Increase in capital markets activity expected due to COVID-19

By Jerome Doraisamy|29 March 2020

Lawyers in the capital markets space should expect a substantial increase in activity in the coming months as companies look to mitigate damage caused by coronavirus, argues one partner.

In conversation with Lawyers Weekly, Gilbert + Tobin partner Adam D’Andreti said he fully expects there to be a “substantial increase” in equity capital markets activity in the next several months as a result of companies requiring immediate cash flow shortfall or for the purposes of prudent capital management.

“While traditional methods of capital raising will continue to be popular (i.e. institutional placements and entitlement offers), many companies will also be considering alternative structures such as convertible notes and offers underwritten or supported by major shareholders – these arrangements will give rise to legal complexities that lawyers will need to advise on,” he explained.

The extreme market dislocation currently being experienced, Mr DAndreti mused – and the responses of central banks and governments – is in some respects reminiscent of the GFC, he said.

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“However, the circumstances which have caused this current market disruption are very different to those of the GFC and some of those differences will have a bearing on the nature (and level) of future fundraising activity and associated legal issues,” he said.

“There are some lessons that can be drawn such as that, just like in the GFC, boards of companies that need capital will need to grapple with wider discounts in pricing deals and more dilutive structures (placements and ANREOs) to obtain funding certainty. More difficult though will be assessing when to raise and, if so, the adequacy of funding given the uncertainty about how long COVID will affect the economy.”

Lawyers in this space will still face numerous challenges in their work in the near future, Mr DAndreti noted.

Capital market lawyers should be considering how clients can best structure capital raisings to maximise funding certainty during the current market volatility that we are seeing which requires consideration of factors such as shareholder approval requirements, the availability of the ‘low doc’ regime and managing underwriting risk,” he suggested.

“Lawyers will also need to help clients manage complex disclosure issues around the impact of COVID-19 on its business and balance sheet and ensuring appropriate due diligence processes are in place in order to inform the company’s disclosures (including risk disclosures).”

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When asked how best capital markets lawyers can work in tandem with their clients as well as in-house legal departments at this juncture, Mr DAndreti said: “Capital market lawyers should be having conversations with clients about the specific impacts that COVID-19 will have on their operations and financial position and also helping in-house counsel ensure the entity is in a state of readiness so that they can move quickly to raise when required.”

For listed companies, key legal issues will be around continuous disclosure obligations (including the withdrawal or any earnings guidance), balance sheet and solvency issues and funding options. Lawyers can also assist clients keep up to date with the various responses from regulators (e.g. ASX, ASIC and APRA) that are relevant to capital raisings,” he added.

Increase in capital markets activity expected due to COVID-19
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