Global: Market malaise spares no one
A bad start to 2022 for global ECM got worse, as fears of a global economic slowdown, inflation and central bank interest rate rises keep issuers on the sidelines for a second quarter in a row.
The USD 115bn worth of global issuance in Q2 is the worst quarterly tally for ECM since the fourth quarter of 2011, according to Dealogic data, well below the USD 369bn raised in 2Q21. For North America and Europe, the combined USD 47.3bn ECM deal value across both markets is the worst since 2009, down 26% and 30%, respectively, from an already poor Q1.
While the war in Ukraine continues to rage, much of the market focus has now turned to a looming global economic slowdown and the end of the extraordinary monetary policy which had propelled equity to new heights in the last decade.
For Europe and the US in particular, rate hikes mean the end of the party for many stocks, which had soared as bond yields hit zero and below.
The few deals braving such dire conditions have been met by a frosty investor base unwilling to put capital to work. Only hefty discounts can offset the market volatility battering many a portfolio manager so far this year.
Volatility remains the great barrier to ECM deals. For most of the quarter, the CBOE’s infamous Vix index has sat around or above 30 – widely seen as a “no-go area” for ECM bankers.
“Market volatility has remained elevated given intense focus on global central bank policy response to inflationary pressures,” said Gareth McCartney co-head of global ECM at UBS. “This has postponed the Initial Public Offering (IPO) pipeline, except for elevated activity in the Middle East. Overall volumes have been muted as a result with a few block trades and select rights issues being the exception.”
IPOs remain the product most impacted by the market malaise. Notably, there were no USD 1bn-plus listings in either the US or China in Q2.
Overall, global IPO issuance is down 33% compared to Q1 and 73% compared to the same period last year. While developed markets suffer, the Middle East prospered, with the region boasting two of the top three IPOs in Q2.
In the US, IPO deal value is down a whopping 66% compared to Q1 and 92% versus 2Q21, while Europe’s was 35% down on Q1 and 92% down on 2Q21. Listing value in Asia Pacific fell 62% compared to Q1 and 80% compared to the same period last year.
Follow-ons drove the global ECM market in Q2, accounting for USD 71.6bn of total ECM issuance. In China, Contemporary Amperex [SHE: 300750] priced a CNY 45bn (USD 6.7bn) cash placing of new shares to fund working capital and project financing needs. The deal was the largest global ECM deal in Q2, followed by Dubai Electricity and Water Authority’s [DFM: DEWA] USD 6.1bn listing on the Dubai Financial Market.
In Europe, rights issues have also driven much of the large cap activity, particularly a EUR 3bn cash call from EDF [EPA:EDF], which priced in April and was the fifth largest global ECM deal in Q2.
Also in June, the Brazilian government privatised Eletrobras [BVMF: ELET6] on a BRL 29bn (USD 5.9bn) primary share sale, diluting its stake below 50%.
If it was a dismal quarter for global IPOs, the convertible bond (CB) market did not fare any better. At USD 7.8bn for Q2, global CB issuance was down 60% from Q1 and 83% below last year’s Q2.
“The precondition for a restart in developed European issuance will be a stabilisation in the secondary market with the VIX back at 20 or below for a sustained period,” said McCartney. “There is an IPO pipeline to execute if that happens. “Clarity on central bank action will be a key pillar. Expect the US to lead any recovery on a global basis and for there to be a broader sector representation vs. 2021.”
EMEA: Middle East touches the sky, as Europe comes back to earth
Issuance in EMEA came crashing down in the second quarter, as volatile equity markets continue to hamper deals.
The Middle East was the standout performer of the quarter in EMEA, described as a “happy island” by a European ECM banker dealing with a never-ending series of European IPO postponements. ECM activity in the region in Q2 reached USD 32bn, up 38% compared to the first quarter.
There were the blockbuster USD 6bn listing of Dubai Electricity & Water Authority [DFM:DEWA], the largest IPO of Q2, and the USD 2bn listing of Borouge [ADX:Borouge], a plastics joint venture between state-owned Abu Dhabi National Oil Company (ADNOC) and Austrian chemicals firm Borealis.
The year to date is already the second-best full year ever for MENA IPO issuance.
Sources speaking earlier this year said both transactions had been heavily oversubscribed, with Borouge attracting many international investors expanding their capabilities in the region and looking to play a bigger role in the high performing economic hub.
The only large EMEA IPO recorded in Q2 was Italian company De Nora [BIT: DNR], a deal made possible by the topical equity story on renewable energy, a slashed valuation, and the support of two cornerstones buying more than half of the book
While most corporates in EMEA held back on their IPO plans, rights issues have returned in earnest. Follow-on activity in the region consisted of 285 deals worth USD 30.3bn, with rights issues accounting for 37% of the activity at USD 11.2bn across 94 deals.
French/Dutch carrier Air France-KLM [EPA:AF] completed an oversubscribed EUR 2.3bn capital raise, followed by other sizable operations such the GBP 575m raise by UK online grocer Ocado [LON:OCDO] and Belgian Elia System Operator’s [EBR:ELI] EUR 590m raise.
These companies braved the market by picking a brief window of feasibility, with strings attached often including smaller deal sizes and considerable discounts to theoretical ex-rights price (TERP).
