IFLR's EU Capital Markets Forum 2018: key takeaways

Author: Amélie Labbé | Published: 19 Apr 2018
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Debt capital markets and the CMU

  • The landscape now is different from when the latest Prospectus Directive (PD3) proposal came out: the wholesale regime has been retained which is a big win for issuers;
  • Product governance would win from having a specific wholesale market but there are difficulties in organising this segment (can a stock exchange be held liable for banning retail investors?);
  • One problem in differentiating retail and wholesale investors is that trades are conducted by member firms, not individuals;
  • There’s a tendency for some issuers to go to other jurisdictions with lower disclosure requirements (HK, Channel Islands or Singapore) but the market doesn’t need a race to the bottom, especially in the HY space. There has been a gradual decline in debt listings, with issuers now going to MTFs;
  • There is a lot of uncertainty with Libor: what happens if you have contracts with maturities extending beyond 2021? No consistency of approach in UK and EU;
  • Last year was all about the doom and gloom of Brexit but 60 IPOs were listed in London. Three equity prospectuses were passported into London, none the other way. There are still issues surrounding the passport, issuers want certainty.CMF

Is the IPO market broken?

  • Are EU markets really reticent to dip their toe into London now? There is more dialogue about which exchange to list on but more conversations are about Frankfurt and NYC now, because of Brexit. This is interesting considering 30% of listings in the EU come from UK companies;
  • The UK Financial Conduct Authority is focused reforming the IPO regime and restoring the centrality of the approved disclosure document. It is also trying to level the playing field between connected and unconnected analysts (give everyone same access) and improve price discovery for the buy-side in a similar way to the US approach;
  • In the US, in a basic domestic IPO, anyone can go to the SEC website and look at statement of IPOs, as these are published months in advance: flow of information is made public much earlier;
  • Will these changes be exported into the EMEA from the UK: are regulators driving this, or are investors and investment banks? It’s primarily the latter two categories.

Emerging market focus

  • Determining if a market is 'emerging' is based on several factors: its competitiveness, inclusiveness, and the fact that it’s well governed, integrated and resilient (EBRD);
  • Another way to assess if a market is emerging is looking at who buys the debt: this is not necessarily a ratings question but who are the investors;
  • Are emerging sovereigns treated differently than their non-emerging counterparts? No, there are no differences in disclosure requirements, it would be difficult to do so. That being said, in some cases, a country or region does provide a safety net (like the EU for Greece for instance);
  • Why does the US dollar still dominate the market? It’s based on its history, liquidity, limited risk and practicalities (currencies need to be freely available and transferable). The market is seeing more denominations in other currencies though, like the euro;
  • Turkey is one market that is getting increasing amounts of interest: it’s interesting because of the variety of products. It may specialise for now in short term instruments, and has a small investor base but it’s very resilient.

Securitisation

  • Simple, transparent and standardised (STS) securitisation is proving a grey area in terms of interpretation: companies are having to change documentation and set up robust governance procedures to face potential liability issues;
  • STS securitisation is not simple (72 criteria), not transparent (traffic light system is uncertain) and not standardised (STS in Germany is not the same as in France): hopefully securitisations won't shrink and become a niche product;
  • Smaller players will think twice about entering this market, leaving it to the larger players: securitisation is not about funding, it’s about capital and risk. Basel is tilting the scale towards ABS.

High yield deals in 2018

  • The HY bond market is no longer as skewed to new issuers anymore. Investors want new names but they remain relatively disciplined;
  • MAR was fairly easy to comply with, until it pushed down to include MTFs and it became difficult for them to comply with the inside information requirements;
  • Practitioners seem to interpret ad hoc disclosures in different ways. It has not been easy to form a team that has the authority to make disclosures in the time needed; 
  • The problem comes when an issuer chooses to do market soundings to comply with MAR, but investors hate to be recorded and might not be honest;
  • Advantages to a HY bond are its increasing visibility on certain markets and its ease to get a credit rating. A tap issue helps to get additional liquidity and diversifies debt;
  • The process needs to be made simpler. We have imported a lot of concepts that are not applicable to the UK and added more complexity to them.

Pushing structured retail products through

  • Performance scenarios in Priips can make short terms changes more favourable, but there needs to be more guidance so to avoid deterring issuers;
  • Mifid II product classification is quite generic and looks similar to Priips from a systemic approach;
  • Firms need to review their obligations under Mifid II each year, so that they can discharge them. It has to be an ongoing approach, documented and based on high-level expertise.