Eui Jong Chung of Bae Kim & Lee, Seoul and David Goldschmidt of Skadden Arps Slate Meagher & Flom, New York, discuss the current features of the debt and equity markets.
Eui Jong Chung and David Goldschmidt
Eui Jong Chung: As the interest rate has been persistently low and there have been abundant funds available for investment in Korean capital market for the last couple of years, many large and medium-sized companies in Korea have been procuring their capital by way of issuance of corporate bonds (as opposed to raising bank loans) in the capital market. However, the appetite for corporate bonds has not been evenly shown to all Korean companies in the bond market. While some corporates tried to raise funds by paying a relatively high interest rate to the investors in the market, the demand for bonds issued by such companies was not necessarily strong. The market was positive only for the issuers who were sufficiently creditworthy as well as capable of paying a decent level of coupons. Under the circumstances, I cannot say that high-yield bond products have been prevalent in the Korean bond market through the last two or three years. Likewise, even though some financially troubled companies attempted to issue perpetual bonds (which are scheduled to be converted into equity upon the occurrence of certain triggering events or expiry of a specified period) as new means to improve their financial statements, they were selectively welcomed in the market.
David Goldschmidt: As a result of the great recession, available credit from the bank loan market was tight. In addition, due to low interest rates, issuers took advantage of the high-yield market and have issued a record amount of debt to refinance existing debt, fund M&A activity and pay special dividends to stockholders. Issuers continue to enjoy relatively low coupons and issuer-friendly terms, including success in placing longer-dated (10-year) bonds, notwithstanding the expected increase in interest rates. As the economy has rebounded, the bank loan market has seen an increase in its activity as well, even though certain banks have been impacted by regulatory restrictions limiting the amount of leverage by borrowers. Moreover, banks have even been lending aggressively to private pre-IPO technology companies as lending restrictions have loosened. We expect the debt market to continue to be robust, however, as interest rates begin to rise, the debt and bank loan markets will need to recalibrate.
In the equity markets, we continue to see companies take advantage of at-the-market offerings so they can continually access the equity markets in a low cost manner. This “tool” is particularly useful to REITs, which are always raising equity given their distribution requirements. We also continue to see a significant amount of block trades being done on a non-marketed basis, which has provided an attractive method for private equity sponsors to liquidate portions of their investments in companies that have gone public in the last few years.
Eui Jong Chung: In the highly volatile and changing market, clients tend to be more demanding and cautious toward underwriters and their advisers. As the window for the issuance of debt or equity on acceptable terms is open in the market for a very short time, the issuer and its advisers need to be ready to proceed with the execution of the transaction whenever the client gives a green light following the preparation of the draft transaction documents and tapping the market reaction. Also, clients tend to no longer accept the standard terms of the transaction documents as previously executed, and instead they attempt to amend the terms and conditions of the existing transaction documentation to the extent that such amendment can open up opportunities for more favourable responses from the market.
David Goldschmidt: Issuers must plan ahead and be prepared to access market windows. Working with counsel, a client can identify the best strategies for their situation – whether using shelf registration statements, at-the-market offerings or other types of transactions. Issuers must be prepared to shift deal type and deal speed. Many issuers continue to use non-deal roadshows to remain in front of investors even when a capital markets transaction is not imminent, as well as pre-marketing activities prior to the launch of an offering.
Eui Jong Chung: The Korea equity market in 2014 was far more active than the previous years. This is due not only to abundant floating funds for investment in the Korean capital market but also the needs of certain large companies. For instance, corporations such as Samsung SDS and Cheil Industries had a long desire for IPO for their corporate governance purposes, while corporations such as Hanwha Chemical and Industrial Bank of Korea had corporate demands to raise large-scale equity capital in connection with its business expansion. One noteworthy observation in recent debt financings in Korea is the clear differentiation between financially healthy companies and feeble companies shown in the dimension of book building process.
David Goldschmidt: While the IPO market has not been as strong as last year, the overall US equity market has remained solid with a rebound of the IPO market in the second quarter and an increased number of follow-on equity offerings over last year. Health care has led the IPO market this year. The financial sector (particularly REITs) was active in the first quarter, and IPOs by technology companies picked up in the second quarter. In contrast to last year, IPO activity by private equity-backed and venture capital-backed IPO companies decreased in the first quarter, attributable to the alternate exit strategy provided by the active M&A market. A number of issuers have also been able to raise a significant amount of capital in the pre-IPO market at healthy valuations, which provides greater flexibility as to when to go public. However, IPOs by private equity-backed and venture capital-backed companies returned in the second quarter. The debt markets have remained strong, with increases in deal count and proceeds in both the high-yield and investment grade markets. The investment grade market has seen a number of jumbo-sized issuances as well as a notable number of REIT issuers. On the high-yield side, issuer-friendly terms and low coupons characterise the market, with a significant portion of the issuances for refinancings and to fund M&A activity. We have also seen a number of issuers pursue spin-offs and a related capital markets transaction to unlock shareholder value.
Eui Jong Chung: Traditionally, Korean law firms were not invited to play substantive roles as counsel for issuer or underwriter in the domestic capital market. Usually, the standard documentation was used by the parties to the transaction and claims for damages against the issuer or underwriter were rarely filed in the past. However, as the opportunities for investment by foreigners in the Korean capital market (whether onshore or offshore) grew, more active participation by local and international counsels has been required for the purpose of avoiding any potential violation of applicable laws and accordingly any liability. For instance, an IPO having an international tranche for foreign investment requires appointment of local and international counsels for each of the issuer and underwriter. Now that internationally reputable law firms from the United States and the UK have set up their own offices in Seoul, Korea, they will be in a position to be retained by the Korean clients as their international counsels more conveniently, although they would not compete with Korean local firms that do not provide the clients with any advice on either New York state law, or English law.
David Goldschmidt: The current capital markets environment continues to be strong, and the legal market remains competitive among firms. All firms continue to experience pricing pressure. We are committed to providing our clients with the highest level of client service in a cost-efficient manner. As capital markets transactions often involve multiple areas of the law, we pride ourselves on maintaining a deep bench of in-house expertise. We are also well positioned to engage in dual-track processes where issuers are simultaneously pursuing a capital markets transaction and, alternatively, a merger-related transaction.