I can vividly remember staring in awe at the shiny display in the window of the Victorinox store on Bahnhofstrasse in Zermatt when I was a boy. For several days in a row, I walked ahead of my parents so that I had enough time to look at all the different models. On the day we were leaving, my dad relented and bought me a Swiss Army Knife.
The knife had every different possible tool embedded inside. It was an amazing feat of product design. I loved it. And I still have it.
That said, I remember being in the woods once on a camping trip and trying to use the saw blade to cut small pieces of firewood. After a few minutes, my hand was bloodied and the saw was so hot that it warped. I had to brute force it back inside the knife and it’s never seen daylight again.
A poignant, teachable moment: Very few things in life are one-size-fits-all.
It’s the same with lawyers.
Recently, I had coffee with one of the co-founders of the hedge fund where I worked for many years. He’s a math/capital markets/structured finance genius.
We spoke about old deals and new. And one thing stood out. His family office was still outlawyering every public company they financed.
If you’re like most investors, advisors, officers and directors, you’re probably thinking: “Well, my portfolio companies, clients, or companies employ savvy in-house counsel and international law firms, so thankfully we’re good.”
You very well might be.
But the probability plummets when an issuer undertakes any kind of structured finance. Then, most of your lawyers are pretty much akin to that tiny saw blade in the face of a pile of kindling. No chance.
How can that be?
As I wrote in my first book – and we discussed over coffee in San Francisco – structured finance funds employ lawyers that do nothing else other than… structured finance. Hundreds if not thousands of deals. Whereas, if you’re lucky, many of your lawyers have done a handful in their careers.
That new revolver, convertible debenture, self-amortizing note, or equity line of credit under consideration is loaded with landmines that most issuer-side lawyers are probably going to miss. Not because they’re bad lawyers or lazy, but because they lack the precise experience and aperture required.
Here’s the overriding takeaway: Structured finance lawyers are trained to think like financiers, and they also know how to evade the scrutiny of those who don’t.
As a former fund manager and former lawyer… I’m not speculating in this regard. When it comes to anything structured, it’s just impossible to overstate how many CEOs and CFOs have imprecise perceptions of what they just signed and how many otherwise great lawyers routinely get out negotiated. I’ve seen it from every different possible angle over and over again for decades.
So, here’s my frank advice.
It’s not the term sheet you’re worried about it’s the laborious deal documents – sometimes thicker than your forearm – where the troubles lurk.
Before you receive them, ask your existing counsel to send you an email designating the 5 or 6 provisions where buy-side attorneys typically insert verbal detonators and ask them to explain each in plain English. If your lawyers really speak structured finance, you’ll not only get that but an additional rendering setting forth some of the personal favorites of opposing counsel.
If you don’t receive that, or you receive a self-evidently underwhelming reply, then let them know – respectfully – that you’re going to associate special counsel to help. In other words, your legal dream team is just going to get a situational expert as a near-term addition.
If the partner in charge of your account is a seasoned pro, they not only won’t be offended but they might even privately express relief.
If you’re going to cut up a bunch of wood, you need the right saw for the job. Negotiating and memorializing structured finance is no different. I got a bloody hand and warped blade. Your company could lose dozens of millions of dollars… or worse.
