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Commercial Awareness Update - March 2020
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<blockquote data-quote="Curtley Bale" data-source="post: 25866" data-attributes="member: 4422"><p>Please find this week's report below! </p><p></p><p><strong><span style="font-size: 15px">Aviation industry hit by COVID-19</span> </strong>By Brian Chiu</p><p></p><p><strong>The Story</strong></p><p><strong></strong></p><p>The impact of Covid-19 on the aviation sector is increasingly pronounced. More than 54 countries have now issued travel restrictions to China and the wider APAC region.</p><p></p><p>With Standard & Poor’s index of major US airlines falling by 8.2%, the biggest drop since the financial crisis, aviation investors are right to be worried. The International Air Transport Association (IATA), an industry body, warned that the industry may take a hit as much as $113bn (£87bn) because of the virus outbreak.</p><p></p><p><strong>Impact on Businesses and Law Firms</strong></p><p><strong></strong></p><p>This situation is unprecedented to airlines, both financially and operationally.</p><p></p><p>Asian airlines are worst-hit as a significant portion of their customers is from China, the epicentre of the outbreak. Cathay Pacific, a Hong Kong premium carrier, has reduced its services to and from mainland China by at least 50% and asked its staff to take three weeks of unpaid leaves.</p><p></p><p>Various American airlines have also suspended services to China and several European countries. European airlines already admit flying nearly empty planes when the Italian government also announced to lock down the entire country.</p><p></p><p>You may be thinking: Why not slash flight schedules to stop the bleeding?</p><p></p><p>Airport slot allocation rules in most countries require airlines to meet 80% of the required usage rates or risk losing its take-off and landing slots to competitors. There is an increasing demand for governments to waive airlines from the rules and offer tax reliefs during these extraordinary times.</p><p></p><p>Governments may have a hard time deciding as some budget airlines are not well-managed in the first place e.g. Flybe (see Alice Manners’ article below). </p><p></p><p>On the positive side, airlines can benefit from the oil price plunge as a result of the price war between Russia and Saudi Arabia (see Rachel Strickland’s article below). Still, lower fuel costs could not save empty flights.</p><p></p><p>Commercially, it is in the common interests of financiers and lessors to accommodate cash-strapped carriers during this challenging time than driving its customers into insolvency. Law firms could hence advise on setting up transitory arrangements for struggling airlines.</p><p></p><p><strong><span style="font-size: 15px">Aon to buy Willis Towers Watson </span></strong>By Curtley Bale</p><p></p><p><strong>The Story</strong></p><p></p><p>The world’s second-largest insurance broker, Aon, has reached an agreement to buy the world’s third-largest broker, Willis Towers Watson (WTW). The all-share deal is said to cost $30bn. This news comes just 12 months after Aon expressed and then closed their interest in buying WTW within a 24-hour period. It is expected that the deal will create a new leader in the commercial insurance brokerage market, overtaking rival Marsh & McLennan. Aon shareholders are expected to hold around 63% of the new company.</p><p></p><p><strong>What it means for Businesses and Law Firms</strong></p><p></p><p>Aon has been keen to consolidate its position in the market, whilst also developing its current capabilities. A deal with WTW will allow Aon to secure its position as well as tap into the expertise that WTW has. The firm is actively looking to develop its expertise in cybersecurity and IP rights and they see a deal with WTW as a way to do this.</p><p></p><p>Moreover, it is estimated that this tie-up will lead to $800m in synergies. The result of this is likely to be a much more capable firm with the ability to serve a range of clients. Cost-saving and consolidating are also a benefit in a small market which is often affected by the low interest rates. Based on 2018 figures, the combination of Aon and WTW would have had a revenue of $19bn. This would put it ahead of the current market leader Marsh & McLennan at $17bn. This demonstrates the strength the two companies may have once merged.