While the ‘glory days’ appear to be over for equity capital markets lawyers, there is still plenty of action in the debt scene, with the resources industry propping up business, while hybrid transactions, the ‘rocket science’ of capital markets, are plentiful. Stephanie Quine reports.

It’s been an interesting time in capital markets. While competing for work in a patchy and subdued market, capital markets lawyers have also seen some very large debt raisings, chiefly in hybrid and debt-related retail products.

Traditional sectors of the market, which are viewed as more steady and consistent, have been somewhat absent.

A major M&A survey by mergermarket found the Asia-Pacific region (excluding Japan) suffered a drop of 23.2 per cent in announced deal value for the first three months of 2012, compared to the same period last year. The first quarter of this year also saw a 5.6 per cent drop in deal value compared to the previous quarter.

Lawyers put the apparent lack of ordinary course capital raisings down to uncertainty, both in Australia and globally, as to demand from investors for ordinary shares.

As Stuart Byrne, national head of Clayton Utz’s equity capital markets (ECM) group puts it: “People aren’t panicking and needing to raise money because the sky’s falling down but, equally, they are not going out and engaging in major acquisitions.”

According to Shannon Finch, King & Wood Mallesons’ corporate M&A partner in charge of the firm’s Sydney office, there is not necessarily a demand for capital at the moment.

“You have to have a reason to raise equity capital and people are using different sorts of products for capital management purposes at the moment; tapping into different parts of the market rather than raising ordinary capital,” says Finch.

Mixing it up

In the midst of market hesitation, issuers have taken advantage of the huge cash stockpiles that retail has built up because it hasn’t been “fleshing out” in the subdued equity markets.

“[They’ve] issued a spate of these hybrid products and both financial institutions and significant corporates have issued billions of dollars in that market in the last few months,” explains Byrne.

“That’s where a lot of the money has been going; out of the equity market into products where investors are focusing more on yield and less exposure to equities.”

Lawyers like Byrne have been kept on their feet with mostly retail-oriented raisings of this nature.

Finch, and KWM M&A partner David Friedlander, have led teams on a wave of hybrid transactions this year including IAG’s $350 million hybrid offering, AGL’s hybrid, and the Colonial $500 million hybrid securities offer.

Elsewhere in the firm, lawyers worked on the ANZ offering, some of the Origin offering, locally and offshore, as well as the Woolworths offering.

Both Philippa Stone and Patrick Lowden, Freehills’ top capital markets and M&A lawyers, advised Colonial Holding Company Limited on its $500 million offer of interest-bearing, subordinated, unsecured notes.

“There’s been a lot of activity of that kind,” says Stone, “but broadly, activity has slowed down. I think we’ll probably see a little bit of a pause.”

The IPO market remains flat and KWM, which is acting for the vendors in Genworth Financial offering, is in waiting after the deferred deal. After an embarrassing delay of its proposed float this June quarter, Genworth Financial will reportedly relaunch its IPO early next year.

“I guess the markets themselves are flat and there’s a mismatch between vendor expectations,” says Finch.

Stone is hoping competitive bidding processes, which potentially involve the raising of equity, will make a comeback soon.

“Those are the most interesting ECM and M&A transactions, there’s a funding package and often its debt and equity and the competitive process means you’ve got the most refined M&A proposal and funding proposal,” she says.

Lowden yearns for the “glory days” when “you had clients all needing equity, all needing debt funding and possibly a bridge from debt to equity, and multiple partners working on all of them”.

“I think that sadly they’ve got away, but we hope to see them back,” he says.

Legal rocket science

For Finch, however, the increased hybrid transactions have “actually been nice” in the sense that “they really are very interesting and carefully put together”.

“The hybrid transactions are the rocket science of capital markets,” she says, “they are complicated and you have to take a lot of care in preparing the disclosure and looking at the regulatory issues so they take quite a few moths to pull together.

“They’re technically very challenging and it’s very satisfying to make sure your explaining complex securities well to the market,” she says, adding that newly regulated hybrids mean lawyers have to think creatively about how to adapt to the new regulatory environment.

Byrne also enjoys the innovation and positivity that comes with working in the capital markets.

“No deal’s the same and it’s a very positive and constructive space; you’re assisting companies and banks to do something positive. It’s very forward looking in its intention and there’s a good vibe to a transaction,” he says.

