Who's Who Legal has bought together Michael Schlitt of Hogan Lovells and Philippa Stone of Herbert Smith Freehills to discuss activity levels, market changes and regulatory developments in the capital markets in their jurisdictions.
Hogan Lovells International
Herbert Smith Freehills
Who’s Who Legal: How active have the capital markets been in your jurisdiction in the past year? Are you seeing an increased number of new deals coming through? How much distressed work is still around?
Michael Schlitt: The equity market was slow in 2012, with only a few big deals. 2013 has seen some improvement with an increased number of large-cap IPOs and capital raisings (with and without pre-emptive rights). The debt capital markets are very active in both investment grade and the mid-cap segment.
Philippa Stone: The market for ordinary equity has been quiet in Australia, reflecting a number of factors. Many issuers raised capital in 2009–10 to address balance sheet issues (Australian equity issuance in some quarters over that period was 10–12 per cent of world issuance, even though Australia only generates about 1–2 per cent of world GDP). These issuers still have sufficient equity – and also, debt funding has become readily available and affordable, and equity market prices have until recently been depressed. Also, while until recently there has been significant M&A activity in the resources sector, much of that has been inbound from other jurisdictions, so that associated funding activity has largely occurred offshore. We hope that recent recovery in market prices on ASX will lead to renewed IPO activity and increased confidence by Australian acquirers – and, in fact, we are currently seeing some recovery in domestic M&A.
However, even in the absence of significant equity issuance to date, we have been very active in relation to hybrid issuance since mid-2012, with all the major Australian banks (and a number of other banks and insurers) undertaking multibillion-dollar raisings following release of the final Basel III rules for bank and insurance company hybrids last year. There have also been a number of other corporate hybrid and convertible bond raisings.
Adapting to Market Change
Who’s Who Legal: How have lawyers and law firms responded to the lack of work in the capital markets? Are opportunities for growth increasingly to be found in the emerging markets?
Michael Schlitt: Some firms have chosen to cut back their capital markets workforce while others have taken the opportunity to build up their teams. Cross-border transactions have become more relevant and we have seen an increase in the number of foreign companies considering tapping the capital markets in Germany.
Philippa Stone: As mentioned above, we have been fortunate in having experienced good hybrid issuance activity even though ordinary equity issuance has been slow. We acted for Commonwealth Bank of Australia in its A$2 billion PERLS VI raising (the first Basel III compliant note issue) and for Bendigo and Adelaide Bank in its CPS raising (the first Basel III compliant preference share issue), and have subsequently acted for the joint lead managers of Basel III compliant issues by all of the other major Australian banks.
In addition, we (and a number of other Australian firms) tend to have equity capital markets teams which also have M&A expertise, so we were able to focus during slow equity markets on M&A. Some of those transactions, like the Yancoal/Gloucester merger last year, also have capital markets aspects – Yancoal’s listing as part of that merger was the largest listing on ASX in 2012. Many of those M&A transactions have been cross-border transactions, involving inbound M&A – for example, Yancoal is a Chinese SOE which acquired an Australian coal miner; and another transaction, Hanlong’s proposed acquisition of Sundance Resources, involved a privately owned Chinese acquirer and an Australian target with primarily African assets. Inbound resources sector M&A activity has slowed. However, we are seeing a recovery of confidence in domestic M&A, with large transactions last year and this year, particularly in infrastructure – such as AGL Energy’s acquisition of the Loy Yang A power station, and privatisations including the sale of Sydney’s Port Botany and the forthcoming NSW power privatisations.
Who’s Who Legal: Financial regulation is becoming increasing complex. Has providing regulatory advice become a larger part of your practice in recent years? What challenges do these regulations present to your clients? How are you helping your clients to address these issues? Have you seen new business opportunities emerge as a result of the regulatory flux?
Michael Schlitt: Our firm continues to advise many banks on financial regulation but it plays less of a role for capital markets work. During the recent credit crisis, we assisted the German government’s agencies, such as the German Financial Markets Stabilisation Agency (FMSA), and other clients, such as FMS Wertmanagement, Erste Abwicklungsanstalt and the Financial Market Stabilisation Fund (SoFFin), with the restructuring and enforcement of various financial markets stabilisation measures and transactions – for example, we recently advised FMSA on the restructuring and split-up of WestLB. We also advised SoFFin on the E5.3 billion capital increase by way of rights issue of Commerzbank AG, and on the on the issue of contingent mandatory exchangeable bonds (CoMEN) by Commerzbank AG. Our team continues to advise FMS Wertmanagement and Erste Abwicklungsanstalt on their debt issuance and commercial paper programmes, as well as the issuances under these programmes.
Philippa Stone: Financial market regulation is obviously an area where we have significant expertise, particularly in navigating changing Australian Prudential Regulation Authority (APRA) and Australian Securities and Investments Commission (ASIC) requirements. For example, APRA released its final rules for BASEL III compliant raisings by banks and insurance companies late last year, and that has led to significant work. As mentioned above, we acted for the Commonwealth Bank of Australia and for Bendigo and Adelaide Bank in, respectively, the first Basel III compliant note issue and the first Basel III compliant preference share issue by Australian banks, and we have subsequently been involved in Basel III compliant issues by all of other major Australian banks and a number of insurers.
More generally, Australia has a relatively benign regulatory environment for capital raising, which assisted Australian companies in raising capital across the financial crisis – for example “low documentation” offers are possible for rights issues by ASX-listed companies, and such offers can also be undertaken very quickly under an accelerated structure which we helped to develop. However, there remain challenges, including the introduction from 1 July 2013 of the “Future of Financial Advice” rules, which involves comprehensive new regulation of financial intermediaries, including rules affecting fees in connection with capital raisings. This is currently generating significant work as our clients come to grips with the new rules.
Clients’ responses to developing regulation can also lead to work – we acted for the ASX Limited, which is itself a listed company on its own market – the Australian Securities Exchange – in its recent A$500 million rights issue. This was the largest ordinary equity issuance in Australia so far in 2013 and will enable ASX to meet emerging international capital standards for clearing counterparties.
Optimism for the Future
Who’s Who Legal: There is a definite sense of optimism among lawyers and stakeholders for the latter part of 2013 moving in to early 2014. Are you optimistic for the year ahead?
Michael Schlitt: Yes, we are and expect 2013–2014 to be better than 2012.
Philippa Stone: Yes. Unlike other firms, we have not had to make reductions in lawyer numbers, and we are currently experiencing high levels of activity across our team.