The IFLR European Capital Markets Forum returned for the 11th successive year on April 2 2014. International Financial Law Review, supported by the International Capital Markets Association, brought together over 280 bankers' counsel, corporate counsel, funds counsel and leading private practice lawyers at the Waldorf Hotel in London.
Below are the key takeaways from the day:
High yield: Maximising deals in new areas
- Companies in Spain and Italy have increasingly turned to high yield as domestic credit lines are cut, with 40% of high yield offerings in the first quarter of 2014 from Iberia and Italy;
- The growth in emerging market issuers has created challenges around educating those corporates on high yield disclosure requirements;
- In-house teams working on high yield are stretched. They are increasingly relying on secondees to review documentation;
- There is concern around the potential for conflict of interest from outside counsel when private equity sponsors were involved on deals.
- Into 2014, high yield is facing increasingly stiff competition from cov-lite and cov-loose lending as alternative sources of corporate financing;
Equity capital markets: Increased confidence from IPOs
- Pre-deal research has grown considerably over the past 18 months, as issuers seek more comfort before listing;
- But there are tensions between the so-called early look, of showing investors overviews of listing candidates, and underwriters leaving themselves open to litigation in the event of misspelling allegations
- Pre deal research is prohibited in the US. Deal guidelines even prohibit pre deal research being sent to parties in the US on a European deal.
- The next wave of emerging market issuers are sub Saharan African companies. Banks face challenges doing business there where they are historically underrepresented
Debt capital markets
- Following regulatory and tax clarifications, banks are queuing up to issue Additional Tier 1 (AT1) instruments;
- Société Générale's decision to put on hold its AT1 deal does not signal that investors have reached their AT1 capacity. The market will maintain itself over time;
- Europe's annual Tier 2 volumes have been $30 billion (2012), $20 billion (2013) and $15.3 billion (year to-date). It's possible banks are issuing Tier 2 to cushion Tier 1 investors;
- The market is interested in how secured bonds' exclusion from bail-in under the EU's Recovery and Resolution Directive (due to be passed this month) will impact investment in different bank bonds;
- Europe's sukuk market will grow, but whether it grows as fast as people predict depends on government appetite to issue.
Securitisation: continued growth amid prescriptive rules
- The cloud of regulation is holding the market back, but there are positive signs activity will pick up – including in periphery countries;
- Opinion is divided on the success of the Prime Collateralised Securities (PCS) label, but a link-up between PCS and regulatory initiatives (the liquidity coverage ratio, for instance) would see it takeoff;
- CRD IV's skin-in-the-game requirements have only had a significant impact on collateralised loan obligations, commercial mortgage-backed securities, and whole business securitisation;
- There is cautious optimism that the next Basel paper on securitisation will recommend lower risk weights;
- Only a small number of European investors are using the loan-level data available via the European Data Warehouse, but bank originators and arrangers are encouraged to use it as it proves to the regulators that transparency is improving.
The potential of retail structured products
- On Tuesday the European Parliament and Council agreed to introduce a Key Information Document (KID) as part of a Packaged Retail Investment Products (Prip) regulation, which was proposed by the European Commission in 2012;
- Level 2 rules should be finalised by September 2016, at which time the Prips regulation would become directly applicable;
- It is not yet clear if the Prips KID will replace the summary prospectus under the Prospectus Directive (PD);
- The UK's strict structured product governance requirements is making it difficult for the country's manufacturers and distributors to compete internationally;
- Regulators on the continent are following the UK Listing Authority's focus on comprehensibility when making sure prospectuses meet all PD requirements.
FOCUS: Successful issuances in diverse emerging markets
- Senior debt capital markets issuance has been record year on year. The first quarter of 2014 in Central and Eastern Europe, the Middle East and Africa also looks strong;
- However, the challenge is to get clients into a position where they can take advantage of windows of opportunity to issue. The Arab Spring, tapering comments from the US Federal Reserve and tensions between Russia and the Ukraine have presented challenges;
- A key trend since the global financial crisis has been unpredictability around third parties in transactions. Challenges include increased legislation around financial sanctions, the ability of rating agencies to change their minds, and changing requirements from listing authorities;
- Another big challenge is increased levels of caution. Investors are now reading prospectuses very closely, asking more questions and doing their own homework before a road-show;
- Increasing variety and complexity in the emerging markets space is set to be a key trend for the future. Diaspora bonds, green bonds, local currency issuances and hybrids are all coming to market.
Wall crossing and pre-sounding
- Wall crossing involves calling potential investors to brief them about a major forthcoming transaction by a publically traded company before the public announcement to the market;
- In many cases, the fact of the transaction is the inside information – there is no need to go any further;
- If the investment bank is not mandated to do a transaction but would like to gauge interest in a deal, that is not inside information and does not constitute wall crossing;
- It is important that wall crossing be done pursuant to an agreed script, which must be vetted by lawyers or compliance officers. In Europe a wall crossing call is always recorded;
- But the US approach to wall crossing is different. It happens much less often than in Europe and wall crossing calls generally do not take place on recorded lines.
Roundtable: Regulation in 2014/2015
- The current conformance period for the US Volcker rule ends on July 21 2015. After that date, banks must be in compliance;
- There is no clear demarcation in Volcker regarding what is, and what is not, proprietary trading. Instead, regulators will use reporting metrics to identify the outliers;
- The final version of the Volcker rule widened the market-making definition significantly, allowing banks far more flexibility;
- However, between the draft and the final version of Volcker, banks' hedging ability was significantly curtailed. This means the market-making exemption will be relied on most extensively;
- The US approach to regulating derivatives has garnered more support than its European counterpart. US authorities set a date in the future for when certain parties will have to clear certain products. Europe's frontloading provisions, which state that three dates will determine clearing, mean a trade that has already been executed may have to be sent to a clearing house years later.