Stuart Byrne, national head of equity
capital markets, Clayton Utz

Resourcing the market

Resource and utility companies remain highly active in the wholesale equity market, particularly at the smaller end of town, says Byrne, who has seen a large number of smaller placements for funding, expansion and general operation out of Queensland and Perth.

“The [resources] sector is relatively buoyant, and not in the sense of large significant deals but in incremental fundraisings to progress to the next stages of development,” he says.

It’s a good sign that there’s activity in this sector because, in difficult capital environments, some industries can struggle.

“The resources sector has assisted our sector-raising funds, which I guess has been a positive for all,” says Byrne.

In 2011, Clutz advised Origin Energy on its $2.3 billion pro-rata renounceable entitlement offer using the innovative new PAITREO structure, which represents one of the largest rights issues in Australian corporate history.

“We were the lawyers on the PAITREO structure so don’t let anyone else tell you they invented it,” says Byrne.

The firm also advised Origin Energy on its $900 million offer of hybrid notes listed on the ASX and on its successful pricing and allocation of a €500 million hybrid issue last year.

Freehills is in the middle of acting for Yanzhou Coal on the proposed $8 billion merger with Gloucester Coal (advised by Minter Ellison).

“That deal’s interesting because I think it will actually be the biggest listing this year,” says Stone, who also recently acted for Aston on the Aston Whitehaven merger, a $5.1 billion merger in the resources sector.

“We’re finding there’s quite a bit of activity in the resources sector; both of those deals are scrip deals so shares are being received as part of an M&A transaction.”

Regulator push and pull

It is important for capital markets lawyers to maintain a good relationship with regulators like ASIC as they must be prepared to explore the way matters are presented in documents to ensure they are onside with what is being put out, especially to retail investors.

But the two don’t always see eye to eye.

“On the regulatory side of things, there is one particular headache and that is the ASIC stance on credit ratings,” says Stone.

“It’s very, very hard for retail investors to predict risk and one of the only decent ways of doing so is to look at a rating ... But given that the agencies simply won’t do that we are encountering the most silly obstacles; you just can’t mention a rating in any way, even in circumstances where it underpins a contractual term and you’re not seeking to advance it in any way as a sort of indefinite recommendation,” says Stone.

In one case, Lowden adds, shortly before lodging a prospectus a client was placed on credit watch which, “in one view, was highly negative”.

“I spoke to ASIC and even then they refused to allow it to go off-prospectus on the basis that the credit watch might be removed and that would imply a positive view,” he says.

Despite hurdles like this, both Stone and Lowden insist they have an excellent relationship with regulators who “generally” do a good job and are “very responsive”.

Byrne believes there has always been a positive approach to innovation from the regulators, which has assisted him and his clients. The ASX has been proposing for some months now to relax capital-raising requirements for small and mid-cap companies with a market capitalisation of $300 million or less. The initiative aims to reduce placement compliance costs and strengthen the ASX’s position in global exchange for emerging companies.

“We assisted on a small raising of only a few million dollars for a resources company just last week so we do all ends of the spectrum,” says Byrne.

“I think the rules, if they’re enacted, may make it easier for issuers, particularly around the additional 10 per cent in a year via a placement subject to shareholder approval,” says Byrne, adding that it was important Australia remained competitive with foreign exchanges, particularly Canada’s, which he says has been very successful in attracting resource stocks onto its boards.

Capitalising on the future

In a market not as deep as some others, Australian capital markets and M&A make for a competitive environment for lawyers.

“Even as you’re working hard on a few transactions you’ll be looking ahead to the next and where the pipeline’s coming from and the market is constantly challenging in that respect,” says Finch.

“But that’s also the source of fun and exhilaration when you do win work.”

While capital markets have been quiet in the first quarter of 2012, with the exception of a handful of the significant bank hybrids, Byrne believes there has certainly been an uptick in the market, and a more positive vibe around, in the last couple of months.

“That will continue, particularly if we can see a few IPO’s moving along in the next couple of months which is a big question mark,” he says.

Meanwhile, ECM lawyers remain competitive as ever in what Byrne calls “a relationship game” to deliver the best pragmatic and accurate advice to clients as possible.

“That’s where the top tier firms compete,” he adds.