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.
- After strong figures in terms of IPOs and capital raised in 2014 and 2015, the UK market has slumped recently due to uncertainties in the run-up to and after the recent EU referendum. Funds raised by UK companies fell to $3.3 billion in the first two quarters of 2016, less than half the figure recorded in both of the preceding two half-year periods. London's AIM market has shrunk, with companies choosing not to list on the market because of the financial strain and anxiety surrounding Brexit. A stabilised political backdrop and lucidity over the nation's changing relationship with the EU are thought to be key to activity picking up again towards the end of 2016.
- The bond market has been on somewhat shaky ground recently, with yields for corporate bonds reaching lows not seen in half a century. Increasingly, investors are choosing lower-graded corporate bonds so as to get more yield. Experts see this as the result of Brexit uncertainty and the ongoing Eurozone crisis. Nevertheless, high-yield bonds remain a strong area of activity for City law firms, especially the magic circle and US firms in London.
- Prior to the Brexit uncertainties, lower oil prices, historically low interest rates and improved financial market conditions meant that banks were coughing up more money for UK businesses, who felt increasingly comfortable taking out loans.
- The possibility of a very different trading landscape in Europe is on the horizon. The UK's access to the single market now depends on political negotiations with Brussels, and senior EU figures insist there can be no cherry-picking of the best bits of access to the single market. London is a hub for capital markets work for the whole of Europe, and Britain's exit from the European Union could see activity previously undertaken in London shifting to the remaining 27 EU member states, especially to Frankfurt.
- Goldman Sachs' global markets team expects a divergence of global monetary policy as the Federal Reserve tightens its grip and the European Central Bank and the Bank of Japan loosen theirs, alongside increased trading in relation to emerging-markets.