Global stock markets are struggling. Justin Whealing finds out how capital markets lawyers are trying to stay afloat.

If Perth is the new black for corporate lawyers, then Sydney and Melbourne are just black.

Nick Humphrey, a private equity specialist and head of the corporate group at Sparke Helmore, is speaking to Lawyers Weekly from Perth, where he joined hordes of lawyers from the east coast to attend the Africa Down Under conference in late August.

Humphrey is based in Sydney and you get the feeling that, despite protestations that he is busy, he wouldn’t have had too much trouble clearing his schedule to attend the Perth conference.

Issuers aren’t coming to the market because of global uncertainty, and you can’t blame them when you look at the post-IPO trading performance of companies such as Myer and Kathmandu, both of which launched large IPOs a few years ago.

“There is no ability to raise capital in Australia at the moment,” says Humphrey. “It is really difficult to do an IPO or do a raising and almost impossible if you are in the exploration stage.”

With the M&A and capital markets in the middle of a slump, east coast transactional lawyers are doing it tough. It is not just energy and resources lawyers that are currently finding that Perth is, to quote that great warbler Beck, where it’s at.

“You would be crazy if you didn’t spend more time in Perth,” says Humphrey. “Half the M&A deals are mining related and private equity funds and the institutions are very interested in mining services businesses.”

The one ray of light for the Australian capital markets has been the mid-cap mining sector.

In August, the Australian Securities and Investments Commission (ASIC) relaxed the capital-raising requirements for small to mid-cap companies from 15 per cent to 25 per cent.

There are more than 1600 of these companies listed on the Australian Securities Exchange (ASX) and more than half of those are from the resources sector and based in Western Australia.

“I am very supportive of the developments to increase to 25 percent the funding levels that can be raised in the smaller to mid-cap companies,” says DLA Piper partner David Morris, who is also the global firm’s joint corporate head for the Asia-Pacific region. “There has been lots of talk about that being very positive for the energy and resources sector.”

While energy and resources and capital markets lawyers all around Australia have welcomed this move from the ASX, other actions from the regulators have been questioned.

In late August, ASIC posted a media release that warned consumers not to be “dazzled” by hybrid securities and to be aware of the risks and complexities surrounding these products.

Given that hybrid securities have been the strongest-performing area of the Australian capital markets this year, the release drew raised eyebrows from lawyers and business commentators across the board.

Is ASIC sabre rattling and scaring people?

“ASIC is right to encourage investors to read documents carefully and be aware of where their strengths and risks are, but I query what ASIC is saying about disclosure,” says Stuart Byrne, the national head  of the equity and capital markets group at Clayton Utz.

“Are they concerned current documents, which ASIC has run a close eye over, are not clear enough and, if they are not, can they tell us why they don’t think they are?”

Healthy hybrids

One of the few rays of sunshine for equity capital markets lawyers such as Byrne has been the hybrid market, which he describes as being “vibrant”.

Hybrid securities involve elements of both debt and equity securities and they are often used by listed companies to boost their coffers, while paying interest to investors in return.

It is not surprising that this form of securities is popular when equity markets are down.
In February this year, Allens and Freehills acted on a $1 billion hybrid security deal for Westpac, and in November last year Byrne led the Clayton Utz team that advised Origin Energy on its $700 million offer of subordinated notes.

“There is a view that more hybrids are to come,” says Byrne. “There is still activity in the market, particularly around balance sheet strengthening and filling in gaps from lower-than-expected revenues.”

Muscling in

With global law firms arriving in Australia and looking to get their slice of the M&A and capital markets pie, the corporate strategies of large and mid-tier firms have been tweaked and, in some cases, completely overhauled.

One firm that fits into the latter category is Sparke Helmore.
Nick Humphrey has bucked a trend by leaving a global firm to join a much smaller domestic firm. He was the head of private equity at Norton Rose but chucked that in at the start of this year to build up the corporate practice at Sparkes, whose traditional strength lies in government and insurance work.

“Norton Rose were pushing away from the mid-market and pushing away from private equity, and the mid-market and private equity is where my clients are,” he says about his decision to leave Norton Rose.

Nevertheless, it is a dangerous strategy to take on the large national and global firms on a ground where they are very comfortable and have most of the key players.

“I don’t think you need to be a global firm to get world-class service,” he says.  “We are used to dealing with the international companies, so in a way it doesn’t matter that we are only a domestic firm because you are dealing with domestic assets covered by domestic law.”

Humphrey has used his connections with key clients such as the Macquarie Group and Westpac to build up Sparkes’ corporate capabilities.

Since January, the firm’s corporate and finance team has grown from 12 lawyers to 30 lawyers, with Sparkes closing 17 deals valued at a total of $400 million.

Interestingly, Humphrey reckons his client base is roughly evenly split between domestic and international clients, which is the same as David Morris at DLA Piper.

That is where the similarities end. Not surprisingly, Morris reckons that, as business becomes more global, global law firms have an edge on domestic rivals.

However, unlike global competitors in Australia such as Clifford Chance and Allen & Overy, DLA Piper does not seek to act for the large financiers on IPOs.

“We are an issuer-based practice, but we are building our broader position in the marketplace,” says Morris.
In June, the head of DLA Piper in the Asia-Pacific, Bob Charlton, flagged to Lawyers Weekly that the firm was looking to boost its stocks in the corporate area.

“In banking and finance, I think we need to look very carefully at where we stand in the market and look at what good clients like Westpac expect from us and make sure we can deliver that adequately,” he said. “Is it sensible, now that Clifford Chance and Allen & Overy have moved here alongside Freehills and King & Wood Mallesons, ... for us to really be having a crack at general lending work for the National Australia Bank? That is a question we need to think about.”

When it comes to the capital markets, DLA Piper, like all firms at the moment, are just happy with whatever work comes their way. Like all lawyers in this area, Morris is talking up the prospect of a recovery but, like his colleagues within those other corporate groups, any talk of optimism for the future is couched with caveats, qualifications and assumptions.

“We see that people are keen to get back into the capital market but certainly what we are looking for is a catalyst to create that opportunity for others,” says Morris, who adds that the withdrawal of the $3 billion TRUenergy IPO last month was a big blow to the market.

“The demand is there and what we need is some core stability in the global position and that should result in more companies looking to explore opportunities in the IPO market.”

Like yoga instructors, capital markets lawyers are willing to try many different positions to achieve core stability.