Roundtable: Capital Markets
Three of the world’s leading capital markets lawyers discuss some of the key issues facing legal professionals in this practice area today.
Participants:
Shawn McReynolds
Davies Ward Phillips & Vineberg LLP
Toronto
Mayer Brown LLP
Chicago
Vieira de Almeida & Associados
Lisbon
Who’s Who Legal: What regulatory changes have there been in your jurisdiction where capital markets are concerned? How have these changes affected your practice?
Pedro Cassiano Santos: Regulatory changes in the capital markets arena essentially corresponded to regulators becoming ever more demanding and more strict. A good example of this may be found in the rules published by the European Central Bank for instruments to be admitted as collateral to discount liquidity made available to Eurozone banks. On the one hand this means more services to be performed by law firms, and requires deeper knowledge and skill from the participating lawyers; but on the other hand this imposes on law firms the burden of achieving this without increasing their level of fees, conscious as we must be not to aggravate transaction cost equations and even, sometimes, the difficult equation our clients may be placed in during these more troublesome times.
Shawn McReynolds: The past year saw the culmination of a protracted reform of the rules determining when capital markets participants must be registered either as dealers or advisers. The goal of the reform was to harmonise the rules in each of the provinces of Canada and this was largely achieved. This reform significantly eased the ability of non-Canadian dealers and advisers to conduct business with institutional investors in Canada, particularly in Canada’s largest market, Ontario, without having to register with the local authorities. Looking forward, the most significant change in the works is the proposed establishment of a national securities regulator by the federal government. This initiative is opposed by some of the provinces and is the subject of a legal challenge as to its constitutionality. If implemented, it will change the landscape of securities regulation in Canada and likely result in overlap and some duplication between federal and provincial regulation that will cause capital markets practitioners to adapt. One would expect the changes to be changes to practice procedures, though, and not a full-scale reworking of the rules for accessing Canadian capital markets.
Edward Best: There have been numerous regulatory changes, most importantly the passage of the Dodd-Frank bill. In addition, there are SEC-proposed and enacted rule changes almost weekly. The pace of change has required us to devote more time and resources on staying current on these developments and keeping our clients up to date as well. At least in certain areas, we have designated people who act as resources both internally and externally.
Who’s Who Legal: In your experience, which sectors and financial instruments have proven more robust under the current market strains?
Shawn McReynolds: Two factors have driven capital markets activities in Canada recently: (i) investors’ thirst for yield; and (ii) commodities. With interest rates continuing to bump along at historic lows, securities that offer a significant yield have been enthusiastically received. Convertible debentures, preferred shares and similar securities have featured prominently in recent offerings. As well, Canada is a leading market for mining companies to raise capital and both base metals and precious metals companies have been very active in raising capital recently.
Pedro Cassiano Santos: The current market environment (particularly out of a small and stressed Eurozone economy such as Portugal) has certainly made the case for reinforced debt securities benefiting from some sort of protection feature for investors and enabling higher ratings to be achieved. In this environment, covered bonds and strong securitisation features (particularly RMBS and mortgage-benefiting SMEs) have been among the sole instruments enabling banks to raise finance in international markets and namely near the ECB. On the equity or quasi-equity fields hybrid capital has expanded quite significantly and is probably the key innovative structure attracting everybody’s attention nowadays. Finally with the low share prices currently seen in the market, we will certainly also witness growing appetite for M&A transactions and tender offers to be launched.
Edward Best: Interestingly, US high-yield issuances in 2009 and 2010 have been at record levels. The IPO and equity markets in general have been spotty. There have also been periods when the general bond market has been closed, though in the last few months it has been very strong. It appears that the market has been less receptive to more exotic instruments and seems to be, at least for the present, focusing on more ‘plain vanilla’ products.
Who’s Who Legal: How has your practice changed to adapt to current levels of work in the capital markets sector? Would you consider it more profitable to diversify or to increase specialisation?
Pedro Cassiano Santos: Our practice has essentially adapted to becoming even more close to clients in order to understand fully their needs and where we can really add value. This has been made under significant pressure on fees, not to aggravate the cost equation of the transactions and necessarily permitting the transaction all-in costs to be determined upfront and therefore working essentially with capped-fee arrangements. This requires, from a law firm, the ability to be simultaneously diversified and creative – I guess above all to be capable of covering all possible sectors and features so as to respond to the clients’ needs, and to be specialised so as to deeply and fully understand the instruments we are working with. Profit-wise, a good blend between both skills is probably what has made the day and for this, we at VdA certainly have made good use of our relatively big and skilful capital markets team, so that we may allocate to each task the required expertise while at the same time responding to all solicitations from our target market.
Edward Best: Diversification by product (eg, capital markets, M&A) has always been a good idea and even more so now. There are advantages, however, to specialisation by industry (eg, FIG, oil and gas).
Shawn McReynolds: Capital markets practitioners in Canada have always been well served by having diversified practices and I don’t expect that will change.
Who’s Who Legal: Have relationships between firms and clients changed? If so, how?
Shawn McReynolds: Legacy relationships remain strong, but firms have had to recognise that cost containment has become a much higher priority for clients. New opportunities have increasingly been subject to significant price competition. This trend is not limited to capital markets work and exists whether we are representing issuers or market intermediaries.
Pedro Cassiano Santos: As mentioned, the generality of our work comes in pre-arranged fee quotes and caps. This inevitably means a change in the relationships between clients and law firms and certainly also leads to increased competition. The major change we perceive in the relationships between clients and law firm is thus that the award of mandates is essentially based on the ability to reach a suitable compromise between a reduced budget, which on top has to be determined upfront and compared with other firm’s budgets, and the appropriate level of competence and skill, coupled with a delivery request to meet ever more demanding transaction calendars, also capable of being set in advance of the transaction work actually starting. Additionally, and while working in a relatively ‘low on fees’ jurisdiction, this also means that the scope for international law firms to participate in our market is reduced, and has probably been reduced even further during these last couple of years. Careful budgeting and the formation of the appropriate teams of lawyers to respond to the client requests are thus crucial skills for law firms these days, and this certainly is marking relationships between clients and law firms at the moment.
Edward Best: It has been a bit of a mixed bag. Sophisticated clients seem to recognise that there is significant value in using a firm that has a long history with the client and a level of trust built over a number of years and deals. Notwithstanding this, even with sophisticated clients, we have seen price pressure and pressure for alternative fee arrangements. We have also seen clients asking for more non-billed services, including legal training. Certainly with less sophisticated clients, there is a trend to choose counsel based on price.