IFLR European Capital Markets Forum 2017: key takeaways

Author: IFLR Correspondent | Published: 21 Apr 2017
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Navigating debt capital markets

  • The Capital Markets Union (CMU), the flagship initiative of Juncker’s EU Commission, will look to integrate EU capital markets more efficiently;
  • The CMU will help to increase liquidity and pricing, and promote growth in the wider economy by providing jobs and promoting financial stability;
  • The European Securities and Markets Authority will play a big role in facilitating this goal But the International Capital Markets Association warned that Brexit is likely to undermine what the CMU is trying to achieve, especially in the wake of a lighter US regulatory stance;
  • The panel also discussed the incoming Packaged Retail and Insurance-based Investment Products (Priips) regulation, specifically the requirement to make a key information document (KID) when marketing it to retail investors, which is by no means straightforward;
  • When it comes to listing venues, it was suggested that the goal posts have changed recently for market regulations, meaning that there is more appetite for deals on multilateral trading facilities (MTFs), in Luxembourg, or anywhere in the EU that was previously unregulated;
  • The panel discussed the new MTF launched by the London Stock Exchange, the International Securities Market. It's trying to adopt a pragmatic and flexible approach to deal with problems that market issuers have raised in the past.


Equity capital markets in 2017

  • 2016 was one of the most volatile post-crisis years, with the volatility index consistently hovering near the top end. 2017 has so far been better, and issuances are nearly double the same point last year - there has however been a big decrease in UK based issuances;
  • A noticeable trend is that people are looking to forge new paths away from well-trodden institutional friendly IPOs – there are now more rights issues, follow-ons and block trades, as well as an increased focus on de-risking an IPO before it happens;
  • Where previously there was a greater emphasis on UK-based issuances, there has been an upsurge of deals closing in emerging markets such as Turkey, Russia or South Africa;
  • The panel looked at two papers released by the FCA, a consultation paper and a broader discussion paper looking at the effectiveness of the existing framework, which will look to streamline the eligibly rules of certain specialist issuers and relax eligibility requirements for real estate issuers – this was deemed a helpful proposal;
  • One of the proposed changes to the LSE is making premium listings more attractive to investors - by allowing dual class shares for example - to attract smaller companies, such as tech start-ups, that are looking to rivals such as the Nasdaq;
  • The panel discussed the pre-IPO research process, drawing attention to the late stage that the approved prospectus is made available to researchers, and the ensuing risk of bias in the research process. The FCA has suggested two alternatives: publishing prospectuses earlier in the process, and breaking it into sections that are published separately, or not granting research analyst access at the same time as connected researchers and withholding publication, to hinder any advantage.


FOCUS: Emerging market deals

  • The recent Turkish referendum is expected to bring stability and allow investors to move forward, meaning that we will likely see debt issuances in the country in the near future;
  • Although larger markets are increasingly looking to diversify, so as to be less reliant on dollar-denominated bonds, too much of which is seen as a risk, emerging markets continue to want dollar-debt. Issuers know this, and the reality is that it is not going anywhere;
  • Liability management transactions were discussed, specifically the extent that the panel has seen recently. The market isn’t where it was six or seven years ago, no one is looking to repay debt - they just want to refinance it. There has also been a shift in the last year or two from distressed restructurings to mainstream debt restructurings;
  • The panel discussed the hugely anticipated recent Saudi sovereign bond issuance, and the question was duly raised as to how one might define an emerging market. Any sovereign or bank where you are uncertain what the process would be to get your money back, where you doubt transparency and if the legal system is settled enough to give confident you will get your money back in the future, is what the panel considered emerging;
  • If you are buying a 30-year Saudi bond, are you buying oil revenue, or are you buying into a diversified economy?
  • Most green bonds in emerging markets will need to be US dollar- denominated, as that is where the investors are – local currencies will also pose a FX risk;
  • The panel discussed the development of covered bonds in emerging markets, which is a very different market to others. These bonds attract entirely different investors, most of which tend to be in Europe and, therefore, in euros.


High yield developments

  • The market is up from last year but that may be more of a reflection of how low volumes were rather than how strong they are now;
  • Issuers have had a strong run of late pushing for more aggressive terms, but sponsors have become more adept too;
  • Pushback from bondholders is needed to change the landscape but they are a disparate group;
  • Emerging market issuances have a different feel to them but there is cross-pollinisation from more developed markets, which will lead to better standardisation;
  • While some doubt bondholders truly understand the extent of covenant packages, they are on the whole sophisticated investors who are specialists in the product and should not be underestimated;
  • As most covenant packages were developed under New York law there is a degree of uncertainty surrounding subsequent unpredictable court decisions;
  • There has been a trend, started by Mydentist, of EU entities listing their deals in the Channel Islands to circumvent the Market Abuse Regulation.


Dealing with the retail structured products delay

  • Now is the time for advocacy on any uncertain points surrounding the incoming Priips regulation – there is no more time to complain about the delay or the regulation itself;
  • Other than the new data protection regulation it is unique in that it allows the authorities to impose fines of up to three percent of annual turnover – which is focusing the minds of senior management effectively;
  • The stipulation that the KID be provided 'in good time’ is causing some confusion, particularly around deals that by nature are executed quickly;
  • There is no grandfathering so historic trades may well need KIDs produced for them;
  • The incoming Markets in Financial Instruments Directive (Mifid) II will extend Priips requirements to virtually every asset class;
  • Proportionality is important here as the general expectation is that for a more complex instrument, more information would be required.


Securitisation: is liquidity killing recovery?

  • The EU’s proposal for simple, transparent and standardised securitisation is noble but has changed in form so much since first suggested in 2015 that it risks damaging the industry further;
  • These changes will also disproportionately affect smaller issuers, which is the exact opposite of the EU’s goal, to boost small and medium-sized enterprises’ access to non-bank funding;
  • The industry is not aligned with regulators on what needs to be achieved – in fact the regulators are not aligned with themselves either;
  • The prospect of the new US administration reviewing risk retention rules is concerning as it creates even more uncertainty and raises the prospect of the US having a competitive advantage;
  • After Brexit, the general view is that the UK and US will become more closely aligned, and the EU’s slow pace of regulatory development may cost it;
  • The concept of equivalence for non-EU issuers, investors and other participants is at the moment unwieldy in the EU’s proposals, which verge on protectionist;
  • The market-led Prime Collateralised Securities initiative was again noble but reveals how potentially damaging labels can be for anything that does not achieve the label;
  • It may well be that the landscape is becoming too complex for investors.


 


 

 

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