Deals may involve the movement of money across borders and through different currencies and financial products. International deals have an additional layer of difficulty: political changes in transitional economies can render a previously sound investment risky.
• Banking clients are ultra-demanding and the hours can be long. On the plus side, your clients will be smart and dynamic. It is possible to build up long-term relationships with investment bank clients, even as a junior.
• Working on deals can be exciting. The team and the other side are all working to a common goal, often under significant time and other pressures. Deal closings bring adrenaline highs and a sense of satisfaction.
• You need to become absorbed in the finance world. Start reading the FT or the City pages in your daily newspaper for a taster.

Current issues

• By and large, the market is still feeling the effects of the credit crunch and the aftermath of the Lehman Brothers collapse. 2009/10 was a difficult year for banks, with a number of them having to restructure their operations entirely. However, there are promising signs in some areas. For instance, in 2010 there was significant growth in project finance work after two years of decline.
• With fewer deals being done, many law firms have downsized their banking and finance teams. The big City firms were no exception, but they have fared better than initially expected due to their ability to adapt quickly in tougher market conditions. Those banking lawyers untouched by redundancies have had to be flexible, with clients needing advice on refinancings, recapitalisations and restructurings. Particularly noticeable is the trend for borrowers to buy back their own loans at a significant discount.
• Post-credit crunch, the cost of borrowing increased (as reflected in higher interest rates on borrowings and upfront fees). Banks are now more cautious, even towards borrowers with a strong credit profile and established relationships. Banks are, in theory, being encouraged to lend by the government and market analysts, but they face stringent credit committee conditions from within – eg enhanced security requirements and strict covenants.
• Commentators have observed a ‘flight to quality’ by clients, meaning magic circle firms are getting the lion’s share of available work. Clients are also putting their faith (and money) into the hands of ‘trusted advisers’.
• An area of particular interest to the magic circle firms is high-yield financing and the European bond market, traditionally the stomping grounds of US law firms. High-yield products provide an increasingly popular alternative financing strategy for clients struggling against the lack of traditional bank lending, and while investment banks were wary of the European bond market a decade or so ago, it now looks to be on the up.
• In order to curb the excesses of the banking community, governments are looking at strengthening regulatory controls. This is good news for regulatory lawyers, who can expect clients to ask for more advice on compliance issues and the implication of financial reforms.
• Secondments to banks are available, even for trainees, and subsequent moves in-house are common. In the past year many banks have laid off large numbers of their own legal personnel, which has increased their demand for law firm secondees at all levels of seniority. Some firms say this has put a strain on their own resources.

Read our True Pictures on:

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