</p><p></p><p>A huge range of law firms and investment banks have been called in to advise on the deal. Aon has relied on Freshfields and Arthur Cox to lead the London leg of the deal with Latham & Watkins heading up the American side. They have also obtained advice from Credit Suisse. The main focus is likely to be on gaining regulatory clearance as well as finalising the terms of the all-share deal. WTW has turned to US giants Weil, Gotshal & Manges and Skadden to help advise them, alongside Goldman Sachs.</p><p></p><p><strong>Oil Price War </strong>By Rachel Strickland</p><p></p><p><strong>The Story</strong></p><p></p><p>Last week, OPEC’s members proposed cutting crude oil output by 1.5 million barrels to drive up the weakened oil price. However Russia, who allies with OPEC, refused to commit to the cuts, wanting to assess the impact of the coronavirus on oil demand and not wanting to allow US shale producers an advantage. Since then, the largest OPEC member, Saudi Arabia has committed to raising production and will offer steep discounts in what has been described as an ‘oil war’. This oversupply and fear of continued depreciating prices has lead to crude oil trading between $30 and $40 a barrel this week.</p><p></p><p>The coronavirus has had a huge impact on oil demand with restricted travel and falling production. However oil companies have been suffering from low commodity prices and lower market capitalisation for the past year.</p><p></p><p><strong>Impact on Businesses and Law Firms</strong></p><p></p><p>Businesses such as airlines and shipping companies who rely heavily on oil will benefit from continued depreciated prices. However, low oil prices and lack of demand are damaging to countries reliant on oil exports, oil companies that are facing unsustainable profits and the corporate bond market with oil companies at risk of default.</p><p></p><p>A price war will hit oil-dependent countries like Nigeria and Angola particularly hard as they have less scope to increase output or access finance. However this is a global problem and US producers have been shedding jobs and suffering from bankruptcies as less investment is entering the US shale market. The shares in Saudi Aramco have dropped 9% and lesser energy revenues could tarnish Saudi Arabia’s Vision 2030 plans to modernise the economy and diversify away from oil.</p><p></p><p>For those causalities of this intense competition, lawyers may advise on complex restructurings and international disputes. Increased output will mean oil companies will look to maximise efficiency through streamlining processes and drilling techniques, investing in new technology, or closing down dormant subsidiaries to lower operational costs. The high global competition and volatility will mean opportunities for corporate lawyers in capital markets and private equity to raise finance.</p></blockquote><p></p>
[QUOTE="Curtley Bale, post: 25866, member: 4422"] Please find this week's report below! [B][SIZE=4]Aviation industry hit by COVID-19[/SIZE] [/B]By Brian Chiu [B]The Story [/B] The impact of Covid-19 on the aviation sector is increasingly pronounced. More than 54 countries have now issued travel restrictions to China and the wider APAC region. With Standard & Poor’s index of major US airlines falling by 8.2%, the biggest drop since the financial crisis, aviation investors are right to be worried. The International Air Transport Association (IATA), an industry body, warned that the industry may take a hit as much as $113bn (£87bn) because of the virus outbreak. [B]Impact on Businesses and Law Firms [/B] This situation is unprecedented to airlines, both financially and operationally. Asian airlines are worst-hit as a significant portion of their customers is from China, the epicentre of the outbreak. Cathay Pacific, a Hong Kong premium carrier, has reduced its services to and from mainland China by at least 50% and asked its staff to take three weeks of unpaid leaves. Various American airlines have also suspended services to China and several European countries. European airlines already admit flying nearly empty planes when the Italian government also announced to lock down the entire country. You may be thinking: Why not slash flight schedules to stop the bleeding? Airport slot allocation rules in most countries require airlines to meet 80% of the required usage rates or risk losing its take-off and landing slots to competitors. There is an increasing demand for governments to waive airlines from the rules and offer tax reliefs during these extraordinary times. Governments may have a hard time deciding as some budget airlines are not well-managed in the first place e.g. Flybe (see Alice Manners’ article below). On the positive side, airlines can benefit from the oil price plunge as a result of the price war between Russia and Saudi Arabia (see Rachel Strickland’s article