Manuel Cordeiro Ferreira and Rodrigo Nogueira, RRP Advogados: ‘Investors are targeting Portuguese utilities’

Regulated assets – especially renewables – are proving attractive to investors due to their resilience in times of crisis, according to RRP´s partners Manuel Cordeiro Ferreira and Rodrigo Nogueira.

Posted Tuesday, February 16th 2021
Manuel Cordeiro Ferreira and Rodrigo Nogueira, RRP Advogados: ‘Investors are targeting Portuguese utilities’

Manuel Cordeiro Ferreira and Rodrigo Nogueira, partners, RRP Advogados

LEADERS LEAGUE: Are investors in Portugal increasingly targeting regulated assets? If so, why? And what regulated assets in particular are they targeting?

MANUEL CORDEIRO: Over the last few years, regulated assets have been in the spotlight. This trend is expected to continue in the near future.

Utilities in Portugal are always a focus of interest as they are assets that largely remain resilient despite economic downturns such as the one caused by the current pandemic. In this context, it has been renewable energy (solar and wind) assets that have taken the lead. Additionally, Portugal’s strategic geographical position and growing investment in sectors that directly contribute to environmental sustainability – such as renewable energy sources – combined with the creation of favorable regulatory environment, has resulted in a framework that attracts foreign investment. This has also led to the creation of added value for export.

It is worth highlighting that the expectation is that Portugal will increase investment in green hydrogen projects (with proposed investments amounting to approximately €16 billion, roughly equivalent to 7.5 per cent of the country’s GDP), which places the country in a position to lead Europe’s early hydrogen economy.

In the financial sector, the consolidation trend is spreading among banks and insurance companies in Portugal, as well as elsewhere in Europe, often in order to meet regulatory demands - especially regulatory capital requirements –  and to address the low levels of profitability currently experienced by banking institutions. Furthermore, the end of the deferrals granted in the context of the Covid-19 pandemic – set for Q3 2021 – is likely to bring to light a series of non-performing loans, which will accelerate capitalization needs, and thus mergers and acquisitions, in the banking sector.

Other regulated sectors, such as health/pharma and telecommunications, have also been active. Consolidation in these industries, especially through the acquisition of local assets by foreign players, has been a trend in recent years and this is expected to continue. The drivers in these sectors seem to be more typical, that is, international expansion and scaling / synergies.

What impact has the pandemic had on SPAs in general, and what impact has it had on specific clauses in SPAs?

RODRIGO NOGUEIRA: The pandemic has brought additional stress to transactions. Buyers are especially wary of the risks related to the performance of the target companies in the context of economic crisis and uncertainty. Although the context seems to be improving for the economy in general, and thus also for M&A, the experience of the past year has had an impact on parties and transactions, and consequently an impact on transaction documentation.

So far, the risks and uncertainty have been addressed in two different ways: pricing and (direct) risk allocation. First, regarding pricing, buyers have been adopting a more conservative stance on  valuation and pricing mechanisms. Fixed prices or locked-box mechanisms, which are viewed as more ‘seller-friendly’, are less likely to be used now as buyers try to incorporate the anticipated (and in some cases already visible ) impact of the pandemic.

In this context, it is reasonable to assume – and we have been seeing this in recent transactions – that the parties will rely more on pricing mechanisms that envisage adjusting the price in a post-completion scenario through completion accounts that are designed to make the payment of the full price contingent on the future performance of the company by applying an earn-out mechanism.

Second, as for risk allocation, parties are expected to be more intent on clearly defining in the SPA the allocation of potential risks deriving from the Covid-19 pandemic.

This may be addressed via various clauses, none more significant than the ones governing material adverse changes to the target companies and businesses (the so-called ‘MAC’ clauses), which are having a resurgence as a result of the pandemic. It is very likely that MAC clauses will include a reference to the pandemic, either to include it as a material adverse change scenario or to explicitly exclude it, which becomes a focal point of discussion between parties. Similarly, we have also seen parties negotiating conditions precedent that are linked to key financial/economic indicators unrelated to the parties or their transaction. In addition, parties are negotiating certain milestones related to the underlying project, which are reliant on market conditions.

