Capital Markets 2018: Trends & Conclusions

Our research highlighted significant variety in capital markets around the world, with interviewees reporting numerous challenges caused by issues including political changes and low interest rates. Nonetheless, practitioners were broadly optimistic for the coming year, encouraged by signs of rising interest rates, increased oil prices and an influx of players such as private equity firms. We spoke to dozens of lawyers, from as far afield as Kazakhstan, Israel, Singapore and South Africa, to get their views on the current state of the market.

Global trends in capital markets

Interviewees reported “a fundamental paradigm shift in the nature of capital markets practice” globally. This has manifested itself in many forms, including “rarer and rarer IPOs in Singapore” and a “shift from transactions to regulatory work across the market” in the UK. According to one lawyer from the UAE, “If you were to map the type of work here, there’s greater diversity. There’s work coming out of a range of locations, and there is a greater range of products than 10 years ago.”

Continued low interest rates have led to low levels of activity in the structured finance space, though as rates begin to increase this work is expected to pick up. Currency fluctuations also have an impact on market activity. “As the US dollar is very weak there are not many active US dollar issuers,” stated one practitioner, adding: “Although the pound has gone up, it is still down from before Brexit, which means people are very interested in going to the UK.” The fall in oil prices unsettled the market and boosted bond issuance activity. However, “as the oil price has partially recovered, bonds will not continue to be issued at the same level”, predicted one source from Dubai.

“The mix of players has changed in recent years and will continue to do so in 2018,” commented one source. UK-based practitioners told us that large commercial banks, while “historically very big securitisers”, have been less active in securitisation due to high liquidity in the central banks. However, this liquidity “means that banks happy to lend into structures against assets where businesses are looking to grow”, and UK, continental European and US banks are keen to take up “good opportunities for lending”. Companies are “taking advantage of high liquidity and low interest rates”, while Brazilian lawyers reported that “large listed companies are accessing the market regularly”. In the debt capital market space, as interest rates begin to rise, one lawyer noted: “Many companies think this is the time to come to market to lock in long-term interest rates before they rise again.” Any rise in interest rates are expected to boost structured finance work over the next few years.

One lawyer from Peru highlighted “the greater presence of private equity firms and global private insurance companies acting in the market.” This “entry and continued presence of portfolio acquirers”, including private equity firms and other investors, is echoed in jurisdictions around the world and was described as “a major trend”. According to one Israeli practitioner, “International investors are now consistently interested in bank portfolios, real estate portfolios and both secured and unsecured loans.”  

Capital markets are “coming out of a few dark years”, with sources reporting that “the market is looking a little healthier” and international investors looking to Europe, Asia, the Middle East and the US. In China, “the market has been extremely busy this year” and there has been “a strong flow” of South East Asian IPOs in the region. Chinese companies “have asserted a general push to be listed closer to home, and a lot are going to Hong Kong for IPOs, rather than the US”. Practitioners in Hong Kong told us, “There continues to be a very large number of Chinese companies accessing international capital through a Hong Kong listing. This continues to be a dominant trend in IPO markets in Asia.” Elsewhere in the region, there are “lots of companies exploring options to access international capital, and companies are increasingly looking to a dual listing on a local or an international exchange”. As well as Hong Kong and Singapore, India is described as “a real bright spot for capital markets in the region” and there has been “an uptick in work over the last 12 months” meaning that, according to one lawyer, “This is the first time in years that I can say there is real and substantial activity in the Indian capital markets space.”

Despite signs of recovery, one lawyer noted that “with rates going up and slightly more volatility in the market, we are expecting banks to be slightly more reluctant to lend”. The source also predicts “uncertainty going forward”. Geopolitical events have a large impact on capital markets. Lawyers told us, “Financial assets are immediately responsive to changes. The response time between market changes and people moving what they do is almost instantaneous.”

Competition in the legal market

Though the markets vary by jurisdiction, there is “intense” competition between experts and “top-tier firms are very busy”. Lawyers placed an emphasis on capital markets work being “a set of skills” and stated that “firms compete on different parts of the skills spectrum”. Capital markets is “a very focused part of a broader finance practice” and, as a result, “true specialists are limited, and few firms develop this expertise”. Work is concentrated among key players, and there is only “a handful of firms that banks and issuers turn to for the big, innovative or complex deals”, according to sources.

UK sources reported a “movement of very good practitioners away from mid-tier firms”, and some large firms have “removed themselves from the practice entirely as it is difficult to generate fees required for a sustainable structured finance practice”. Other firms “have really built out their practices” in order to better service clients. “As we become more borderless,” sources told us, “it is critical for firms to be in key markets including the US, the UK and (post-Brexit) the EU to respond to clients’ needs.”

A decade on from the 2007-2008 financial crisis which “decimated” the market, and despite the many “difficult years” since, sources are tentatively hopeful for a “revival of capital markets work this year”. Sources in Singapore commented, “The market is in much better shape,” while in Belgium practitioners predicted, “It’s going to be a good year for capital markets generally.” In Ukraine, which “is still feeling the impact of the financial crisis”, practitioners are “hoping that this year will provide more opportunities than the last”.

Rising interest rates around the world will shape the market and define lawyers’ work flow. Interviewees told us that companies are keen to access debt before interest rates rise again, and this has been a source of activity in recent months. Structured finance is “a great tool” when interest rates are high and is “expected to pick up in the next few years” as a result of such increases.  However, political events continue to influence the market and market players are quick to react to uncertainty or instability. For example, “A number of large issuers have considered moving their funds from the UK to Ireland as part of their Brexit contingency.”

In light of these challenges and new opportunities arising in the market, companies, banks and issuers alike require specialist advice from the “small pool” of capital markets lawyers with the knowledge, skills and experience in the space, and these practitioners look set to remain extremely busy over the coming year.  

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