I'm Ludo Lugnani and this is ZipLaw: an independent newsletter covering top commercial and legal news from the day. Our interview essentials explain how each story impacts law firms and their clients so that you can discuss them confidently in interviews and applications.
Today's read (8 minutes):
- Fed and Bank of England raise Interest Rates (again).
- The Great Threat of Water Scarcity.
- Case: Italian City must pay £950k to Deutsche Bank.
- Deal: Kirkland leads on Eataly €200M Private Equity Investment.
plus answers to your questions!
Fed raises Interest Rates (again).
Yesterday the Federal Reserve (the Fed) announced a 0.75% interest rate rise. The Fed’s benchmark rate now stands at 3-3.25%, up three percentage points since the start of the year.
I was just about to hit send on this newsletter when news came in that the Bank of England has matched the Fed's move by raising interest rates by 0.5% to 2.25%. The benchmark rate is now at the highest level since the start of the global financial crisis in 2008.
The US rise was expected, but came with a couple of surprises. The new projections revealed that rates would probably rise to more than 4.5-4.75% at the end of 2023, higher than expected. The projections also suggested that unemployment would rise by at least 0.7% before the end of next year.
The Fed's comments are quite concerning, and are being replicated by other countries' economies. On September 20th the Swedish Riksbank lifted its benchmark rate by a full percentage point. the Bank of England just raised interest rates by 0.5%.
What is the impact of higher interest rates?
How does this impact law firms' clients?
- A global recession may come sooner than we think. The higher dollar is causing problems.
The increase in interest rates are bound to slow down economic activity as it is more expensive for people and businesses to borrow money.
Additionally, the US interest rate hikes have prompted the value of the dollar to rise by about 2.5% over the past month alone, and by 16% since the start of the year. This is because the Federal Reserve is increasing interest rates faster than other major countries. The dollar is also acting as a safe haven for many investors who have grown more concerned and put their money into safer assets like US Treasury bonds. This has further pushed up the value of the dollar.
The rise of the dollar is proving increasingly difficult for other economies to handle. Falling currencies mean higher import prices, exacerbating inflation problems and forcing central banks to undertake their own rate-rises to keep up.
Additionally, it also places further strains on multinational businesses. Exports also become more expensive abroad, which could hurt American companies that export goods or services. Johnson & Johnson, have recently complained that the rising dollar could hurt their profits since foreign sales lose value when converted back into dollars and they become less competitive with local companies as their products become more expensive overseas.
How does this impact law firms?
- A slow-down for certain departments e.g. Corporate, could be balanced out by departments that boom in recessions e.g. Restructuring and Insolvency.
- Top Departments: Restructuring and Insolvency, Litigation, and Employment.
The interest rate rise came with an indication from the Fed, that the previous goal of achieving a “soft landing”, whereby the central bank can cool the economy without excessive job losses, is becoming increasingly unrealistic.
The US unemployment rate is expected to rise to 4.4%. This means we can expect a spike in demand for work for employment lawyers as companies in the US and worldwide look to re-arrange their workforce via redundancies. If these are mishandled, businesses could become liable to claims of unfair dismissal at the Employment Tribunal.
Another thing to note is Jerome Powell's uncertainty he expressed about just how severe a recession could result from the Fed’s efforts to root out inflation. This menas there is a very real risk of recession. In the UK, we can expect further interest rates rises as the Bank of England looks to contain the rise of inflation, and this could further stifle economic activity.
Overall, the prospect of a global recession looks increasingly likely. In one of our past newsletters, we discussed whether the UK is already in a recession. If this is the case, then we can expect Litigation and Restructuring and Insolvency departments to be particularly busy. For the former, this is due to businesses struggling to meet contractual obligations (both in supplying, and paying for services or goods) thus leading the way to a wave of litigation.
For the latter, it will be a matter of advising on the best course of action for businesses in financial distress. This could include entering administration to salvage what is possible, selling off assets as part of a pre-pack sale, or even an outright liquidation depending on the circumstances of the case.
The Great Threat of Water Scarcity.
Water shortages are becoming increasingly common for businesses worldwide.
A mix of record hot temperatures, population growth and poor management of water have exacerbate water scarcity worldwide.
This may seem like a secondary problem for businesses when compared to pressing matters such as the rise of inflation, or the supply chain crisis.
However, water is a crucial element to most businesses production lines, and an extended water shortage could have severe impacts on the global economy.
How does this impact law firms' clients?
- Water-reliant industries will suffer greatly from water scarcity.
Water shortages could affect many hydro-dependent industries, including food production, mining and power generation to apparel and electronics.
There are many examples of this. In Chile, the world’s biggest copper producer, the driest decade on record has forced mining firms such as Anglo American and Antofagasta to reduce output this year. Companies like Toyota, and Foxconn, which makes iPhones for Apple, halted production in south-western China after a drought caused hydropower shortages.
Norway, known for its abundant hydropower, said that water shortages may force it to curb supplies to its neighbours’ grids. In Germany, the Rhine has fallen so low that it has affected the ferrying of cars and chemicals north, and coal and gas south.
