Europe’s equity capital markets have tentatively re-opened as companies execute on planned corporate refinancing while conditions allow, before the mood music worsens as a global economic slowdown begins to bite.

In the last few weeks, Air France- KLM [EPA:AF] and telco firm Millicom International Cellular [STO:TIGO-SDB] have launched large rights offerings. The Air France deal shows some risk appetite given both its size and the nature of the raise, which is being earmarked for COVID-19 relief debt repayment.

While both deals were widely expected, sources say that it is a positive sign that companies are choosing to undertake their equity financing plans and a sign that European markets are stable enough for large raises.

The rights issues follow several primary financing deals in the accelerated market, including a deal by German travel operator Tui [ETR:TUI1] in early May to repay government debt sustained during the pandemic and a capital raise by Swiss packaging company SIG Group [SWX: SIGN] to part-fund two acquisitions.

Deal value is still well below average, but Q2 issuance so far has grown significantly compared to an anaemic first quarter.

Strong pipe

There are also several more capital raises that could be launched soon, including but not limited to a rights issue for Italian oil drilling manufacturer Saipem [BIT:SPM], a cash call by ALD SA [EPA:ALD] to fund the acquisition of LeasePlan and a capital raise by Siemens Energy [ETR: ENR] to purchase the 100% of Siemens Gamesa Renewable Energy [BME: SGRE ] with the aim of fully integrating and then de-listing the company.

Siemens Energy announced a tender offer for Gamesa last week and said the offering, should it be fully accepted, should entail EUR 2.5bn financed with equity or equity-like instruments.

Two Investors speaking to The ECM Pulse highlighted the market is not open for all primary activity, adding that companies must be clear about the rationale behind the cash calls. Gone are the days where companies could tap investors for cash to put towards unspecified growth projects or unnamed acquisitions, they noted.

But when there is a clear use of proceeds, and even better if a planned capital raise has been previously announced, markets are open, they said.

“Most of the deals coming through now aren’t much of a surprise, which helps,” added a senior ECM banker. “The announcement of the Siemens Energy/Gamesa deal though is a great example of what companies can do,” he said, adding the German industrial group would find it easy to tap investors for cash.

Sources speaking to the ECM Pulse over several difficult months have continuously expressed confidence that there would be a market for primary capital raises. The main hurdle is issuer hesitancy, either because they feel their stock is too low or markets are too volatile.

“I have been telling my bankers since mid-March that if there are clients who want to do capital raises for rescue or for acquisition, the market is there,” said a senior ECM banker. “While it is, more difficult, there is a bunch of things in the pipeline. Tui and Air France show balance sheet-strengthening deals can be done,” he added.

Momentum building

Given the broadly negative economic outlook, heads are turning to corporate balance sheets and likely pressing needs for capital strengthening.

“We haven’t got to the point yet where we can identify exactly which companies are going to need capital, but before too long cracks are going to start to appear,” said the first banker.

A third banker added that client mindset is rapidly evolving, accepting accept that they may have to undertake capital raising to firm up their position in the wake of economic turmoil.

“We saw after the financial crisis that primary raises are the first thing to really come back,” the third banker said. “We probably still need to get to the stage where most corporates fully accept that the outlook is now fundamentally different to what they thought before. But these conversations are now happening.”

Several sources say that many companies are turning their thoughts towards potential M&A deals and market consolidation opportunities especially given cheap valuations following the equity market turmoil since Russia invaded Ukraine in February.

Deterioration in credit markets, combined with rising interest rates making debt more expensive, mean companies are more likely to finance deals through either cash or equity, with the latter possibly more attractive at a time when strong balance sheets are also likely to be needed.

“I can’t tell you how many conversations we are having with clients at the moment about raising cash for M&A activity and investors will support stories they believe in,” the third banker added.