Global Overview

Quiet ECM but Porsche makes some noise

Once again, fresh equity issuance took the back seat as the lazy summer break gave way to rising volatility on the back of US inflation data and hawkish talk from the US Federal Reserve.

Global ECM deal value in the third quarter of 2022 stood at just over USD 146bn, with Asian deals representing the largest slice of the market with a roughly 55% share, according to Dealogic. That, however, is heavily influenced by domestic Chinese issuance of A-shares, which accounted for 54% of the region’s totals.

Americas followed, seeing 311 deals worth USD 37.6bn, while EMEA saw 240 deals worth around USD 28bn.

The wild swings in underlying equity indices have kept most Initial Public Offering (IPO) candidates at bay. Bourses across the globe have seen 341 listings worth USD 44.3bn in 3Q22, up 17% compared to last quarter but down 63% compared to the same period last year.

The blockbuster IPO of Porsche bucked the trend, bringing some cheer to an otherwise muted quarter. At up to EUR 9.6bn (including over-allotment), the German automaker’s Frankfurt listing was the largest deal of the quarter, pricing at the top end of its range but closing flat on the first day of trading.

In North America, the USD 1.7bn IPO of insurance company Corebridge Financial [NYSE:CRBG] on September 14 gave US investors some joy after a slow year for listings on the NYSE. The Middle East powers on when it comes to ECM activity, with the AED 3.735bn (USD 1bn) IPO of Dubai-based road toll operator Salik adding to the tally. Year-to-date momentum is set to continue in the fourth quarter with the expected listings of Empower and Americana.

Convert comeback

The quarter was also notable for the re-opening of the global convertible bond market, with a USD 1.95bn issue from NextEra Energy [NYSE:NEE] in the US and a EUR 950m mandatory convertible bond from Siemens Energy [ETR:ENG] in Germany as notable deals.

Markets saw 84 equity-linked issues worth USD 20.3bn in 3Q22, compared to 61 deals worth USD 10.8bn in 2Q22. The US dominated the convertibles chart with four of the five USD 1bn+ deals, with China seeing one USD 1bn+ issue.

While these transactions breathed life into global equity capital markets, volumes and values are still well down on 3Q21 and beyond, trailing the respective quarters in 2020 and 2019.

The global economy, stunted by low growth and rising inflation and derailed by the war in Ukraine, has proved difficult ground for fresh issuance. Global central banks have taken an aggressive stance on inflation and are raising interest rates with the US Federal Reserve leading the pack.

The decade of accommodative monetary policy that followed the Global Financial Crisis was a springboard from which stocks could soar to lofty record heights. But that momentum has shifted and there is an expectation that equity capital markets activity will remain subdued until stocks settle on a new base level.

Jeff Mortara, the co-global head of ECM at UBS, said: “Our advice is put the work in now to be IPO ready so that you can decide quickly to go to the market. This means have documents done, bankers selected, and be far along in confidential filings so you can start an IPO marketing process in short order. If you don’t invest in the option, you might miss a constructive IPO window of opportunity, and watch it go by.”

Americas

New issuance dries up as valuations contract 

IPOs in the United States sunk to a six-year low in the third quarter as rising interest rates, the war in Ukraine, and broken supply chains caused investors to reprice stocks.

There were 34 IPOs raising USD 3bn on US exchanges in 3Q22, compared to 38 firms that raised USD 4.3bn in 2Q22, according to Dealogic. Corebridge Financial’s USD 1.68bn offering was the largest of the year, even if the life and asset management unit of insurance giant American International Group [NYSE:AIG] priced at the low end of the range before proceeding to trade lower.

Year to date, the data is even more dismal. Traditional IPOs are at a 32-year low. So far there have been 82 deals worth USD 8.7bn – the lowest deal value since the first nine months of 1990.

About 80% of the class of 2022 raised under USD 50m in proceeds, said Rachel Gerring, the IPO leader at EY Americas. Usually, it’s the other way around with most companies in the US raising at least USD 50m.

“Valuations are contracting,” said Gerring. “There is a disconnect between what investors are willing to pay and what companies are expecting.”

The downturn is even more conspicuous when compared to the 319 IPOs that delivered USD 124bn in proceeds during the same period last year. Special purpose acquisition companies (SPACs), which helped fuel last year’s record numbers, have fallen spectacularly, raising a paltry USD 553m in new issuance this quarter, down from the USD 98bn peak in proceeds in the first quarter of 2021.