“Rights issues are an all-weather way to raise significant amount of capital,” said Alexis Bauza, Executive Director Strategic Equity Capital Markets, Natixis CIB. “Still, market windows matter and launching the deal on the back of positive momentum in terms of news flow or share price development is a strong enabler: this is what we have done for Faurecia and Air France-KLM deals,” he said.
Much like elsewhere, convertibles were again a no show in the region, down 99.4% in deal value from the first quarter of 2022 with only one deal worth USD 2.6m priced compared with three in 1Q22 worth USD 491.5m, and 18 transactions worth USD 8.3bn in the same quarter last year.
Americas: No big deal
Runaway inflation, rising interest rates, recession fears, and the ongoing war in Ukraine rattled equity capital markets in the Americas with deal volume sinking to the lowest level in more than a decade.
The second quarter of 2022 saw just 301 transactions totalling USD 32.9bn in deal value, which is the least amount of dollars changing hands since the first quarter of 2009. The number of IPOs, follow-ons, and convertible debt deals, collectively, was 49% below the same period in 2021.
The absence of new billion-dollar listings this quarter is particularly notable. For the first time since 1Q16, there were no IPOs raising USD 1bn or more.
On the US exchanges, where most transactions west of the prime meridian take place, there were just 39 IPOs in 2Q22, down from 80 in 1Q22. The fall is even more spectacular when compared to 2021 quarterly performance (249 deals in 4Q21, 182 in 3Q21, 179 in 2Q21 and 399 in 1Q21). There was just USD 4.3bn raised in US IPOs in 2Q22, 8% of the IPO dollars generated this time a year ago.
Cash shells can’t catch a break
Last year, everyone and their mother seemed to be launching special purpose acquisition companies (SPACs). But intense regulatory scrutiny of the asset class and Wall Street’s recent aversion to risky investments have pushed SPACs far out of favour. Now, even the most experienced sponsors are treading cautiously.
There were only 15 new SPACs listed on the US exchanges in the second quarter, worth USD 2bn in deal value. That represents just 20% of the capital that blank check firms raised last quarter, and it is a mere 14% of the dollars generated from new SPAC issuance in the same period last year.
Not only are there fewer sponsors willing to bring cash shells to market, but big banks like Citi, Goldman Sachs, JP Morgan and Morgan Stanley are deliberately avoiding SPACs due to liability concerns.
Brazil utility powers follow-ons
Follow-on offerings in the Americas continued their poor start to the year, dropping to lows last seen in 2009. Only USD 21.9bn was raised across 148 follow-on deals in the three months to June end, down 64% compared to USD 61.3bn raised from 259 deals in the same quarter last year.
The government of Brazil’s privatisation of utility company Eletrobras [NYSE:EBR] through a USD 6.9bn share offering was the biggest in the region. As the world’s second largest equity deal in 2022, it accounted for almost a third of total Americas’ follow-on activity. Boston-based wireless communications infrastructure provider American Tower’s [NYSEA:AMT] USD 2.3bn follow-on to repay debtors was the second largest in the region.
Below those headline grabbers, follow-on issuance in the Americas raised significantly smaller pools of money.
APAC: Brutal reality check
As if concerns on heightened inflation following Russia’s war in Ukraine and protracted confusion surrounding Beijing’s Internet policy were not enough, recession fears also started creeping in in APAC in the second quarter, as central banks hastened the pace of rate tightening.
That took a huge toll on Asia’s equity capital markets, where an eerie drought of IPOs, equity-linked bonds and follow-ons led some banks to shed jobs, especially those associated with Hong Kong/China-related functions.
“The market will continue to be difficult,” said a Hong Kong-based ECM banker, who works for a global investment bank that is just “done” for now with layoffs. “For confidence in the credit market to come back, it’s going to take time, and rates are going to put pressure on financing costs… while we might see recovery in selected industries or markets, risk appetite is just not there for new paper to be printed,” he said.
The MSCI Asia Pacific Index, which peaked around mid-February, has plunged 27% thus far, and there’s not even the slightest sign that the markets might bottom out soon.
Second-quarter activity slumped to multi-year lows across the board.
Asia printed 128 IPOs in the second quarter, raising just USD 6.9bn, Dealogic data shows. That marked the lowest quarterly reading by value since 1Q19, when the region raised USD 6.4bn from IPOs.
State-owned Life Insurance Corp. of India [IN:LICI] alone raised USD 2.7bn in a deal priced in mid-May, making it the largest regional IPO in the second quarter. The stock has lost 25% since debut.
Worst CB market since Asia Financial Crisis
Follow-on activity fared even worse, with 219 deals priced for USD 9.3bn in this quarter, which is the worst since the first quarter of 2016, when the region raised USD 9.2bn from 213 transactions, according to Dealogic.
Still, the equity-linked bond market easily made it the worst-performing asset class, with just two deals worth a combined USD 255m – the poorest quarterly showing since 4Q98, during the Asia financial crisis.
“In the last quarter of 2021, we were hoping for a better first quarter this year, but that didn’t happen, and then we hoped the second quarter would get better, but that’s not happening either,” said a second ECM banker in Hong Kong.
The third quarter CB pipeline – if there’s any to speak of – would be around two to three on a scale of one to 10, while the IPO pipeline could be around four to five, provided that there’s sufficient cornerstone support. “It’s just brutal,” he said.
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