UK - Equity capital markets 2010
While IPOs are a long-forgotten word in the City of London, rights issues and share placements have been rampant this year as the tight bank credit markets force companies to seek alternative financing. While there have been arguably more rights issues in the market this year, lawyers report that sponsors have been unable to make their minds up, flipping between a rights issue and an open offer until the last minute.
Barclays, Lloyds TSB and the Royal Bank of Scotland got the ball rolling with multi-billion pound issuances. When HSBC announced its £12.5 billion rights issue, some commentators were wondering how much liquidity was left in the market.
A lot, as it turns out. The property companies were next to go to market, followed more recently by the commodities companies. "The amount of money raised from rights issues has been beyond expectations," says one partner. Another partner adds: "We're seeing a continued trend for strong companies being able to raise money in this market. The fact that Rio Tinto is getting money means that the cash is still there for the right company."
For law firms, this has led to a strong work flow for equity capital markets lawyers over the past year. Rights issues have fed back into more work, especially the banks that want to buy back their preference shares from the UK government. Cashbox placements have also been on the increase.
The US has been a key destination for most rights issues and share placements due to its bigger pool of investors. "We've seen quiet a few issues where the banks want to go to the US, much more than 6-12 months ago," says one partner. "Documents are getting longer and clients want documents done to US 10B5 standards. It's wider audience; the US has bigger pockets." Herbert Smith and Ashurst have been particularly busy with US placements this year.
However while UK companies have been a solid source of work for law firms, the emerging market work that had been flooding the LSE and Aim markets over the last few years has dried up. This has caused some problems for US firms such as Skadden Arps and Cleary Gottlieb who relied on a steady stream of these mandates from countries such as Russia and Kazakhstan.
Looking forward, IPOs are not expected to reappear in London until 2010 at the earliest. Private-equity companies are expected to be among the first to get involved, using IPOs to spin-off various portfolios. "Private-equity companies are very highly leveraged and need to unwind to make them viable," says one partner. "They need capital injections, but this wipes out the returns of the shareholders over the past few years."
Foreign companies are also expected to make a return to London, with China tipped to be a strong source of mandates in coming years.
A full firm-by-firm analysis of the UK equity capital markets can be found here.