Ivison's Platform Project finance Legal Business March 2004
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Ivison’s platform CMS Cameron McKenna’s projects practice is the cornerstone of the firm. With pressure on fees and numerous bidding wars, it’s not always easy to make a profit. How has Camerons cracked it? VANESSA PAWSEY
‘I REALISED PROJECT FINANCE WAS taking over my life,’ jokes CMS Cameron McKenna’s head of banking Andrew Ivison, referring to the time in 1995 when PFI was emerging and he was advising on the HMP Parc Bridgend and the Channel Tunnel Rail Link. Not much has changed – today, Ivison is one of the best-known PFI lawyers in the market. He’s been around since the beginning and has worked on many of the UK’s most high-profile and market-leading projects, most recently acting for Metronet in the enormous fee bonanza that was the London Underground PPP. His practice spans the sectors from hospitals, prisons and schools to transport and defence. Nearly ten years on, the practice has positioned Ivison and his team at the heart of the firm as well as at the forefront of PFI.
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He is one of the firm’s biggest billers, and the projects practice brings in around 10% of the firm’s £174m turnover. But it’s not an easy moneymaker. Getting ahead in a constantly evolving market where there is enormous pressure on fees and a high risk of backing the wrong bidder, is a definite skill. Ivison says the key to success is to have high-profile transactions, a volume of deals, a mix of international and domestic work and a balance between fee structures to obtain both cash and overall profitability.
Model maker Camerons’ project finance practice runs horizontally across
Illustration MILES DONAVON
the firm’s practice areas and has done since its inception in the early 1990s. Does that mean it was ahead of its time? Not necessarily, says the evermodest Ivison. ‘We just found that it was a good way of working.’
Last year, the firm had a strategy review which drew on the project finance model and set up sector groups across the firm. The project finance group spans banking, real estate, corporate, insurance, employment, and energy, projects and construction (EPC). The ten dedicated partners are split between EPC and banking. Best known
‘I don’t believe refinancings are sufficiently more sophisticated so that the parties on original transactions can’t do them.’ Andrew Ivison, CMS Cameron McKenna March 2004 Legal Business 49
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> are: Jonathan Beckitt, who heads the group; Ivison; Trevor Butcher, who is an expert in roads; and Frank Dufficy, who specialises in health (see ‘Camerons’ top PFI partners’). Others like Nancy Eller and Jason Davies, who are relatively junior partners, are quickly making names for themselves. Before the merger in 1997, McKenna & Co had a highprofile construction practice with a strong overseas element. So when the PFI market took off in the mid-1990s, it was easy to make the jump. Partners Robert Phillips and Fiona Woolf pioneered the practice and Ivison was first brought in to do the financing. The merger with Cameron Markby Hewitt strengthened the finance practice and gave lawyers the chance to focus their attention on project finance. ‘After that people were excited by the success of the practice and more and more people wanted to get involved,’ says Ivison. The result was the burgeoning practice we see today.
Projected profits When it comes to PFI, Camerons competes with the likes of Allen & Overy, Ashurst, Clifford Chance, Freshfields Bruckhaus Deringer and Linklaters. There are many more firms in the market; PFI can bring together an unlikely combination of players, with the private sector instructing a top City firm and the public sector opting for a regional firm. Because the blueprint for profitability and fee structure in these firms is so different, and because there is pressure on the clients to achieve value for money, making a profit can be challenging. Less so in the private sector where clients expect to pay more, but firms need to have a broad experience
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CAMERONS’ TOP PFI PARTNERS
Jason Davies for the Royal Bank of Scotland and Dexia as arrangers to a Carillion/ RBS project vehicle on the John Radcliffe Hospital PFI project. ■ Advised the lender group (EIB and the commercial bank group arranged by RBS, CIBC and HSBC) to the SEEBOARD Powerlink consortium on the London Underground Power Project. ■ Acted
Nancy Eller the team advising the project company on a complex financing for a major variation to the Great Western Hospital, Swindon. ■ Advised UK Highways Plc in relation to the commercial bank refinancing of the M40 DBFO road project. ■ Led
Andrew Ivison the lead arrangers on the £600m refinancing of National Air Traffic Services. ■ Advising the Metronet consortium on the London Underground PPP. ■ Advised
Jonathan Beckitt the Department of Transport, on the Channel Tunnel Rail Link. ■ Advising Surrey County Council in relation to the reconfiguration of its portfolio of office accommodation. ■ Advised
