Roundtable: Capital Markets 2011
William K Jenkins -
Stephen Pincus -
The International Who's Who of Capital Markets Lawyers has brought together two of the leading practitioners in world to discuss key issues facing lawyers today.
Participants
WILLIAM JENKINS
Fraser Milner Casgrain LLP
Canada, AB
Goodmans LLP
Canada, ON
CHALLENGES
Who’s Who Legal: What are the biggest challenges facing capital markets practitioners in your jurisdiction?
Bill Jenkins: The conversion of Canadian generally accepted accounting principles to follow International Financial Reporting Standards (IFRS) has been a significant project for all issuers and can complicate offerings during this transition period.
Current rules generally permit prompt access to capital markets by reporting issuers whose disclosure record is up to date. On the underwriters’ side, the short time to market can make due diligence a particular challenge unless the issuer has made a practice of permitting designated underwriters’ counsel to review and perform due diligence with respect to significant continuous disclosure documents as they are filed. Unfortunately, this is far from a uniform practice.
In general, the continuing evolution of the securities regulatory regime is a challenge which requires constant attention. Conversely, aspects of the rules which do not evolve quickly enough can be even more problematic – applying traditional securities law requirements developed before the internet became ubiquitous can be difficult or just a plain waste of time given the extent to which business communications practices have evolved.
Stephen Pincus: I believe the biggest challenge facing capital markets practitioners today is the unpredictability of demand for particular securities. Of course, there have always been market “windows” for different asset classes, industries, issuers and types of securities, and market volatility is something that practitioners should generally be comfortable with.
In the past couple of years, however, the windows of demand have become less predictable and often narrower. An existing issuer may miss an opportunity for an equity or debt financing at a favourable price unless it has timely access to good strategic advice and is well prepared to implement an offering. For an IPO issuer, the narrow windows are even more of a challenge because lead times are much longer than for follow-on offerings. In response, practitioners must look to efficiently compress offering timetables in order to minimise the risk of clients missing the market window.
This challenge naturally also presents practitioners with opportunities. Clients increasingly appreciate the need for advisers with deep market experience and understanding, a creative approach to designing securities that address commercial, tax planning, governance and investor objectives, and the ability to react nimbly to ever-shifting market dynamics.
MARKETPLACE CHANGES
Who’s Who Legal: According to the lawyers we spoke to, volatility and uncertainty in the capital markets has slowed down the demand for IPOs. What industries are keeping the demand afloat, and how does the volume of work compare to the need for restructuring?
Bill Jenkins: Although the current market is not seeing as high a volume of IPOs as was experienced four or five years ago, the IPO market is open and in particular there continues to be strong interest in the oil and gas and mining sectors. The TSX continues to be an exchange of choice for IPOs in the natural resource sectors regardless of the location of the underlying business operation.
Stephen Pincus: The strength of Canada’s economy, financial and resources sectors, and currency has supported relatively strong capital market activity since the 2008 international market downturn. Almost $30 billion of equity capital was raised on the Toronto Stock Exchange and TSX Venture Exchange in the first half of 2011, a 15 per cent increase over the same period last year. In 2010 these exchanges had 524 new listings (by far the largest number of new listings last year for any international exchange) with 71 of these from countries outside Canada.
There are currently over 330 non-Canadian companies listed in Toronto. Almost half of these issuers are based in the USA but the others are spread throughout the world. Issuers from around the world increasingly see Canada as a favourable venue for a secondary market listing or an IPO. This has been particularly evident in the mining and energy sectors, which have enjoyed record levels of equity capital market activity, including IPOs, as a result of the commodities boom.
The real estate capital markets have also been extremely strong and there have been several IPOs in this sector. This is largely a function of the Canadian markets’ appetite for yield, driven by low interest rates, the closure of the domestic income trust market due to the SIFT tax (effective this year), and the perceived stability of income generating securities. The SIFT tax does not apply to appropriately structured Canadian REITs or non-Canadian assets, whether real estate, resources or operating businesses.
Canadian real estate investment trusts (REITs) and real estate operating companies (REOCs) have been very active in raising capital over the past couple of years, but the popularity of a recent IPO of a REIT with properties in Europe suggests a possible trend toward more international real estate offerings in Canada.
EQUITY VS DEBT
Who’s Who Legal: Post-recession, has there been a refocus from equity to debt work in your jurisdiction? What does this tell you about the level of confidence in the market, and how did the level of foreign client interest change?
