The World Is Flat: Operating In Different Capital Markets

Monday, October 1, 2007 - 01:00

Editor: Please tell us about Bracewell & Giuliani's international practice.

Carey: I have been at Bracewell & Giuliani since April 2007, having arrived as a lateral partner from Bingham McCutchen. I came to New York with a few other Bingham partners, including Evan Flaschen. Prior to joining Bingham, I was in London for six years where I was heavily involved in international financial transactions. The opportunity of continuing that involvement attracted me to Bracewell. At the time, Bracewell was in the process of rapidly building its New York office's capital markets capabilities to offer hedge funds help with all aspects of distressed debt, including M&A, high yield or bank debt, etc.

At the time I joined Bracewell, not only was the New York office expanding, the firm also had a mandate from some of our clients to increase its presence in London - which it has done, including hiring Adam Mozel, who is the head of our London office. The expansion of our New York office enhanced our ability to handle high-end, high-margin transactions, whether they involve capital markets or international finance in general.

Our London office is the link between our Kazakhstan office and the New York office. We selected Kazakhstan as an office site at the behest of our energy clients. However, since we opened that office, we have done a lot of non-energy work, especially numerous debt deals for Eastern European banks, in Kazakhstan - one of the reasons we have expanded our London office. Our emerging market work for banks has become one of our most important practice areas. We went to Kazakhstan thinking that the focus of our work would be primarily energy related and were surprised to find ourselves doing so much bank debt financing. While in London, I was involved in various deals for Russian and Polish banks and steel companies, using New York law. Our clients in this region are looking for finance capabilities and English law capabilities in the London capital markets.

Editor: Who are your clients in the New York office?

Carey: In the New York office we are involved with numerous deals that are in process or being done out of our London or Kazakhstan offices. We represent energy companies in both Houston and Kazakhstan in their dealings with the Kazakhstan government, in financings and in meeting their other legal needs in the country. We have the biggest presence in Kazakhstan of any law firm. We have done a number of bank deals with Kazakhstan banks such as private placements and convertible debt deals. Any time you do an emerging market deal, whether it follows an established pattern, such as convertible debt or a straight private placement, or is a unique form of structured finance, there are a lot of wrinkles involved. It takes a herculean effort on all sides to work through the jurisdictional and government issues to do what amounts to a traditional offering in the U.S. Once done, these deals offer a template for future deals. We have done a number of bank private placements where Kazakh banks have been trying to raise money in the international capital markets as opposed to straight offerings into the Kazakh markets. When accessing international markets, you need English and U.S. lawyers to work through the issues because western investors expect to see a specific product. There is the dicho-tomy between western investors expectations and Eastern European issuers vastly different expectations. Bringing those two parties together into a structure that everyone is comfortable with is the challenge.

Editor: Is there also an issue of knowing your way around the regulatory structures?

Carey: Having worked on several of these deals, you develop connections in the government with the regulators. Because finance lawyers operate from a blueprint of how a deal is done, much of what is required is that they rely on good precedent established in a first instance (which they continue to improve). If this is followed, you have a front runner position with regulators if you are among the first to make the product.

Editor: What is your background in international capital markets?

Carey: Besides my background in emerging market deals in Russia and Eastern Europe, I worked for almost six years in London where I gained most of my international capital markets experience. I represented issuers and underwriters in high yield financings involving 144A, regulation S and acquisition financings - often for private equity firms. I was practicing during the corporate telecom boom when there was a ton of liquidity in the market and when investors were throwing money at newly formed telecom entities without benefit of upstream guarantees or security as well as sponsor-led deals for leveraged buyouts.

Editor: What are some of the key differences you have seen in rules across jurisdictions?

Carey: The SEC has proposed different reporting requirements over the past five or ten years for foreign issuers. The SEC accepts IFRS in foreign firm annual reports for foreign reporting companies. There is the European Prospectus Directive which involves European Prospectuses which were required by the SEC to conform to certain disclosure standards. The SEC has been looking into globalizing accounting standards as one of its major projects in its push to harmonize financial reporting.

Editor: Do you see further integration taking place towards a single accounting system?

Carey: It would be ideal if all nations went to one accounting system, but investors are comfortable with each of their own systems. Where you do have unease is in a purely private deal where there is not time to obtain financials in accordance with international accounting standards. For instance, suppose you have a high yield offering from a Greek company where there is no exchange offer and no registration rights. It is up to the deal team's discretion as to whether to go with local financials. Investors feel this is a gray area in which they do not find much comfort.

Editor: Does deciding on what capital markets to use make a difference with some issuers?

