practice area articles
Global Capital Markets Update
By Paul Hastings Professional
Securities and Capital Markets Global Outlook
What are the important developments shaping investment trends in today’s markets? Where can clients find the most promising opportunities to unlock value—and what challenges may block the way? Our partners share their insights on what to watch for as 2019 draws to a close.
During the past quarter the European capital markets have been dominated by three key trends influencing market actors. Each has shown remarkable longevity and affected businesses across the continent.
1. The Eurozone has revisited its monetary policy, pushing a more expansionist message (but not investment) while trying to manage the sharpening decline in national economic activity.
2. The continuing story of Brexit has overhung markets since last March, heading ostensibly to resolution at the end of October but building caution into the calculations of investors and business management alike.
3. We have seen the gradual breakdown in established patterns of cross-border trade and investment, as concerns about U.S. tariffs and protection of European economic interest complicate investment opportunities.
Looking to the end of the year and beyond, we asked London Capital Markets partner
What are the most significant ways that EU monetary policy will affect capital markets?
A longstanding objective of European integrationists remains the creation of a unified capital market for the Eurozone, which is still a series of defined and differentiated national markets. Political efforts to address this have not advanced, but the European Central Bank (ECB)’s recent reduction in borrowing rates nonetheless affects banking markets throughout the EU, pushing interest rates in stronger economies into increasingly negative yields. About half of all European government bonds and 20% of European investment-grade corporate debt now has negative yields. This phenomenon is not confined to Europe; while negative-yielding U.S. debt has been falling, worldwide it has risen from $8.3 trillion to $17.0 trillion in the past nine months alone.
For borrowers, the clear advantages of reduced acquisition costs have buoyed European M&A activity for companies that offer good fundamentals. On the downside, the low cost of debt has enabled less robust companies to extend their financial lives when restructuring or acquisition might be the better path for their stakeholders. Whether ECB policy will deliver a stronger path to growth for Eurozone countries remains less certain. The Netherlands, traditionally a conservative in economic debates, has signalled a willingness to boost domestic investment, but Germany – the real lynchpin of fiscal austerity in the Eurozone – has shown little appetite to follow an expansionist path.
What difference will Brexit make to the Eurozone’s economic development?
Following the Brexit vote, the UK confounded many expectations that an immediate downturn would follow—but recently there are signs of growing caution. Nonetheless, given the lacklustre performance of Eurozone countries overall, the UK has not fared badly. This complicates the task of plotting the scenario between the post-Brexit UK and the Eurozone – especially as most aspects of that future relationship remain to be negotiated. Undoubtedly investment decisions have been delayed and expansion curtailed, but to date, the resilience of the UK economy overall has enabled the UK to keep pace with its EU counterparts.
Post-Brexit, major issues need resolution, including how and when regulatory and investment practices are harmonized or divided. Given recent UK developments, securing legal and regulatory clarity to the greatest possible extent will be an imperative for growing businesses on either side of the Brexit divide. Navigating these will require considerable legal expertise and strategic agility.
How can European business tackle the impact of potential higher barriers to entry?
Considerable focus has been given to the current U.S. policy of erecting or threatening tariffs on European car imports, following on from tariffs imposed on other European exports to the U.S. Interestingly, this coincides with developments within Europe and the UK to increase scrutiny of, and in some cases block, inbound investment in industries deemed to be strategically important or central to a national economy.
While the parallels are not exact, they are telling and reflect an increasing focus on protecting national interests as opposed to supporting the existing global and regional linkages that have characterized the development of the global economy over the past several decades. For companies that are active in cross-border investment, legal complications will require expert and informed support.
Foreign investors who want to put money into U.S. businesses that rely on sensitive technology, infrastructure and data will face greater scrutiny after February 2020 following recently-introduced regulations that strengthen the criteria and coverage of CFIUS (the inter-agency Committee on Foreign Investment in the United States) to review deals in tech, infrastructure, data and even real estate. Both Germany and France are among a host of EU countries introducing more rigorous screening of foreign takeovers of EU companies, with a particular focus on acquirers with links to foreign governments, such as China. The UK recently called in for review the acquisition of Cobham by U.S. private equity firm Advent International, a deal in which Paul Hastings advised the agents and underwriters for Advent.
Dong Chul Kim
The Korean IPO market has been quiet so far this year, with no significant offerings with an international tranche. However, that will change in Q4, with two issuers with an offering size of approximately $400 million each recently filing their offering documents publicly.
While capital markets activity in North Asia more broadly has been affected by wide-ranging political and economic factors, economic activity within and between major economies in the region has shown some resilience, especially in areas such as technology and healthcare.
Teri O' Brien
Poor post-IPO performance by some highly anticipated issuers has recently dampened enthusiasm among major tech investors for IPO exits. The cost and transparency of the IPO process has led some well-funded private issuers to look at direct listing, which eliminates underwriting fees. Some companies – such as AirBnB – are under pressure to ensure employee stakeholders can realize the value of their stock options (in the case of AirBnB, some options expire in 2020), and direct listing may provide stakeholders with a path to liquidity.
In the pharma sector, two major acquisitions (Bristol-Myers-Squibb for Celgene and Abbvie for Allergan) seemed to promise a robust year for deal making, but beneath the headlines, the overall pace of activity has slowed. Some blame is placed on over-valuation of potential target companies and on the ample funding available from private equity firms keen to add promising new companies to their portfolios. Pfizer bucked the trend by paying an outsized $11.7 billion for oncology specialist Array, and Gilead’s collaboration deal with Galapagos will certainly add to the dynamics of a somewhat uneven year.
Latin America’s largest economies saw a tumultuous election year in 2018, followed by political and economic volatility both outside and within the region. Consequently, 2019 has shaped up into a fairly unpredictable year for Latin American capital markets. Brazil has nevertheless played host to healthy activity, with new business-minded government leadership focused on privatizations and reform (although frequently lacking a tactful, inclusive approach). Historically low interest rates led to frothy domestic and cross-border debt issuances and liability management in the first half of the year, and we’ve seen a real spike in Brazilian equity deals (both IPOs and follow-on offerings) heading into Q4. There’s cautious optimism that 2020 might be even stronger; fingers are firmly crossed.
Highlights of Our Recent Client Successes
Advised Global Fashion Group on its private placement of €330 million convertible preference shares to a group of 21 existing shareholders of the company.
Advised GeNeuro on its €63 million IPO and listing on the regulated market of Euronext in Paris, along with underwriters Bryan Garnier & Co. and Société Générale.
Advised Midcap Partners and Oddo BHF as joint lead managers and bookrunners for the share capital increase of Wallix Group, a software company providing cybersecurity solutions.
Advised Genkyotex on its issuance of convertible notes with warrants attached to YA II PN Ltd, an investment fund managed by Yorkville Advisors Global LP, a U.S.-based management firm.