Two postponed IPOs have swiftly brought back gloom to European equity capital markets. But as some shelve plans, others dust off theirs with listed corporates looking to support their balance sheets or fund transformative M&A through equity finance.
There have been 470 primary equity financing transactions in Europe, through either follow-ons or convertible bonds, up from 416 deals at this point last year. Because of market volatility, ticket sizes have been smaller, but the USD 38bn of deal volume for primary ECM in Europe so far in 2023 is still 20% higher than last year.
The number of DCM deals by listed European corporates has decreased, according to Dealogic data.
At the end of September, the Fed quashed hopes of a quick reversal in monetary policy and rate cuts until at least mid-2024. While this impacts risk appetite for IPOs, it should finally push some companies sitting on the fence towards equity financing.
“We have been mandated on two more equity financings; it is now a real theme, and the interesting thing is the target is November for these deals, so they are coming through fast,” said the ECM banker. “Many of these were slow to come through initially; there was a lot of reluctance, understandably, with markets so volatile.”
Alongside higher rates, a glut of borrowing undertaken during the COVID-19 pandemic is expiring soon.
Next year through to 2026 are heavy on maturities, noted a convertible bond investor, adding that companies would start plans to refinance soon, preferably 12 months before maturity, so debt does not become a current liability under accounting standards and affect credit ratings.
However, with markets still volatile, and many share prices well below where boards would happily raise equity, the threat of dilution could make an equity raise unpalatable. In this scenario, CFOs could choose CBs to limit dilution until a share price had recovered and hit the conversion premium, according to Ivan Nikolov, a convertible bond consultant.
Liquidity still king
Investors are also eying primary raises, with one ECM specialist saying that their firm was reviewing opportunities in primary, particularly where there is M&A.
The investor added that they would also look at balance sheet restructuring deals, but would be more favourable to companies doing larger raises to fix their entire capital stack rather than anything deemed too incremental.
Investors though are showing a bias towards primary raises from larger, more liquid companies versus smaller or mid-cap names.
During Synthomer's rights issue, “lots of shareholders were sitting on the sidelines not deciding what to do with the rights and lots of hedge funds were aggressively shorting the stock and going long on the rights,” said a source familiar with the deal, commenting on the volatility of the stock before pricing.
If a company is not a largely held, actively traded stock, it can be difficult to get attention and buy-in from portfolio managers, even for a company like Synthomer, said the source, adding it had a strong equity story and a host of ‘Buy’ ratings from analysts. Synthomer declined to comment on dynamics around its rights issue.
In the end, however, enough came on board for the transaction to price well, with 92.6% of the rights being taken up and the remainder snapped up in a rump placement.
As with all ECM in 2023, bigger appears to be better.