Trevor Butcher the preferred bidder for the A249 (Stockbury (M2) to Sheerness) DBFO Road Project. ■ Advised The Hospital Company (Swindon and Marlborough) Ltd (THC) on a complex variation to add a new privately financed diagnostic treatment centre (DTC) to the recently completed Great Western Hospital PFI project in Swindon. ■ Advised
Frank Dufficy for the Skanska/Innisfree Consortium on consortium arrangements, financing arrangements (capital markets/commercial bank debt), project documentation including NHS standard form in relation to the Walsgrave ■ Acted
NHS Trust project. ■ Advising Aspire Defence Ltd (Kellogg Brown & Root and Mowlem) the preferred bidding consortium sponsors, on its bid for the £3.9bn project to provide technical, administrative and domestic accommodation and associated support services for the military and civil staff at Aldershot and the Salisbury Plain area. Sponsors: Amey; Balfour Beatty; Barclays Private Equity; Carillion; Equion; HSBS Private Equity; Innisfree; KBR; Kier; Laing; Metronet; Mowlem; Prudential; M&G; Skanska; Thames Water Funders: Bank of Ireland; Banco Espirito Santo; Bank of Scotland; Barclays Capital; Depfa; Dexia; Dresdner; FSA; HSBC; HVB; Lloyds TSB; MBIA; NIB; Royal Bank of Canada; Sumitomo; The Royal Bank of Scotland; XL
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of the market and be comfortable acting for its involvement to allow it to all parties including the public sector. In compete on fees. Anne Baldock these instances they need to find a way of and her fellow PFI partners at least breaking even. must be among the very few Camerons’ practice is split 20:80 between A&O lawyers that don’t public and private sector work, and in the stipulate a minimum deal size. private sector it does more for the contractors than for the banks. Bidding wars Ivison thinks the current ratio is about The other problem facing firms right. In the early 1990s, Camerons was is the risk of backing the wrong doing much more public sector work than it bidder. Tendering processes can currently does, and its refocus reflects a take years and if firms work on desire to increase profitability. In contrast, Herbert Smith has historically acted for the public sector after partners Nicholas Tott and Jason Fox were seconded to the Private Finance Panel Executive in 1994. More recently it has made inroads with the contractors, but its focus is still on bespoke Rod Hoare, chief executive, Metronet deals. ‘We do the standard ones but there has been a lot of commoditisation and we always need to find projects of a certain value,’ a success fee basis, it can be a explains Tott. loss-making exercise. Charles Robson at Lovells agrees that the According to Ivison, the solution is to work at the cutting edge. ‘We key is to know when to agree would secure public sector mandates in new to it. ‘We’ll do some work with and emerging sectors where we can be a success fee element, but it’s involved in the development of the not very sensible risk managetemplate,’ he says. ‘This isn’t because the ment to do all work on this rate is materially higher, it’s because the basis,’ he says. ‘If a client wants amount of work is much bigger. Our aspiraus to, we will consider what to tion is that the deals don’t make a loss. But do based on the importance of also that they attract strategic value because the job and what else is going they give us the know-how to participate on at the time.’ going forward.’ It’s not easy to see whether The big, one-off projects aren’t the something is going to be problem, there simply aren’t enough around. Mark Elsey at Ashurst says the answer is to act for the private sector and to improve efficiency. ‘We try to develop close relationships with clients and have standard documentation,’ he explains. ‘We will work out our strategy towards key issues early on so that we don’t spend time battling over it.’ Elsey relies on repeat deals, which are great for efficiency because you are dealing with the same funder and the same participants. Like Ashurst, Allen & Overy has focused its efforts on efficiency. The firm seconded David Lee to the Treasury Task Force in 1997 to help write the standardisation documents. Since then it has leveraged off Tott: always need to find high-value deals
successful. Knowing the sponsor’s track record is an advantage, but Ivison says Camerons will often put in more than one proposal for more than one sponsor. Presuming that the clients agree to their legal advisers taking a dual role, the difficulty for many firms is then finding the capability. The size of Camerons’ practice, with ten dedicated partners, gives it a distinct advantage. Ivison says that advising on all sides of the transaction is crucial to making the
‘Ivison’s strength is that he leads from the front and listens to what we want. Unlike some firms, Camerons is willing to tailor its needs.’
practice work. He adds: ‘Banks and sponsors can give volume of business, but the project companies that are formed may well be good longstanding clients.’ The advantage of the public sector is that it usually pays fees on a periodic basis, whereas the private sector tends to pay on closure. Ivison says that firms need both public and private sector clients to maintain both cash flow and long-term profitability.