below). Still, lower fuel costs could not save empty flights. Commercially, it is in the common interests of financiers and lessors to accommodate cash-strapped carriers during this challenging time than driving its customers into insolvency. Law firms could hence advise on setting up transitory arrangements for struggling airlines. [SIZE=4][/SIZE] [B][SIZE=4]Aon to buy Willis Towers Watson [/SIZE][/B]By Curtley Bale [B]The Story[/B] The world’s second-largest insurance broker, Aon, has reached an agreement to buy the world’s third-largest broker, Willis Towers Watson (WTW). The all-share deal is said to cost $30bn. This news comes just 12 months after Aon expressed and then closed their interest in buying WTW within a 24-hour period. It is expected that the deal will create a new leader in the commercial insurance brokerage market, overtaking rival Marsh & McLennan. Aon shareholders are expected to hold around 63% of the new company. [B]What it means for Businesses and Law Firms[/B] Aon has been keen to consolidate its position in the market, whilst also developing its current capabilities. A deal with WTW will allow Aon to secure its position as well as tap into the expertise that WTW has. The firm is actively looking to develop its expertise in cybersecurity and IP rights and they see a deal with WTW as a way to do this. Moreover, it is estimated that this tie-up will lead to $800m in synergies. The result of this is likely to be a much more capable firm with the ability to serve a range of clients. Cost-saving and consolidating are also a benefit in a small market which is often affected by the low interest rates. Based on 2018 figures, the combination of Aon and WTW would have had a revenue of $19bn. This would put it ahead of the current market leader Marsh & McLennan at $17bn. This demonstrates the strength the two companies may have once merged. A huge range of law firms and investment banks have been called in to advise on the deal. Aon has relied on Freshfields and Arthur Cox to lead the London leg of the deal with Latham & Watkins heading up the American side. They have also obtained advice from Credit Suisse. The main focus is likely to be on gaining regulatory clearance as well as finalising the terms of the all-share deal. WTW has turned to US giants Weil, Gotshal & Manges and Skadden to help advise them, alongside Goldman Sachs. [B]Oil Price War [/B]By Rachel Strickland [B]The Story[/B] Last week, OPEC’s members proposed cutting crude oil output by 1.5 million barrels to drive up the weakened oil price. However Russia, who allies with OPEC, refused to commit to the cuts, wanting to assess the impact of the coronavirus on oil demand and not wanting to allow US shale producers an advantage. Since then, the largest OPEC member, Saudi Arabia has committed to raising production and will offer steep discounts in what has been described as an ‘oil war’. This oversupply and fear of continued depreciating prices has lead to crude oil trading between $30 and $40 a barrel this week. The coronavirus has had a huge impact on oil demand with restricted travel and falling production. However oil companies have been suffering from low commodity prices and lower market capitalisation for the past year. [B]Impact on Businesses and Law Firms[/B] Businesses such as airlines and shipping companies who rely heavily on oil will benefit from continued depreciated prices. However, low oil prices and lack of demand are damaging to countries reliant on oil exports, oil companies that are facing unsustainable profits and the corporate bond market with oil companies at risk of default. A price war will hit oil-dependent countries like Nigeria and Angola particularly hard as they have less scope to increase output or access finance. However this is a global problem and US producers have been shedding jobs and suffering from bankruptcies as less investment is entering the US shale market. The shares in Saudi Aramco have dropped 9% and lesser energy revenues could tarnish Saudi Arabia’s Vision 2030 plans to modernise the economy and diversify away from oil. For those causalities of this intense competition, lawyers may advise on complex restructurings and international disputes. Increased output will mean oil companies will look to maximise efficiency through streamlining processes and drilling techniques, investing in new technology, or closing down dormant subsidiaries to lower operational costs. The high global competition and volatility will mean opportunities for corporate lawyers in capital markets and private equity to raise finance. [/QUOTE]
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