Spare a thought for the big banking and finance practices these days. After boom times fuelled by a fat telecom surge just before the close of the century, they are now facing a regional economy hit by recession, terrorism, and now disease.

Impressive resumes from some of the big-name firms in banking and finance are quietly floating around, it is whispered. Fee-earning star partners are returning to New York and London, to be replaced with sideline associates or, worse, not at all.

High volume, low margin deals are fast becoming the norm. Big-ticket items are few and far between. 

"It is an uncertain market," says Jonathan Moult, head of banking and finance at Herbert Smith. From his vantage point in Hong Kong, the overall market is looking grim. "The local Hong Kong dollar loan syndicated lending market is at a very low level. Anything that isn't focused firmly on the PRC is not looking very active."

Moult says this shift has been a steady one over the past two years. "When I came here in 1997, Hong Kong was a vibrant finance centre in its own respect, as well as for doing business in China. But now, most of the work is clearly China related."

He notes that the major deals his firm has done are for Chinese banks or Chinese corporates, or foreign investors investing in China. They are not 'Hong Kong' deals as such. While they are organised or executed in Hong Kong, the economic thrust is towards the Mainland. 

Others have noted that because consumers are not spending or borrowing, the banks are feeling pressure. Share prices have to go up but returns on asset books are stagnant. Then there is the fact that many of the big regional banks were forced to make huge write-offs on non-performing loans (NPLs) as consumers around the region balked at paying heavy credit card debt.

Singapore-based banking and finance partner Paul Oldman, of Lovells Lee & Lee, agrees. "You can't disguise that it's a difficult market."

He points out that although there have been a few examples of lending to large corporates at thin margins, a number of banks feel credits are not sufficiently robust.

Another partner adds: "I am seeing some bad news coming out of some of the major finance practices. You are not seeing a lot of business and they may be running on empty."

He says that much of that suffering is due to the fact that many firms were heavily involved in - known for, really - equity and debt capital markets - markets that are now dead quiet.

"If you are doing equity or debt capital markets plus you are heavily exposed to the local banking community, you are not doing regional project financing out of Hong Kong," he said. "There are very limited project financing opportunities."

Believing that much of the routine business firms are doing isn't economically viable, especially in the current environment, he adds: "The only way you make money is to get the largest transactions that have the highest profile for which you work around the clock for several weeks, several months, and then you put in a substantial bill.

"If you get two or three of those, you are happy."

And firms that have higher overheads and expectations need to get a much larger number of deals. Given the overall economic climate, he says, there are not that many significant transactions around... or at least not enough of them to keep all the firms in the manner in which they are accustomed."The telecom sector has a few exceptions," says Oldman. "Although it has gone through a rough period, with the internet bubble and the overcapacity of telecom equipment, as long as you have a company that is relatively robust in its domestic market, people are willing to lend. We just closed the latest refinancing for PCCW, for example, but looking down to less well known companies, there isn't a lot going on."

One area that is generating fees, says Oldman, is project financing in Japan. Lovells Lee & Lee tends to do a lot of work for Japanese trading companies on outward-bound projects and is currently involved in a large project financing transaction in Myanmar for a Japanese trading company. Tokyo's capital markets is also providing some deals, especially in the repackaging area. His firm has just completed the first managed collaterised debt obligation in the Japanese market.

As for securitisation, although his firm did recently close a deal involving Aeon in Hong Kong - and which was based on a credit card receivables - Oldman feels the area isn't overly active around the region. Korea has provided a few opportunities, but even those may be under threat given the recent media uproar over some corporate governance issues relating to credit card companies.

"We are looking around at opportunities," he says, "but it's spasmodic."

Moult says in this part of the world, the only bright spark is the Mainland, especially project and other forms of financing.

"If you are not successful in China right now then you are going to be struggling," he says. "We have a Tokyo office that is doing rather well on foreign investment into Japan and is servicing the major trading houses but generally, the Japanese market is moribund."One of the big-ticket items in the region recently, however, must be the US$1.5bn acquisition financing of Hyundai Merchant Marine's car carrier division. Nic Johnston at Freshfields led his team on the borrowing side, acting for Wallenius Wilhelmsen Lines, now the largest car carrier operator in the world.

"It was the largest deal in Asia last year," says Johnston, "and definitely a first for its type. What you remember usually is when you cock something up. But we didn't cock anything up in this deal."

Another interesting deal involved Telecom Asia, a Thai company that had borrowed heavily in US dollars during the last financial crisis. It had undergone restructuring but wanted out of its US dollar obligations.

"The way it did that was reasonably creative," Johnston adds. "What it effectively did was convert a stack of foreign debt into domestic bond debt."

One of the concerns was the unattractiveness to the Thai bond market of corporate bonds with anything longer than five years, so Telecom Asia needed to credit enhance the bonds.

"We went to the rating agencies in Thailand," he says, "and asked if this bond carries the credit of Telecom Asia plus the bond holders have a guarantee of a certain percentage of the debt from the triple A rated German bank and US finance organisation we were using. We asked what percentage we needed to guarantee to get the bond rated at a higher level."

Johnston says that deal was the first of its kind in Thailand and is the way of the future. It allows domestic companies to use their prominence to raise bonds to refinance foreign debt but also uses the foreign credit community in helping that company raise more long-term debt where that is not available in the local market without them.

"That is a model that can be translated into a number of jurisdictions in Asia," he says. "India is a good example, where they suffer from their foreign currency borrowings and also suffer from restrictions from raising external commercial borrowings, whereas some of those restrictions on getting guarantees are less onerous."

Johnston is working on a financing in Taiwan that he feels indicates the start of a trend. Taiwan is famous, he says, for not doing much in the way of foreign currency financing or external borrowing.

"They seem to have a lot of money sloshing around in Taiwan and generally don't go to the international markets to finance."

Johnston says he is witnessing some deals in Taiwan being taken offshore and feels the Taiwanese are seeing the value in obtaining some of their debt externally instead of relying on domestic creditors.

Another unusual deal recently came out of Manila. The Asian Development Bank instructed Herbert Smith to advise it on a large financing exercise based on the privatisation of National Power Corporation, the electricity industry of the Philippines.

Moult decided to use a 'rolling guarantee' for half the deal but just as the deal was nearing completion, allegedly the same structure failed in Argentina.

Moult says that when Argentina went into default, it turned out the World Bank didn't pay on the date that everyone expected it to.

"It was a landmark situation for the market. Investors in that bond thought they had a triple A guarantee for principal payments. When the World Bank said read the fine print, the investors went from triple A to sovereign defaulted. The price went from nominal 100 to say 20," he says.

Moult solved the issue by using the second structure of the deal to cover the entire project. 

And where to now? Deals like the ones above in Korea and Manila are scarce, partners say. Is anything of note coming down the pipeline, aside from the break-even work many firms are keeping busy with?

Patrick Fontaine, of Linklaters, sees a number of chemical projects and smaller manufacturing or infrastructure financings in China as notable.

"It's really just now that we're seeing huge chemical projects by the central government," he says. "As China tries to use more natural gas, either imported or piped in from the West, we will likely see a lot of oil and gas related financing. There are a few more deals than there were."

Fontaine also predicts that as companies rationalise and spin off non-core businesses, existing management teams could purchase these. "We expect some leveraged loan opportunities to arise - in other words buyout opportunities and acquisition financing. I think those will come up now and then."

But according to Moult it will get worse before it gets better. "Unless there is something unforeseen, I don't think we will see much movement in the market in the short term. It is an awful thing to say, but the sooner the war is over, the better. The system needs to get going again."