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Tracy Edmonson, head of corporate finance at Latham & Watkins, hasn’t had a break in months. The 1 percentage point drop in federal interest rates since the beginning of the year has her clients rallying to market — but not to sell stock. There aren’t many buyers for that. Instead, her clients are selling debt, and at a feverish pace. In the past two months, for example, Edmonson has ushered Pleasanton, Calif.’s Safeway Inc. to market twice to sell a total of $1.8 billion in bonds. And that’s just for starters. She closed several other deals this year that she can’t disclose, plus she has “a couple of billion” dollars in deals in the pipeline. “There’s incredible pent-up demand — we’re just crushed here,” said the Latham partner in San Francisco. When it comes to complex corporate finance, Latham keeps company with the New York firms, whose Silicon Valley outposts are also swimming in debt deals. They haven’t had such debt activity in a while. With equity markets roaring in recent years, companies weren’t selling much debt, and investors were happy to log great returns with their equity holdings. All of that changed last spring, of course, as the stock market cooled. Nobody bought much of anything last year, and investors still haven’t warmed to stocks. But the interest rate cuts put into effect this year have made debt a little more attractive for companies. And the deals are looking better to equity-weary investors who want to bulk back up on debt instruments. “One security comes into favor when another falls out,” said Bruce Dallas, a Davis Polk & Wardwell partner in Menlo Park, Calif., who’s been doing a brisk business in debt instruments in recent months. For his technology clients, Dallas has been structuring hybrid debt deals that mix in an equity component. The deals are similar to common convertible debt deals that enable companies to turn the debt into stock to get out from under debt payments. “With the great slowdown in equity, it’s nice to have something to fall back on,” said Paul Pringle, a Brown & Wood partner in San Francisco. The New York firm regularly does a brisk business in debt offerings. Pringle worked across from Edmonson on the Safeway debt financings but like everyone else in the San Francisco Bay Area, had been doing many more equity financings in recent years. The debt markets don’t give much hope to fledgling Silicon Valley enterprises. They often lack the revenue streams to pay back debt or simply haven’t been around long enough to earn a good credit rating. But that’s not to say Silicon Valley’s homegrown firms can’t get into the swim of things. The corporate group at Wilson Sonsini Goodrich & Rosati that specializes in complex financings is doing a brisk business when it comes to debt. The firm has had a hand in four convertible and straight debt financings this year. But it’s also lending its debt financing expertise to the firm’s brisk mergers and acquisitions business. In fact, John Fore, the Wilson partner who specializes in complex finance, is still hiring even while most corporate law firms are hiding from job candidates. He’s holding interviews for several open slots on his team. “If current market conditions continue, there will be a greater need for lawyers who have the expertise to handle transactions that are more complex than traditional straight equity,” Fore said. Fore is counseling many of the firm’s clients who are already servicing debt loads. Most of these are mature Silicon Valley companies. Some may seek to refinance as a result of toughening financial times ahead or if they execute a big merger, Fore said. And ramping up its expertise as its client base matures is part of Wilson’s long-term growth strategy. “Historically in Silicon Valley, everything’s equity-driven. But companies are more complex, and the forms of capital available to them have gotten more complex,” Fore said. “We’ll start seeing more deals structured with some component of leverage,” he said. For now, though, the bulk of the billion-dollar debt financing deals are falling to the New Yorkers. “In the Bay Area, there are very few of us who do this kind of debt work,” Edmonson said. But if the market languishes as it has, she may soon be getting company.

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