Elsewhere in the Americas, the exchanges in Canada and Mexico saw a quarterly increase in IPO proceeds. But while the USD 2.67bn in 3Q22 raised in Canada is more than the USD 2.07bn seen in 2Q22, it is still well below the same quarter last year when USD 4.55bn was raised. It is a similar story in Mexico, where USD 243m was raised in 3Q22 compared to USD 73m in 2Q22 and USD 310m during the same quarter last year.

Converts up, follow-ons down

Follow-on offerings in the US are also in decline. The third quarter saw USD 21bn raised across 187 deals, the lowest quarterly tally this year. Year to date, follow-on deal value stands at USD 71.6bn across 486 deals, which is the lowest level since 1996 and less than a third of the follow-on proceeds during the same period last year.

Convertible debt was this quarter’s saving grace. Sixteen converts raised USD 10.8bn in 3Q22, pushing the US equity capital markets a tick higher than last quarter. In total, 237 deals raised USD 34.8bn across US ECM – a little more than the 195 transactions that generated USD 32.7bn in 2Q22.

Market conditions can change in a hurry, Gerring noted, and when they do there is an ample supply of growing profitable private businesses that have predictable business models to attract public investors. But many of them do not expect the fourth quarter to improve much, so potential public market debuts may have to wait until 2023 instead, she said.

EMEA

Porsche to the rescue

Geopolitics and market turmoil continue to weigh on equity capital markets in EMEA, with both issuers and investors entrenched in their defensive positions. The list of worries stirring volatility is long, including the war in Ukraine, the energy crisis, political elections, and a hawkish regulatory stance on inflation quashing hope for economic growth.

Over the third quarter, ECM issuance in EMEA stood at USD 28.1bn across 240 deals, down 35% in deal value compared to 2Q22 which saw 360 deals worth USD 42.9bn. Of the total in this quarter, 193 were follow-on deals, which, while still the largest contributor to overall ECM volume in EMEA, was at its lowest quarterly volume since 3Q01 with issuance of only USD 16.4bn.

In Europe, the talk of the town was Porsche, almost the sole focus of ECM chatter since the end of summer holidays.

A renowned global brand backed by top-tier cornerstones, Porsche would be a rare beast in Europe’s IPO market in any given year. In the drought of 2022, it was such a unique investment opportunity that many buysiders were happy to overlook corporate governance concerns that would possibly be a red flag elsewhere.

The star power and sheer size of Porsche mean there is little read across to the rest of the market, sources say, offering faint hope of an immediate rebound. Many IPOs in the pipeline have been postponed, including Galderma and ABB’s [SWX:ABB] e-mobility division in Switzerland, as well as Plenitude in Italy and Ibercaja in Spain.

According to Francois-Olivier Mercier, UBS head of ECM syndicate for EMEA, the lack of deals “is mostly a function of lack of supply, rather than not having market capacity or investor appetite to absorb these liquidity events, so more of a seller decision issue rather than buyer constraint.”

Only the Middle East remains a brighter IPO spot. Despite the disappointing aftermarket trading of Dubai real estate company TECOM [DFM:TECOM], investors are still flocking to deals. The September IPO of Salik was oversubscribed by 49x with gross demand of over AED 184.2bn (USD 50.2bn), adding further momentum to the growing local market.

But excluding Porsche and Salik though, it remained a poor quarter for IPOs in EMEA with only 35 listings worth USD 982m. Including the two mega deals, the total IPO deal value stood at USD 9.8bn across 37 deals, compared with just over USD 12bn in 2Q22 and USD 18.4bn in 3Q21.

Even if markets tentatively reopen, they will most likely remain shut in the UK, following the major fiscal shock delivered by the Conservative government that has roiled markets and sent sterling spiralling.

Struggling to attract major potential IPOs, such as private equity firm CVC or semiconductor firm ARM, the London Stock Exchange has seen quarterly issuance hit a mere USD 2.9bn, down from USD 4.4bn in 2Q22 and USD 16.8bn in 3Q21.

Cash, please

Amid worsening economic conditions, other corners of ECM showed signs of life. Management boards took a hard look at their cash positions, prompting a series of capital raises in late summer ahead of a likely tough winter.