In addition to this, issues with water scarcity could expose clients to reputational damage and regulatory fines due to their potential waste or mis-management of such a precious resource.
How does this impact law firms?
- Law firms will need to assit clients on evaluating the risk of water scarcity, and finding solutions.
- Top Departments: Commercial, Corporate, Regulatory.
A report this year by Planet Tracker said that about a third of listed banks do not assess water risks in their portfolios. For shareholders, it mostly comes far behind carbon emissions as an environmental, social and governance (ESG) concern. It is not a risk that can easily be assessed in ESG ratings as it is so dependent on local conditions that it requires myriad approaches.
However, ESG is a crucial aspect for law firms's clients. Therefore, we can expect an increasing number of clients to ask law firms for advise on compiling these ratings to ensure regulatory compliance.
With regards to the issues in supply of services or goods caused by water scarcity (see our examples above), law firms will need to advise clients on the enforcability of contractual terms. This could include advice on consequences of failing to meet supply obligations due to water scarcity, liability and indemnity obligations, alongside the potential involvement of force majeure clauses to cover liability.
Clients will also asked law firms to advise on solutions they may adopt to circumvent this issue. For example, in Singapore, NewBrew makes craft beer out of reclaimed sewage. They believe that, in future, many companies will have to treat and reuse water to overcome scarcity. This could involve drafting contracts for the supply, and treatment of water with heavily negotiated warranties, and indemnity clauses to cover issues in the supply and the quality of the water.
Law firms can also assist with the construction of desalination plants which have become a go-to solution for global mining firms in Chile. This could involve anythign from advice on acquiring the land to build on, to the construction of the plant, the employment of staff, and contracts for the desalination process.
Additionally, lawyers may be asked to draft contractual agreements for monitoring and managing water consumption between multiple parties, and on enforcing the terms of the agreements if there are any issues with the supply. Beer and soft-drinks companies, which heavily rely on clean water, have targets for improving efficiency (Heineken says it uses 2.5 litres of water to make a litre of beer in Mexico, about half the global industry average). This can be done by extending the monitoring of water use from their own operations to their suppliers. Law firms could also advise fashion retailers on this, as their suppliers are often heavy users of water and dyes in dry areas.
Top Court Case:
The High Court has ordered the Italian city of Busto Arsizio to pay Deutsche Bank £950,000. The city entered into the agreements with the bank in 2007 to restructure its €70 million debt, swapping variable interest rates for rates with a cap and minimum amount. At the time, the terms were thought to benefit Busto by some €7.3 million. But the 2008 financial crisis caused interest rates to tumble, shifting the balance of payments on to the municipality. The interest rate agreement expires in 2031.
Deutsche brought a claim to enforce the terms of the agreements in 2018, arguing that the local government had full authority to enter into the contracts. The city countersued the bank, demanding €3.8 million in restitution and arguing that the transactions had not been approved in 2007 by its council members. However, the High Court found that agreemen is valid and binding. Therefore, Busto Arsizio was required to comply with its pyament obligations.
Deutsche Bank AG is represented by Sonia Tolaney KC of One Essex Court and Rupert Allen of Fountain Court Chambers, instructed by Andrew Denny of Allen & Overy.Busto Arsizio is represented by Paul Downes KC of Quadrant Chambers, instructed by Pietro Gatto of Vega Law.
Eataly has secured a €200 million majority investment from private equity firm Investindustrial. The capital injection gives Investindustrial a 52% stake in the food chain and will allow Eataly to retire net financial debt and maximize financial flexibility for the group's global expansion plans. The Italy-based company will continue to expand in foreign markets including North America, where it already has eight flagship stores, including in New York City, and through continued development in Europe, the Middle East and Asia. Investindustrial is a European private equity firm with more than €11 billion of raised fund capital. Their recent deals included a $950 million investment in TreeHouse Foods.
Kirkland & Ellis and Studio Legale Chiomenti advised Investindustrial.
Answering your questions!
Q: Do you expect Restructruing lawyers to have more work as the economy becomes increasingly unstable? - Sam (Bristol, UK)
Ludo: Absolutely. I think the wave of work for restructuring and insolvency has been a long time coming, and has potentially already started (see our analysis of the Fed and Bank of England rate rises above). The global economy was very vulnerable during the peak of COVID, but businesses survived by relying on government support measure such as the support for commercial rent under Commercial Rent (Coronavirus) Act 2022. The trend may have already started. Total company insolvencies in Q2 2022 increased by 13% from Q1 2022 and by 81% from the same quarter in the previous year.
We can expect a growing demand for restructuring and insolvency lawyers as many businesses enter insolvency proceedings. A counter point could be made to argue that the government's announced support for businesses in relation to energy bills could further delay this. However, I think there are too many factors at play in the economy putting pressure on business: supply chain issues, inflation, the uncertainty of the war in Ukraine, the cost of living crisis (to name a few). All these put a strain on businesses' operation, and their finances. It is quite possible the wave of insolvencies has already started as exemplified by the increasing rate of insolvencies mentioned above.
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