Banking on fumes? IB fees thin out as dealmakers stall

Data InsightDealspeak 3 October

Banking on fumes? IB fees thin out as dealmakers stall

Investment banks (IBs) face a drastic drop in fees as dealmakers react to a harsh macro-economic environment by stalling and fumbling with the keys.

EMEA dealmaking fees are running far behind last year’s record levels, with EUR 13.7bn raked in so far in 2022 across M&A, ECM, DCM and syndicated loans, according to Dealogic estimates.

Revenues have been on a downward trajectory since January. In particular, 3Q22 revenues stand to be the slimmest in the last four years, coinciding with the quietest period for M&A activity since 3Q20, as per Dealogic’s data.

Over the last nine months, investment banks have collected an estimated EUR 7.5bn in M&A advisory fees on par with 9M21. As per Dealogic’s methodology, 90% of the fees charged for an M&A transaction are allocated upon completion, meaning that part of this year’s revenues cascade from the 2021 deal bonanza.

After a busy 2Q22, M&A volumes have come down crashing in the third quarter. This follows a string of decisions by prominent private equity houses to defer their exit plans for maturing assets until market conditions improve.

Examples include the sale of capiton-backed German omega-3 fatty acid manufacturer KD Pharma. The dual-track process, which was expected to result in an EUR 1bn deal, was shelved in August, as reported. BC Partners has equally slowed down plans to sell French credit management services provider iQera, as reported.

Watch the gas pedal

Underwriting products, including ECM and leveraged finance, have fared worse due to a drop in new public market issuance in a volatile environment.

An array of IPO hopefuls including Spanish bank Ibercaja and Swiss pharmaceutical company Galderma have put their listing ambitions on ice in light of choppy markets. This has resulted in the worst nine months for ECM revenues on Dealogic records, even in spite of Porsche’s [ETR:P911] EUR 9.4bn IPO at end-September.

Leveraged finance income has also taken a dip amid reports of banks struggling to offload previously underwritten debt, creating an opportunity for private credit to capture market share.

Banks have pocketed in around EUR 3.4bn from DCM products – such as high-yield and investment-grade corporate bonds – this year, the lowest number since 2011. Syndicated loan income stands at EUR 1.5bn to date, also the lowest in the last decade.

Restarting the engine

The prospect of a recession spurred by hawkish central banks taking tough measures to fight inflation is of particular concern. Larger tickets reliant on external financing are particularly vulnerable to credit dislocation, whereas in the midmarket direct lenders are already tightening leverage to cover their bottom lines, as reported by Debtwire.

Currency weakness could prompt a resurgence in cross-border activity driven by overseas investors, bringing along more fees for dealmakers. Porsche’s blockbuster float may provide impetus for other IPO candidates stuck at a pit stop, while Italy’s Banca Monte dei Paschi [BIT:BMPS] will test investor appetite through a EUR 2.5bn rights issue.

If credit markets also change gears, investment banks will have a chance in the race.

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