Even in a brutally exposed leveraged finance market, A&O's clearout has raised eyebrows

When Legal Week revealed in February that Allen & Overy (A&O) had asked five partners in its London leveraged finance team to depart as part of its sweeping restructuring, it is fair to say the move generated some surprise.

Yes, the sector has been devastated by the financial turmoil over the last year, leaving A&O and its 69-partner City banking practice heavily exposed. But even so, the level of departures from the firm's 12-partner leveraged finance team - historically one of A&O's most influential and highly-rated practices - was still unexpected.

In comparison, there are so far no indications of similar cuts at Clifford Chance, and Linklaters' leveraged team is expected to largely avoid downsizing in the New World restructuring - at partner level at least. If unconfirmed reports that only 10 A&O banking partners are set to go in London in total are true, it certainly suggests that leveraged finance is suffering far more a the firm than larger banking lines.

As such, many in the banking community have viewed A&O's stance as political, given leveraged finance's history of nurturing strong-minded characters such as former head Tony Keal and the Norton Rose team recruited in 2002.

This view is reinforced by historical tensions between leveraged finance and global loans - the latter team being generally more in step with A&O's leadership. Inter-team competition could easily have aggravated matters further, as no fewer than 15 London partners in other banking teams also cover acquisition finance to varying degrees.

As one leverage partner at a US law firm says: "The inability to move from one team to the other makes them more inflexible, but you sense it is mainly political. You do not get rid of the likes of the leveraged finance names they have done without also getting rid of global loans."

Leaving the politics to one side, though, there is no doubt that the LBO market is brutally exposed by the ongoing turmoil in credit markets and the related dearth of debt-backed acquisitions.

Many deal finance lawyers are being redeployed to work on other areas such as broader finance matters or restructuring work. Ashurst, for example, which has one of the largest leveraged finance teams in the City, has managed to keep all 35 lawyers in its London group as a result of redeployment and refocusing.

But with deal volumes falling off a cliff, the reality is that no amount of redeployment can entirely remedy the situation.

On the plus side, there are many in private equity who believe a moderate revival in bank lending, combined with low asset prices, means 2010 should be a far more promising year, even if 2009 looks set to play out very slowly indeed.

"Volumes are 95% down from the peak of '07 and the product has been completely decimated," says one City partner. "We are a service industry so if there aren't the deals going on then action has to be taken. In the bigger firms it is harder to adapt and react so what choice do they have?"

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Even in a brutally exposed leveraged finance market, A&O's clearout has raised eyebrows

When Legal Week revealed in February that Allen & Overy (A&O) had asked five partners in its London leveraged finance team to depart as part of its sweeping restructuring, it is fair to say the move generated some surprise.

Yes, the sector has been devastated by the financial turmoil over the last year, leaving A&O and its 69-partner City banking practice heavily exposed. But even so, the level of departures from the firm's 12-partner leveraged finance team - historically one of A&O's most influential and highly-rated practices - was still unexpected.

In comparison, there are so far no indications of similar cuts at Clifford Chance, and Linklaters' leveraged team is expected to largely avoid downsizing in the New World restructuring - at partner level at least. If unconfirmed reports that only 10 A&O banking partners are set to go in London in total are true, it certainly suggests that leveraged finance is suffering far more a the firm than larger banking lines.

As such, many in the banking community have viewed A&O's stance as political, given leveraged finance's history of nurturing strong-minded characters such as former head Tony Keal and the Norton Rose team recruited in 2002.

This view is reinforced by historical tensions between leveraged finance and global loans - the latter team being generally more in step with A&O's leadership. Inter-team competition could easily have aggravated matters further, as no fewer than 15 London partners in other banking teams also cover acquisition finance to varying degrees.

As one leverage partner at a US law firm says: "The inability to move from one team to the other makes them more inflexible, but you sense it is mainly political. You do not get rid of the likes of the leveraged finance names they have done without also getting rid of global loans."

Leaving the politics to one side, though, there is no doubt that the LBO market is brutally exposed by the ongoing turmoil in credit markets and the related dearth of debt-backed acquisitions.

Many deal finance lawyers are being redeployed to work on other areas such as broader finance matters or restructuring work. Ashurst, for example, which has one of the largest leveraged finance teams in the City, has managed to keep all 35 lawyers in its London group as a result of redeployment and refocusing.

But with deal volumes falling off a cliff, the reality is that no amount of redeployment can entirely remedy the situation.

On the plus side, there are many in private equity who believe a moderate revival in bank lending, combined with low asset prices, means 2010 should be a far more promising year, even if 2009 looks set to play out very slowly indeed.

"Volumes are 95% down from the peak of '07 and the product has been completely decimated," says one City partner. "We are a service industry so if there aren't the deals going on then action has to be taken. In the bigger firms it is harder to adapt and react so what choice do they have?"

More comment and analysis.

More news, deals and comment on Allen & Overy

Allen & Overy on the Legal Week Wiki