WWL: Over the past year, sources have spoken of a greater need for multi-source financing through products such as convertible bonds, as banks maintain a cautious approach towards the release of funding for new projects. Is this something you have noticed and what have been the most popular methods of alternative debt and equity financing?
Adam Givertz: Notwithstanding the strength of the stock markets, the new issue equity market continues to be choppy. For many issuers, raising equity capital remains a serious challenge. Although the new issue debt market continues to be robust, particularly in the United States, for medium-sized and smaller Canadian issuers without significant positive cash flow, the debt markets are often not a realistic option. The result has been that issuers have sought alternative financing, which has included convertible debt although this market has not been a great source of capital in the past 12 months.
For mining issuers, royalties and streams have proven to be an important alternative source of financing in the past few years. In Canada, royalty financing has also made its way out of the resource sector as a financing tool for smaller companies with positive cash flow. Although the royalty and streaming sector remains small as a proportion of the overall financing market, growth of existing royalty and streaming companies and the entrance of new royalty and streaming companies suggest that royalty and streaming transactions will continue to proliferate.
Josh Davidson: I specialise in financings for publicly traded master limited partnerships (MLPs), which are largely limited to the energy sector by tax law. Since MLPs do not pay tax at the partnership level, they have a cost of capital advantage over similarly situated corporate competitors. This means MLPs play a very large role in the build-out of energy logistics assets to support increased domestic oil and gas production. Furthermore, MLPs are sold as cash distribution and growth vehicles. Both these factors result in MLPs frequently issuing debt and equity securities. Most of the equity is typical common equity but increasingly MLPs are issuing straight preferred equity as well.
WWL: There have been reports of a gradual rise in cross-border transactional work, as foreign investors sense opportunities in emerging markets. In your jurisdiction how would you describe the balance between domestic and cross-jurisdictional work, and which sectors in particular are currently attracting investment?
Adam Givertz: Today, most investment banks have sales desk in more than one jurisdiction. The result is that almost every capital markets transaction has a cross-border element. It is really just a matter of degree. The Canada–US cross-border public offering was a popular IPO vehicle in the late 1990s but lost some popularity among Canadian issuers in the last decade, particularly in the Sarbanes–Oxley era. However, as new and existing issuers alike become accustomed to the regulatory environment, there is less trepidation about entering the US market. The result is that we have seen a significant increase in the number of Canadian issuers seeking a listing on a US exchange. We are also now seeing a return of the cross-border IPO, particularly among tech issuers.
Josh Davidson: The MLP sector is geared toward domestic investors because of tax issues and certain foreign jurisdictions restrictions governing the issuance of partnership securities.
WWL: In recent years debt and equity capital markets have been difficult to predict at best. In your jurisdiction, how has the legal market responded to developments over the past year? With optimism in some quarters that 2014 could be the strongest year for some time, do you expect a corresponding increase in strategic hires by law firms?
Adam Givertz: We have not seen a significant restructuring in the legal market either in response to the challenges of the past few years or in anticipation of growth in capital markets business.
Josh Davidson: Houston, as the centre of the oil and gas industry and much of the MLP business, has seen very high demand for capital markets lawyers. I expect this demand to continue as long as the domestic energy boom continues and the stock market stays reasonably high.
WWL: There has been an improvement in the equity market since a slow year in 2012, with examples of large-cap IPOs and raisings. However, in many countries lawyers are seeing more activity in the debt capital markets, with high-yield investment products popular among investors due to availability and affordability. Have you seen signs of improvement in the equity capital markets, and how would you compare the levels of debt and equity-based work?
Adam Givertz: The IPO market in Canada presents a mixture of both optimism and scepticism. The last half of 2013 saw a rebound in IPO activity, with REITs driving the market. This led to great enthusiasm coming into 2014 that there would be an IPO boom in Canada. The tech sector, in particular, was supposed to lead the way. But then came 2014, with the first quarter being the worst in five years and not a single IPO printed. And although we have not seen a tech IPO yet, the second quarter of 2014 was something of a rebound for the Canadian IPO market, with five deals in excess of $100 million led by the $1.4 billion PrairieSky Royalty Ltd. IPO. Canada is still dominated by resource industries and the new issue market in the mining sector continues to lag. But, as noted, the high-yield debt markets continue to be very robust, and offer medium-sized and large companies a deep source of capital. This is particularly true in the mid-tier mining sector, which traditionally eschewed debt but has not been a frequent participant in the debt markets over the last three years.
Josh Davidson: MLPs typically have a capital structure balanced roughly equal between equity and debt (consisting of bank debt and debt securities). Some MLPs have investment grade ratings, others are high-yield issuers. With interest rates low, MLPs, like other companies, are being opportunistic in raising capital in favourable conditions.