After a rollercoaster ride, deal finance lawyers are oddly confident once again

These days it's hard to keep up with the mood of leverage finance lawyers, who are once again in one of their upbeat phases. Having been terminally gloomy since the credit crunch began, acquisition finance lawyers seemed in remarkably revived spirits by the start of 2010. Unfortunately, it didn't take long for the mood to sour as evidence of a slowdown in the US and, worse, mounting woes emerged in Europe's debt markets.

Yet, counter-intuitively perhaps, the outlook has brightened into an Indian summer, with many of the leading deal finance teams reporting healthy levels of activity and respectable pipelines. Perhaps this is because, while the news from the US has worsened, signals from the eurozone and public finances have been at the more optimistic range of forecasts in recent months. It is also helping that, on the sponsor side, private equity houses are now in the position of having to do deals, given their need for exits and to put committed funds to work, even if conditions are far from ideal.

This was illustrated in the summer by a flurry of acquisition finance transactions. Allen & Overy (A&O) leveraged finance partner Tim Polglase comments: "There is an element of luck to these instructions as it depends if you are backing the right horse, but at the moment we are quite pleased about the success we have had over the last few months."

In addition, the relatively poor performance of this year's high-profile initial public offerings (IPOs) has an upside for debt counsel in that it leaves more sponsors looking at debt financing options or secondary buyouts. In a similar vein, the problem of constrained bank lending is leading some to seek a capital markets solution, in particular with high-yield bonds. According to City advisers, several major European banks have indicated that they will be looking at refinancings with a high-yield element this autumn.

Stephen Gillespie of Kirkland & Ellis says: "People think high-yield is on the rise in Europe. High-yield is directly tied to the equity market – if the IPO market is down, high-yield is up and vice versa, and a number of clients are looking at it at the moment."

Further evidence of a renewed confidence in the outlook for leveraged finance comes from the level of recruitment seen over the last 12 months from top law firms. As we report this week, Clifford Chance (CC) is rehiring partner Michael Dakin as part of a renewed growth push in European high-yield. Another top 10 City firm is set to announce a similar appointment within weeks.

This comes after Milbank Tweed Hadley & McCloy's headline-grabbing US finance team raid on Latham & Watkins in August and recent partner appointments from A&O and Freshfields Bruckhaus Deringer. Likewise, acquisition finance lawyers, having been targeted last year in many law firms' recessionary cutbacks, have generally not struggled to find well-paid new homes.

Expectations are particularly high for Latham in Europe in the wake of its recruitment of a four-partner finance team from White & Case. It is clear that many law firms are now putting their money on a revival in the leveraged finance market. As CC finance head Mark Campbell says: "There is a sense that there are deals to be done and high-yield is definitely part of the picture."