Interim obligations, when applicable, could also be a factor.. From the buyers’ side, more protective mechanisms related to the management of the target company’s business in the period between the signing and closing will be sought. Meanwhile on the sellers’ side the inclusion of exceptions to the aforementioned undertakings will be sought to guarantee that the sellers have sufficient powers to deal with any potential crisis caused by Covid-19 outbreaks that may require additional and extraordinary measures.

‘The expectation is that Portugal will increase investment in green hydrogen projects’

How are clients demands changing in terms of what they want from their legal advisers?

MC: Law firms are not immune to crises. Shocks to the economy and to our clients will always affect law firms.

The impact on fees and revenue is more acute at firms that rely heavily on transactional work. Not only are there fewer transactions (or  big ticket transactionse being kept on hold), but clients are also keener on requesting lower fees, more certainty (with fixed or capped fees) and risk sharing  (for example, abort fees rather than success fees).

On another level, the pandemic has made it more difficult (and at times absolutely impossible) for lawyers and clients to meet in person. This physical barrier, which could have had a quite negative impact on client-lawyer relations, paradoxically led to the strengthening of bonds and to more frequent contact with clients.

In fact, social distancing led to a closer virtual relationship, with  more regular videocalls being organized. For example, a client that we used to meet with only every few weeks, has now become a client that we maintain contact with every other day. These more frequent contacts are also held in more informal settings, with both clients and lawyers dressed in informal clothing and affected by the same mundane issues, such as the background (or sometimes even foreground) noise of children and pets or bad internet connections.

Furthermore, clients are increasingly looking for lawyers who can easily adapt to times of uncertainty like those we are currently experiencing. These lawyers’ skillsets include flexibility, capacity to respond quickly to unexpected change, and the inventiveness to overcome practical problems that might arise. This is especially important in the context of public registries andtax authorities for example,which are closed or unresponsive..

Finally, it is now even more clear that it is fundamental that law firms and lawyers are well-equipped on a technological level as clients’ demand for availability around the clock has not waned. This entails an investment by law firms in the necessary hardware and software to ensure that all its lawyers and administrative staff are able to work remotely without compromising the quality of the output and the confidentiality of  information.

What do you think will be the growth areas for law firms in the coming year? For example, do you anticipate increases in restructuring, insolvency and litigation work?  

RN: The current pandemic has led to an increasing deterioration of the economic and financial context worldwide. In Portugal, this crisis will surely aggravate the situation of many Portuguese companies.

Over the past year this has led to a growth in requests for advice on labor matters, the measures enacted by the Portuguese Government - such as mandatory lockdowns (and measures such as furloughs and layoffs) – and other limitations on the organization of companies’ work and workforces.

The crisis has also led to, and will surely continue to lead to, an increase in defaults, or at least delays in meeting contractual obligations.

As a consequence, we are already seeing a surge in the number of companies making use of the judicial and extrajudicial mechanisms provided by Portuguese legislation for company restructuring, namely the Special Revitalization Process (PER) and the Extrajudicial Framework for Business Recovery (RERE) and, if this exceptional situation persists, a considerable increase in the number of insolvency proceedings is expected. Additionally, new legal mechanisms are being created by the Portuguese Government to support or expedite the restructuring of companies affected by the crisis, which we expect will lead to a rise in demand   for legal advice on restructuring and insolvency.  

In anticipation of this increase in work, and as a way of meeting clients’ expectations, RRP Advogados recently set up a litigation, restructuring and insolvency department, headed by Filipa Alfaia Barata. The new department, in partnership with the firm’s other departments specialized in corporate law, banking, tax, labour and social security, has started advising debtors, creditors and investors on restructuring and insolvency matters.