Download Dealmakers Income trust offerings keep lawyers hopping

Income trust offerings keep lawyers hopping
(National Post, Jan. 27, 2003)
By Sandra Rubin
Forty-two income trusts made their debut on the Toronto Stock Exchange last year. Retail
investors were delighted. Bay Street law firms were delirious.
Income trusts, which represented more than 86% of the total IPO value in Canada in 2002,
were a lifeline for top-tier corporate law firms at a time traditional initial public offerings
were conspicuously difficult to come by.
Legal fees for issuers’ counsel on a trust commonly range from $500,000 to $1-million or
more - with fees for underwriter’s counsel generally about a half to two-thirds of that.
The fees are higher than for conventional IPOs because creating a trust and bringing it to
market is far more complex and lawyer-intensive than most regular initial public offerings.
While all the major Bay Street law firms got trust work last year, Goodmans and Torys are
widely seen as getting the greatest concentration.
Industry insiders mention McCarthy Tetrault, Blake Cassels & Graydon and the Montreal
office of Stikeman Elliott as among the next group of firms that do a large amount of such
deals.
Torys filed 19 trust IPOs in 2002, although some have not yet closed or got pulled due to the
jam in the pipeline in the fourth quarter, while Goodmans had its fingerprints on the creation
of 18 new trusts. Both firms also did secondary offerings for existing trust clients.
Jeff Singer, a corporate finance partner at Goodmans, says the aggregate value of his firm’s
trust deals last year was about $3.5-billion.
“I can tell you they represented a significant proportion of our revenues,” says Mr. Singer,
who acted for RBC Capital Markets and BMO Nesbitt Burns on the $142-million TGS North
American REIT.
“One of the beauties of REIT and income trust work is it involves more than just the
securities group - it draws on the tax group, the corporate finance group, the real-estate group
and, depending on the segment, can also involve a particular regulatory group.
“It keeps a lot of people busy.”
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Goodmans, with a core team of about six people specializing in trusts, is especially dominant
in the area of real estate investment trusts, and estimates it has worked on more than 50% of
all the REITs traded in Canada today.
That phenomenon can be traced to its roots as a Bay Street law firm that allied itself with
entrepreneurs because it lacked the senior banking relationship that helped shape a Blakes or
a McCarthys.
Commercial real estate was its lifeblood in the 1950s and 1960s, making Goodmans a natural
to act for issuers on the REIT conversions that grew out of the real-estate wrecks of the early
1990s.
Goodmans has leveraged that experience to expand into business trusts and win underwriting
retainers. Of the 22 trust deals it worked on last year, 60% were for the underwriter.
Torys, in contrast, had deeper Bay Street institutional connections right from the start,
especially with CIBC World Markets, which is a market leader in income trusts and has
directed a lot of work the firm’s way.
Torys’ corporate finance and securities clients also included mutual funds that were - like
Goodmans’ real estate entrepreneurs - forced to restructure when commercial real estate
values collapsed.
Jamie Scarlett, a corporate finance partner at Torys, says the firm may have been wellpositioned, but it also decided to commit resources to developing trust expertise early in
2001, after seeing investment bankers so interested in them.
“And when I say we invested in the area, we really racked up the non-billable time,” says Mr.
Scarlett.
Today, Torys has about six partners and half a dozen associates who do principally trust
work.
The firm also made the most of its U.S. presence, the largest of any Bay Street law firm. It
worked with CIBC in Toronto and New York, along with a tax partner from Chicago-based
Kirkland & Ellis, to develop a structure that would allow them to IPO a firm with a U.S.
operating business by using a Canadian trust.
The result was Heating Oil Partners Income Fund, the first income trust with a U.S. operating
business. It’s a model Torys has been promoting with its banking clients.
Of seven of the 19 trust IPOs it filed prospectuses for last year, with a total value “north of
$2-billion,” six involved U.S. companies and in all but one case, Torys was on for the
issuers.
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“These transactions, cross-border transactions, require special expertise and experience particularly with the U.S. companies coming to Canada looking for local counsel who know
how to do it,” says Mr. Scarlett. “We’ve been fortunate that a number of our underwriting
clients have recommended us to a number of issuers.”
Other firms have found other ways to win market share.
Garth Girvan, a mergers and acquisitions partner at McCarthys, says his firm has played off
its expertise in areas such as power generation and mining to attract work.
“Putting these types of transactions together requires industry expertise,” says Mr. Girvan.
“For example, in the power industry, trusts are based off power-purchase contracts that
guarantee cash flows into the future. An understanding of this type of contract is needed to
structure such arrangements. The great thing about these for law firms is that you can’t draw
up a template. Each one is unique.”
McCarthys acted for the issuer on the $250-million Noranda Income Fund and for the $212million Clean Power Income Fund.
Stikeman Elliott believes its Montreal tax group has been a real business draw for
underwriters looking to structure trusts that involve a Quebec company.
“We have dominated the Montreal market in income trusts,” says Kip Cobbett, the managing
partner in that city. “And the reason is, we have a very, very creative tax group.”
In fact, Stikemans was on for three of the largest IPOs of any type last year: It acted for
CIBC World Markets and Scotia Capital in the $415-million SFK Pulp Fund; for RBC
Capital Markets in creating the $324-million Bell Nordiq Income Fund, and for National
Bank Financial and BMO Nesbitt Burns in the $250-million Boralex Power Income Fund.
With so many companies turning to income trusts last year as a way to IPO in a dead market,
there was a sudden glut. It is believed about $5-billion of trusts were filed in the final three
months of the year - a period insiders say might have been able to handle $2-billion.
As a result, some had to be pulled, leading to apprehension about whether the work will be
there to support law firms again this year.
“People are interested to see what happens in the next three months,” says Jeff Lloyd, a
securities partner who acted for BMO Nesbitt Burns last year on the $220-million Sun Gro
Horticulture Income Fund, among other trusts. “They are watching institutional purchasers in
particular, and how receptive they are to some of the new offerings that were put on hold in
the fourth quarter.
“I think there’s a desire on the part of the underwriters to make sure that the marketing of
these trusts suits the institutional appetite. People are trying to get a feel on how receptive the
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institutions are to meeting about potential income trust deals. But it’s very early days. I think
the next few months will tell the tale.”
Stephen Pincus, who heads the trust group at Goodmans, says he believes there will still be a
tremendous amount of work, but that the IPO boom of the past 18 months will give way to a
more mature phase.
“I think one of the things that will evolve is some consolidation - I think there will be some
M&A between funds. I think there will be some going-private transactions with some of the
smaller ones, with somebody coming along and making a bid for them.
“A third trend would be more creative financing structures. I think we may see more
convertible debenture offerings - some of the oil and gas funds have already done convertible
debenture financings. I think we’ll find lots of creative financing mechanisms will be
developed. And I think we’ll see more cross-border deals coming to market because there are
a number in the pipeline that are being worked on but aren’t out there yet.”
Mr. Pincus believes the recent decision by George W. Bush, the U.S. President, to remove
the tax on dividends might have a positive impact on the Canadian trust market. He says
Canadian companies whose dividends are taxed might consider converting to business trusts
because it is more tax efficient and might be more appealing to investors.
If so, at this time next year Canadian law firms may owe Mr. Bush a heartfelt thank you.
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