There were 10 convertible bond transactions worth USD 1.9bn in EMEA in 3Q22, compared to four deals worth USD 436m in the second quarter. A notable September cohort of convertible bonds led the charge including Siemens Energy, Zur Rose [SWX:ROSE], Elis [EPA:ELIS], and Neoen [EPA:NEOEN].

“When you look at the ingredients for equity-linked that make it attractive you see rising rates, a higher cost of debt and increasing credit spread as well as increased volatility. On the demand side, there is also a lot of upcoming maturities in equity-linked leading to funds that will need to be re-invested.”, said UBS’s Olivier-Mercier, adding there is EUR 7bn worth of paper approaching maturity. “It really is an environment where stars are aligned,” he added.

More issuers are expected to seek capital, and October will see yet a politically-charged, controversial rights issue from Italy’s Banca Monte dei Paschi di Siena (BMPS) [BIT:BMPS].

In addition, more accelerated sell-downs along the lines of the recent clean-up sale of Lufthansa [ETR: LHA] and the GTT sale from Engie [EPA:ENGI] are expected. This quarter’s follow-on issuance of USD 16.4bn was well below the USD 30.2bn recorded in 2Q22 and even further below the USD 30.9bn printed across 256 deals in 3Q21.

Asia-Pacific

Let’s move on

For the third quarter of 2022, the region, excluding onshore China, printed USD 14.2bn worth of new listings (including secondary listings in Hong Kong), up nearly 77% from the second quarter, based on Dealogic data.

Yet, investors can forget about 2022. Despite an uptick across asset classes in the last three months, most issuers will likely shun the equity capital markets as much as they can in the final quarter of the year, given geopolitical and macro uncertainty.

Many of the third quarter’s IPOs happened mainly because issuers sought to get deals done before regulatory approvals lapsed, and on the back of brief stock rallies on hopes of a more dovish Fed given economic slowdown concerns. But that was soon dashed by the latest US inflation data, which triggered another huge rate hike by the Fed in September.

Of the 3Q22 IPO crop, the secondary Hong Kong listings of China Tourism Group Duty Free [HKG:1880], which raised USD 2.34bn, and Tianqi Lithium [HKG:9696], which pocketed USD 1.7bn, topped the chart in terms of deal value, followed by a USD 954m domestic listing by Thai Life Insurance PCL [BKK:TLI]. China Tourism has gained 16.2% since debuting on the Hong Kong exchange, while Tianqi Lithium has lost 12.4%, and Thai Life has advanced 1.3%.

Despite a rather bleak market outlook across the region, China’s A-share IPO market grew for the second straight quarter in the July-September period, when it raised USD 25.3bn, up from the preceding quarter’s USD 19.15bn.

The surge came as Chinese IPOs in Hong Kong remained largely muted, while the ADR market was still shut down. To stem economic damage caused by Covid-19 lockdowns, China’s central bank has also cut its benchmark rates by a 0.15 percentage point thus far in 2022, providing some liquidity to the equity market.

Hitting the brakes

“You might still see sporadic deals here and there,” said one banker. “Yes, markets picked up in third quarter but that’s only because of very brief equity rallies which I doubt would continue” into the final months of the year.

When asked for his view on the fourth-quarter primary market outlook on a scale from one to 10, with one being very quiet while 10 being very robust, he said it will most likely come in around three to four. A second banker predicted a two.

“Corporates will need cash at some point, which means deals would happen, but any issuance will need to be done in defiance of challenges from macro to geopolitical,” the second banker said.

That means issuers will need to be market savvy enough to get deals done. As such, down rounds ahead and at IPOs will become more common. “It will be a matter of how down these rounds are going to be,” the first banker said. Some CB deals may also get done to roll over existing papers, he added.

The third quarter’s equity-linked bond market in Asia, ex-China, ballooned to USD 1.8bn from the previous quarter’s paltry USD 225m, thanks in large part to the USD 1bn paper from China’s ZTO Express in late August, and Lenovo’s USD 675m note priced in mid-August.

The region’s follow-on market improved, with the total deal value closing at USD 18.3bn versus the previous quarter’s USD 13.1bn, according to Dealogic.

Private equity firm KKR’s USD 1.16bn clean up sale of its shares in India’s Max Healthcare, a hospital chain operator, on 16 August, was one of the largest follow-on transactions of the quarter. Max Healthcare has since gained 13.8%.

Both bankers expect deal activity to pick up in 2023, when global rates are expected to peak. But with odds of recession on the rise, risks of another capital market shock must not be underestimated.