Capital Markets 2016: Trends

According to lawyers 2015 was a year of uncertainty, with the unsettled state of the current market largely attributed to the slowdown in the Chinese economy, the drop in oil prices, the Brexit debate and ongoing US elections. While the global debt markets have remained buoyant, albeit with a slight downturn, the equity side has witnessed a slowdown in activity, with companies reluctant to participate until the market becomes less sceptical. Furthermore, the practice area has seen a boom in the fin-tech sector over the past year, as alternative sources of funding, such as online and peer-to-peer lending, continue to diversify the market and broaden the options available for those seeking access to capital. 

According to Thomas Reuters, January 2016 saw the global capital markets experience the slowest start to a year since the same period in 2002, with the figure of new equity sold reaching only $21.7 billion. The high-yield market has been the worst to suffer, as uncertain economic times, and a reluctance to gamble have meant that it has experienced “a flight away from risk”. The second half of 2015 saw the global high-yield volume down by 58 per cent compared with the first half of the year, demonstrating the extent to which the space has been affected by the current global political and economic situation. Lawyers have also described the IPO market as “a weak and pockety area” in which certain sectors such as bio-tech are seeing some activity, but overall, no one is in a hurry to push forward transactions. The investment grade market however, continues to thrive and remain active, a trend that practitioners are certain will continue into the coming year.

The past year has also seen particular sectors continue to thrive, most notably the field of energy. The beginning of 2016 saw the downturn in oil prices reach a distinct low, with a barrel of oil trading at just under $30 a barrel. It therefore comes as no surprise that the legal community has identified the energy market as one of the most active areas for capital markets lawyers. With many oil and gas companies now forced to reassess their financial situation and reduce costs, M&A and restructuring have come to the fore. The need to fix and refinance debt, and in many cases avoid bankruptcy, has led to a drive for both strategic and opportunistic acquisition financing, resulting in an increased workload in the space for practitioners.

Sources have noted that one of the greatest trends over the past year has been the development of the fin-tech sector. Before the economic crisis of 2008, banks were the main financial source; recently, however, they have retreated slightly from offering structured products, and there has been a shift in the market towards alternative sources of capital, most notably online platforms. A recent report from EY named Britain the leading fin-tech centre in the world, demonstrating the extent to which it has become an integral part of the jurisdiction’s capital markets arena. Many have pinpointed the cause of this trend to be the global economic uncertainty and instability that has plagued the past few years, and led banks to take a more measured approach to lending, thus creating a void that new companies such as Zopa and Funding Circle have taken the opportunity to fill.

The boom in the fin-tech sector has naturally boosted the profile of peer-to-peer lending, making it an increasingly attractive option for those looking to source capital. Lawyers have noted that these emerging online platforms are seen essentially to “cut out the middle man”, and offer bespoke and tailored solutions for clients. Alongside the diversification of finance sources, they also highlight a shift in drivers of financial innovation, as hedge funds and insurance companies, rather than banks, have begun to take the lead and deliver new and innovative products to the market. Despite the emergence of new players to the market, lawyers are keen to stress that the banks continue to hold a strong and important role, one that they believe will regain its strength over the next few years. It is evident therefore, that the markets are becoming more accessible to a larger number of people, as entry routes continue to diversify and expand.

Another area of the industry that has gained prominence is that of Islamic finance. According to the World Bank, the Islamic finance industry has grown by 10-12 per cent annually over the past decade, with shariah-compliant financial assets reaching a current total of approximately $2 trillion. The last year has witnessed some major sukuk issuances, a trend that has continued into this year with Dubai Islamic Bank’s $500 million sukuk listing on Nasdaq Dubai in April. Activity in 2015 made it clear that Islamic finance transactions had well and truly permeated the global financial system. In July, Emirates Airline issued its first sukuk underwritten by UK Export Finance, represented by Allen & Overy. The financing, which totalled $913 million, was for the purchase of four Airbus A380-800 aircraft, and signals an increasing interest and involvement in the shariah-compliant debt market.  

As cash flow from conventional sources has dried up, lawyers have noted that people are now looking increasingly to Islamic finance, as a means of gaining liquidity. This is seen most prominently in the project finance sphere, with many ventures now beginning to add Islamic components to their financings. It is also being increasingly used in restructurings, with Islamic instruments being used to refinance conventional instruments. As these trends continue, many are noting a growing overlap between project finance and Islamic finance work, with project finance lawyers increasingly finding themselves and their firms’ practice dealing with the latter industry.

Competition over the past year has remained “heavy and intense” according to one lawyer, with firms looking back at their positions in 2008 in order to gauge where they need to be stronger now. Many have noted firms beginning to become more active at marketing themselves, while others have decided to focus on the impact of cost pressures. As the state of the global economy continues to remain relatively depressed, firms are beginning to feel an increased focus on fees from clients, forcing them to reassess their existing fee arrangements, and develop “flexible, mutually convenient and client-friendly” structures. Lawyers have also continued to highlight that practice development, as well as the development of client relationships are key, as clients look for greater skill sets, and the ability to be adaptable, versatile and think innovatively.

With the market sentiment too volatile for many companies to procced in the current climate, it seems as though 2015 has, for many, brought a brief hiatus in activity, as they wait for some of the ongoing global issues to resolve themselves. This uncertainty has made it difficult to gauge how the next 12 months will play out, but with the private markets and fin-tech sector proving “as vital as ever”, it seems as though financial innovation will remain the order of the day. 

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