In a nutshell
The world's capital markets are trading floors (either real or virtual) on which cash-hungry businesses obtain funding by selling a share of their business (equity) or receiving a loan (debt) from lenders. Capital markets lawyers advise companies ('issuers') and investment banks ('underwriters') on these complex transactions. Here are some of the terms you'll encounter.
Equity capital markets: where a private company raises capital by making its shares available to the public by listing itself on a stock exchange and executing an initial public offering (IPO), as a result of which it becomes a public company (or plc). The London Stock Exchange (LSE) and New York Stock Exchange (NYSE) are the most prestigious exchanges, but companies may list on many other exchanges worldwide. Once listed, a company's shares can be bought and sold by investors at a price determined by the market.
Debt capital markets: where borrowers raise capital by selling tradable bonds to investors, who expect the full amount lent to be paid back to them with interest. Structured finance: this area can get gloriously complicated, but its aims are simple – to increase liquidity and limit or trade on risk, which in turn offers up extra funding for borrowers.
Derivatives: financial instruments used by banks and businesses to hedge risks to which they are exposed due to factors outside of their control. The value of a derivative at any given time is derived from the value of an underlying asset, security, index or interest rate.
What lawyers do
- Carry out due diligence on issuers and draft prospectuses which provide information about the company and its finances, as well as past financial statements. Under current rules, a prospectus must comply with the requirements of the EU's prospectus and transparency directives.
- Negotiate approval of a listing on the stock exchange. This involves the submission of documentation, certifications and letters that prove the client satisfies the listing requirements. As soon as a company undergoes an IPO, it will be subject to all the rules and requirements of a public company, so the necessary organisational structure must be in place before then.
- Work with underwriters and issuers to draw up the structure of a security and help the parties negotiate the terms of the structure. The underwriter's lawyers draft most documents related to a bond issue. An issuer's lawyers will comment on them and negotiate changes.
- With derivatives, lawyers communicate back and forth with the client discussing legal issues and risks related to various possible structures for the product, as well as suggesting ways to resolve or mitigate those problems and issues.
- Issuer's and underwriter's counsel work together with a team of bankers, accountants, insurers and an issuer's management to get securities issued.
Realities of the job
- Capital markets lawyers are mostly based in the City of London. The biggest firms have specialist departments focused on capital markets or one of its sub-groups, while mid-size firms may lump capital markets work in with corporate.
- Clients can be very demanding and lawyers work very long hours. On the plus side, large law firms usually have strong and close relationships with investment bank clients and financial institutions, meaning that trainees and NQs can get frequent client contact.
- Lawyers have to gauge the needs and personality of the company they're working with and require an aptitude for responding to and resolving issues as they arise.
- Capital markets lawyers feel all the highs and lows of market forces – if you're trying to get a deal done market conditions often matter more than the willingness of the parties involved. Even if a deal has been organised, unpredictable market conditions can mean it falls through.
- The total value of IPOs on the LSE's Main Market and AIM (its junior stock exchange) for the first half of 2018 was £3.9 billion, a slight increase when compared to the first half of 2017 (£3.8 billion). Good news? Look a little further back and you'll notice the first-half numbers for 2014 and 2015 were far higher (£13 billion and £6.8 billion respectively). While political uncertainty is still present while the Brexit negotiations are ongoing, the lack of potentially destabilising votes in 2018/19 means there's a chance to pave the road to recovery. EY predicted a rush of activity for the remainder of 2018 before Brexit comes into force.
- Inflation is coming and there's talk that bonds – a resilient market since the financial crash – may be on the wane. Both the US Federal Reserve and Bank of England have recently raised interest rates a little (a tell-tale policy decision to curtail inflation). However, these increases do make high-yield corporate bonds more attractive, especially those which are lower rated (their shorter maturities are key). Global bond funds have been hit by heavy redemptions lately, partly due to investor fears over central banks pulling back from their decade-long quantitative easing programmes.
- Bonds are suffering, but stocks are soaring. The US stock market is being buoyed by Trump's perceived pro-business, anti-regulation stance and his infrastructure promises. But it's not alone: the FTSE 100 and the German Dax also show equity prices reaching record highs. Reasons for this include China's massive 'Belt and Road' initiative (a boon to mining companies) and a commitment to an oil output cut by Russia and Saudi Arabia.
- London is a hub for capital markets work for the whole of Europe, but Britain's exit from the EU and its single market for services could see activity previously undertaken in London shifting to cities in the remaining 27 member states, especially Frankfurt. Several trading platforms are already looking closely at Europe and its post-Brexit contingencies, as they can no longer rely on London for their access to the single market (through passporting rights). Cboe Europe and TP ICAP, two of the biggest UK-headquartered trading groups, have set out plans to move to Amsterdam and Paris for this reason. They’ll follow in the steps of MarketAxess, which opened in Amsterdam in June 2017. Then there's the clearing of euro-denominated transactions in the UK, a £755 billion-a-day trade. Euro-clearing involves financial products priced in euros being traded between 'clearing houses' which act on behalf of investment banks and the like. It's not unlikely that Brussels will grab a slice of the pie during negotiations.
- Before Brexit, Europe hatched a plan for a Capital Markets Union (CMU), to achieve a shake-up of financial markets within Europe. At its heart it aimed to rid businesses of a dependence on banks for investment, making it far easier to access capital markets, and encouraging investment across borders. But in light of Brexit, these plans have gained even more significance for the EU. The initiative will now look to strengthen the capital markets of the remaining countries. In July 2018 several EU member states published a joint statement urging the European Commission to take more decisive action as Brexit looms.
- The LSE's Main Market is showing an increasing geographical diversity. A 2018 report by LexisNexis revealed that in 2017 71% of newly listing companies were incorporated in England and Wales, but the remaining 29% were incorporated in seven other jurisdictions. In 2016 all newly listed companies on the Main Market were incorporated in England and Wales.