European primary equity markets saw an uptick in deals in recent weeks, bringing year-to-date issuance to USD 20bn, according to Dealogic. But there are many issuers sitting on the sidelines still not ready to test the brutal market, sources tell The Pulse.
This week saw a EUR 704.97m rights issue from Faurecia [EPA:EO], to fund its acquisition of Hella [ETR:HLE], priced alongside a GBP 576.2m accelerated primary placing from UK grocer Ocado [LON:OCDO], to fund the growth of its online solutions offering.
The Ocado trade was driven by a small group of large shareholders, this news service reported, and Faurecia announced today (22 June) that its cash call had been 187% oversubscribed. The transactions priced alongside another EUR 122.3m rights issue by French REIT Foncière Inéa [EPA:INEA], which also wrapped up this week.
This week’s deals follow the recent Air France-KLM’s [EPA:AF] EUR 2.25bn rights issue, to repay state pandemic support, and a USD 732m cash call by telco Millicom [STO: TIGO-SDB] last week, to fund acquisitions. “Capital raises seem to be the only thing you can execute at the moment,” said a senior ECM banker, commenting on the contrast with the European IPO market, which remains challenging.
For investors, backing a portfolio company in strategic M&A or even a balance sheet reset is an easier call than buying into an untested asset at an IPO. The success of recent rights issues and other primary transactions show the buyside is still willing to put capital to work.
No plain sailing
Italy’s Saipem [BIT:SPMR], which set the terms on a EUR 2bn rights issue on Wednesday, and Banca Monte dei Paschi di Siena [BIT:BMPS], are two of the big upcoming names in Europe’s rights issue calendar. BMPS revealed a new strategic business plan on Thursday (June 23), which revealed it would launch a EUR 2.5bn rights issue before the end of the year.
They will have to contend with increasing market volatility, however. The CBOE VIX index is above 30, a treacherous level for ECM bankers, and the European VSTOXX is up 22% from where it was at the beginning of the month. “The market is demonstrating real signs of distress,” said a second banker.
For Saipem and BMPS, the rights issues are expected to be so dilutive that banks cannot just set a wide discount to TERP as a buffer, as they did on the Air France-KLM rights issue to guarantee that the issue price could withstand sustained volatility, the banker added.
“What matters with these deals is trying to find two weeks where you think the market is going to be less dicey,” he said. “Saipem is risky. The last time the company did a rights issue, the banks were left with the rump and, while they all made money in the end, that is playing on people’s minds.”
Companies announcing a rights issue can also become targets of short sellers who then use the cap hike to close their positions, several sources said, putting further downward pressure on the stock. Saipem and BMPS are the two most shorted stocks in Italy with declared short interest against the stock at 6.07% and 4.38%, respectively, according to shortsell.nv.
Saipem declined to comment and BMPS did not respond to a request for comment.
Deals with a growth angle are not immune from market stress either. Last week, Elia System Operator [EBR:ELI], a Belgium-based company engaged in developing and operating electricity networks and transmission, started meetings on a EUR 590m rights issue. The company launched the deal at a subscription price of EUR 124.50, implying a tight discount to TERP of 12.2%.
While sources on the deal are confident given over half is pre-committed to shareholders, some in the syndicate have expressed concern over an 11% decline in the stock since its launch early last week. The share price sits at EUR 130, just above the subscription price.
Books close tomorrow (23 June). Elia did not respond to requests for comment.
Waiting for normal
Market volatility means that some issuers have decided to wait until autumn, or even 2023, before contemplating capital raises, said two bankers speaking to The Pulse.
The first said that most of his time was now spent engaging with corporate clients on capital raises, but that many were waiting for the US Federal Reserve to complete its rate hike cycle. Strategists point to a market expectation of another 75bp hike in July and a 50bp/75bp one in September to combat rising US inflation, after which there is hope that markets will adjust to a new normal.
“You need a base level off which you can raise, but a lot of people at the moment have been scared by this market into paralysis” he said, adding that most now saw increased capital raising activity as inevitable.
Companies are already thinking about readjusting balance sheets away from debt towards equity.
Some sources speculated that tech firms, maligned in equity trading this year and often undercapitalised, would likely need capital. While many will not get a strong reception, there will still be winners.
“Look at a company like Asos [LON:ASC],” said the first banker. “That’s a company that has struggled in trading but isn’t going anywhere, and will benefit from the long-term changes in the way people shop. I suspect companies in that ilk would be well supported.”
Asos did not respond to requests for comment on any capital raising plans.
Memories of a market shaken by the COVID-19 pandemic, when many stocks desperately raised working capital, are still fresh. Sources say they hope shareholders will step in again now, just as they did then.
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