Carey: There seems to be a race to the bottom where people tend to go where it is easiest to list and where there is the least amount of regulatory oversight. One concern from a U.S. competitive standpoint was that there were a lot of firms doing special purpose acquisition company offerings (SPACs). This amounted to a blank check company which could issue stock before it held any assets. The investor was not told how his money would be used, other than generally with respect to acquisitions in a certain industry. The SEC did not favor these offerings. Another easy route to the public markets was the AIM market in the UK which offered the competitive advantage of streamlining the deal through the regulatory maze since deals did not require the heavy review that the SEC required. Many first-time issuers shifted to the AIM market.

Another strategy that proved popular at one time involved non-registered high-yield debt, an area in which I specialized, which could be issued in a narrow window to consummate an acquisition. When I first went to Europe, all the high yield offerings were done with an AB exchange or back-end exchange offer where you do a 144A, regulation S, high yield financing to which registration rights were attached. Because of various concerns, including liquidity as well as investors in the U.S. who bought the securities but were only allowed to hold a specific amount of restricted securities on their books, the issuer would promise within a time period to register the notes and do an exchange offer of unregistered for registered notes. This had the effect of streamlining the process of getting SEC approval. Investors got comfort from both the features of liquidity as well as the disclosure in those deals which would be the same because the offering memo on which you sold the original deal would not be different from the S-4 used to exchange the notes. One of the things that rendered this type of deal less attractive was that with Sarbanes-Oxley many investors in Europe were hesitant to invest so the market moved to pure private deals without exchange offers.

Editor: In order to sidestep Sarbanes-Oxley would some domestic companies go into the AIM market?

Carey: I have not seen an increase in domestic offerings going over to AIM other than SPACs.

I have seen an increase in pure private high-yield deals which have specific language built in as to what parts of Sarbanes-Oxley apply for reporting requirements. There is an appropriate competitive concern by U.S. regulators relating to the ease with which one can go through the AIM market. Some concerns are that lawyers have to work through the process, disclosing what they can and protecting against any risks (which might be insolvency regimes, enforceability of guarantees, etc.) where you are dealing with a European or other foreign entity that has operations in various jurisdictions. Those jurisdictions may not be necessarily different from the U.S. or, on the other hand, may not necessarily be what U.S. investors are used to or particularly like. Attorneys have to make the investors fully understand what the possible risks are and structure around them as best they can.

Editor: How has your firm acquired information about the various markets?

Carey: At the inception we may establish an informal "best friends" relationship with a leading local firm to ramp up more quickly. To acquire information it is an iterative process of talking to the company, consulting with local lawyers, drafting a document that reflects what the risks are and reviewing it until you are satisfied that you have adequately discussed the risks and tried to minimize them.

We know the Kazakh regulations and we know what the risks in Kazakhstan are. It is not so much cross jurisdictional as locally oriented. From my experience in terms of high yield offerings of chemical companies with operations in Spain, France or elsewhere you have to do your homework, just as with any registered transaction. We are using our knowledge of Kazakhstan to move into other emerging markets, such as Ukraine and Turkmenistan.

Editor: What should the role of counsel be in guiding a client into the correct structure?

Carey: After the advent of Sarbanes-Oxley, it was important in advising an issuer in a high yield offering to avoid the underwriter's urging to write an exchange offer into the document entailing registration rights, making the issue subject to Sarbanes-Oxley. It is far better to prevail on the underwriters as long as there is sufficient liquidity to make the deal a pure private placement, saving the issuer money as well as headaches.

If you are doing a lot of debt deals, much depends also on where the debt is located in terms of structural subordination - that is, if the debt is at the holding company level to what extent are upstream guarantees are available?

Editor: Are the structures of deals or clients different across jurisdictions?

Carey: The difference between a deal in Europe and the UK and a deal in the U.S. is that in the U.S. the model for debt financing has been to have both the high yield and the bank debt sitting at the same level for the same issuer. You just rely on contractual subordination. In Europe the model has been that not to trust contractual subordination and because the banks have a tremendous amount of leverage, they would make force the issuer to shove the high yield debt into a holding company so that it is structurally subordinated. The market has evolved so that the debt at the holding company level would have the benefits of contractually subordinated guarantees at the operating company level. That is an important structural difference that we have found.

Editor: How will the capital markets change in the future?

Carey: Recently there have been changes because of the worldwide turmoil owing to the liquidity crunch. For example, the European Prospectus Directive, the push to bring accounting standards into line across jurisdictions, represents a change. In terms of debt deals, whether they are domestic or international, the pendulum swings back and forth. When there is a lot of liquidity in the market, sponsors and issuers have a lot of leverage so covenants get looser and more issuer-friendly. When the pendulum swings the other way and there is little liquidity, you see a tightening of covenants with underwriters and investors getting more leverage, but with tighter covenants you generally see more defaults.

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