Bill Jenkins: Convertible debentures have been a very popular security for offerings since the recession, and that does reflect investor caution. There has also been a plethora of rate-reset preferred share offerings. Generally, offshore investors are not as active, but neither have they disappeared from the market.
An important development in the last few years, arising in part from the recession but also from the government’s decision to close off the income trust structure, has been the development of an appetite in Canadian public markets for high-yield debt. Until recently, Canadian issuers of high yield debt had to access the US market, typically on a private placement basis. A number of public or private high yield offerings have been completed in the last few years, and it seems reasonable to expect the market to continue to grow.
Stephen Pincus: About $50 billion of public equity capital and $160 billion of public debt capital was raised in Canada during 2010.
Investor appetite for yield has led to the emergence over the past couple of years of a high-yield debt market in Canada. Some Canadian issuers had previously accessed the US high-yield market, but may now find a local market more efficient when issuing Canadian dollar debt and raising capital more quickly and in smaller amounts. Convertible debentures are another source of yield for investors; these were historically a retail product in Canada, but have recently also attracted institutional investors, particularly in the context of a number of post-2008 “distress” financings. Recent offerings have included US dollar denominated convertible debentures and the contemporaneous offering of convertible debentures in connection with an equity IPO.
Canadian companies and financial institutions have also raised significant equity capital in recent years by issuing preferred shares. Over $15 billion was raised by way of preferred share offerings in Canada in 2009 and 2010. Initially offered primarily by Canadian banks and other financial institutions, preferred share issuers have become increasingly diversified. Canada’s first offering of REIT preferred units was completed in January 2011. Most recent preferred share offerings have involved rate-reset shares, which offer investors regular yield while managing interest-rate and inflation risk.
RECENT DEVELOPMENTS
Who’s Who Legal: Have there been any recent legislative or regulatory developments in your jurisdiction that have affected your practice? How have your clients responded to the changes?
Bill Jenkins: The transition to IFRS, mentioned above, has required significant work by the CFOs of Canadian reporting issuers and their staff. For most issuers, the worst is now behind them. A second regulatory development of note is the adoption of an updated rule governing mining reserve reports (NI 43-101).
While class action litigation is not new to Canada, relaxed rules for class actions adopted over the last few years together with statutory liability for secondary trading has greatly magnified the risks associated with the disclosure practices of Canadian public companies.
Overarching all of this have been potential structural changes, such as the now abandoned merger between the LSE and the TSX and the attempts by the Canadian federal government to create a single Canadian securities regulator. Constitutional references challenging the legislation were successful in both Alberta and Quebec, and appeals of those decisions have now been heard by the Supreme Court of Canada, which is expected to rule later this year. Any change to a single regulator may actually be disruptive, as the existing provincial commissions already coordinate their activities efficiently.
Stephen Pincus: One very helpful recent development is the amendment by Canada’s securities regulators of the technical reporting rules for mining companies. This is the culmination of a ten-year process which sets the “gold standard” for mining disclosure internationally. The amendments to National Instrument 43-101 are designed to give issuers more flexibility and reduce their compliance costs without compromising investor protection. These new rules reinforce Toronto’s role as the world’s “mining finance capital”.
Another set of amendments recently released by Canada’s securities regulators relates to executive compensation disclosure (Form 51-102F6). While the new requirements (based on proposals released last year) are not a fundamental change in direction, they require additional disclosure regarding risk and compensation governance, and clarify requirements for disclosure of performance targets.
“Say on pay” by shareholders has also been a focus of some attention in Canada following US legislation and the release of a model policy by the Canadian Coalition for Good Governance. On 14 January 2011, the Ontario Securities Commission issued a staff notice seeking comment on the desirability of developing regulatory proposals on whether shareholders should have a separate advisory vote on executive compensation and “golden parachute” payments. Views have been divided. The Commission also asked for comment on whether to introduce rules to facilitate individual director voting and majority voting in uncontested director elections, and rules to enable shareholders to make more informed voting decisions and ensure their votes are counted at shareholder meetings. These developments reflect a significantly heightened concern with shareholder democracy in the capital markets generally, and particularly among certain institutional investors.
Finally, two court decisions this year have suggested that it may be easier than in the past for class action lawyers to commence class action lawsuits on behalf of secondary market investors. Such class actions are still in their infancy in Canada and tend to be based on extreme fact situations. While still relatively uncommon compared to their prevalence in the US, they will no doubt be monitored closely by Canadian capital market practitioners.