Headline clients Historically, clients in the PFI market have had too great a concern for hourly rates, but, increasingly, sophisticated clients realise that hourly rates are only one part of the equation and firms should also be judged on their ability to project-manage. Camerons’ biggest clients include The Department for Transport, Metronet Consortium, Aspire Consortium, Lloyds TSB and The Coventry & Rugby Hospital Company. Chief executive of Metronet, Rod Hoare, says that during the tender process for London Underground, he was looking for a firm with experience, good knowledge of risk management, a good depth across a number of disciplines with someone who showed good leadership. This had to be > accompanied by competitive fees, an
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> agreement that they were semi-dependent on winning and a time-based element. Hoare says that Camerons won because it had good experience and because Ivison had good expertise, both legally and financially. ‘Ivison’s strength is that he leads from the front and listens to what we want,’ he says. ‘Unlike some firms, Camerons is willing to tailor its needs.’ But according to one partner at a rival firm, the fact that the clients aren’t always sophisticated means that the client relationship assumes an even greater importance in PFI. ‘When the deals are very complex, it’s more about perception,’ he says. ‘If the client is being looked after well then it is happy,
Elsey: relies on repeat deals
Mark Elsey says that the market will continue to evolve. ‘The key thing as an adviser is to try and predict the evolution. You need to position yourself ahead of the client so that you can meet its needs.’ Refinancing is now accepted as standard practice, with profit split 50:50 between the private and the public sector in PFI deals closing after September 2002. Refinancing, along with a growing secondary market, offers City firms another opportunity to win profitable work. Camerons is already playing its part here. Last year, Ivison led a team advising the lead arrangers on the refinancing of a £600m facility in connection with the acquisition by The Airline Group of the government’s 46% interest in National Air Traffic Services (NATS). But the firm has a challenge on its hands. Camerons is currently ranked alongside the Magic Circle, but the refinancing market lends itself to firms that, like A&O, have great depth in banking and are very close to the funders. Camerons can’t compete at the same level as A&O. But Ivison says: ‘I don’t believe the refinanncings are sufficiently more sophisticated so that the parties on original financings can’t do them.’ However, he goes on to add that ‘refinancings in the capital markets work in favour of firms with PFI and capital markets experience’. But this challenge won’t change Camerons’ flourishing position in the primary market, where it is ideally positioned to offer clients the expertise they require at a lower cost. Camerons partners have learnt to accept lower profitability than the likes of Freshfields, thus lowering charge-out rates. Other firms may not like it, but Camerons has the vital offering on experience and fees, and as a result it can expect to continue winning the large mandates. In the market Camerons is viewed by its competitors, perhaps jealously, as aggressive. Clients don’t notice or don’t care. Ivison and his team can take the flak. When it comes to winning major projects, they’ve got tunnel vision. LB vanessa.pawsey@legalease.co.uk
‘The key thing as an adviser is to try and predict the market’s evolution. You need to position yourself ahead of the client so that you can meet its needs.’ Mark Elsey, Ashurst despite possibly having a bunch of crap documents.’ The public sector is sometimes seen as a less sophisticated client, and historically there has been some tension between the public sector and City firms. But Ivison says that the public sector has moved on from the idea that value for money comes down to hourly rate. ‘That has been a big issue in the past but I don’t think it’s as prevalent today,’ he says. ‘The Treasury is trying to ensure that the public sector gets good value for money and ensure that the right firm is selected for a particular job.’ Freshfields and Herbert Smith have done a lot of work for the public sector in the past, but the consensus is that, while the evolution of PFI into new sectors will continue to attract City firms, standardised work is now very much the domain of the regional firms. Most of these can take advantage of their regional offices for fee structure and have strong links with local government. This means that the City firms are going to be increasingly reliant on contractor and funder work.
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The PFI revolution Like it or not, most people have accepted that PFI is a permanent fixture in the market. There are ongoing elements of controversy (such as the current debate in the health sector over the extent to which the private sector should take over the provision of medical services), but the fact that it has been exported across the globe is testament to its popularity. According to the head of projects at Eversheds, Stephen Matthew, the government should take some responsibility for the criticism. ‘I don’t think the politicians did a good job of making an appealing case for PFI,’ he says. ‘The original justification from the Treasury was that PFI took public spending off the balance sheet. But now this has been overtaken by a better justification that it is a smarter way of procuring public assets.’