Subsided volatility has opened the possibility for block trades in EMEA but sources say many sellers are not yet ready to execute, hopeful of riding the recovering wave a little longer.

On Tuesday (March 23), Icelandic State Financial Investments sold a USD 408m block in Islandsbanki, effectively re-opening the blocks market and EMEA ECM, after a period of paralysis following the Russian invasion of Ukraine. The VSTOXX, the European index which tracks expected levels of volatility in European stocks, is trading at around 30, far below its peak of 48 on March 7 and closer to the levels seen before the invasion. This has coincided with a turnaround in fortune for European stocks, with the Stoxx 600 up 10% from its early March lows. Germany’s DAX has performed even better in the last few days rising 12% since the beginning of March.

Calmer markets prompt ECM bankers to actively pitch accelerated transactions, three equity capital markets bankers told ECM Pulse. However, many sellers are keen to hold onto their positions. “There is always that decision to be made between taking a window or waiting and that is what sellers are weighing up,” said one of the bankers. Many issuers are waiting to see whether stocks continue to rise to better monetise their holdings, he added.

The Stoxx 600 and DAX are both still down year-to-date, even after last week’s bounce, which is holding some sellers back. “We have a pipeline, but I was just off the phone to an issuer for a holding that is still not quite there even though the market backdrop is far more benign,” said a second banker.

There is a danger however that sellers could wait too long for the opportune window. A third banker said many of his potential block sellers were kicking themselves for not executing a transaction earlier in 2022, when markets were less than ideal but not paralysed as they have been in the last month.

With the war in Ukraine still raging, interest rates rising and inflation running rampant across western economies block sellers are being advised to do a deal now rather than try to ride an unpredictable market to higher profit. Some might have a very short window as corporate blackouts will soon start ahead of Q1 earnings, preventing many sellers from reducing their stakes until after results.

Keeping it local

A source close to the Islandbanki block trade, which was upsized to USD 408m from around USD 377m to meet investor demand, said local investors drove the transaction.

Because a group of fundamental local institutions took most of the stock, the discount was relatively tight. The final deal price of ISK 117 (USD 0.91) per share was only 4% below Tuesday’s close of ISK 122.

Another advantage for the trade was the fact that it had been well telegraphed by the Icelandic government, which had made clear in regulatory disclosures that it would further sell down stock.

The transaction was also widely distributed with the top 20 investors taking half of the deal. This is different from a trade in German sensor maker Hensoldt [ETR:HAG], for example, on March 5 where the top ten investors took 70% of the deal, this news service previously reported.

Larger allocations mean more liquidity in the stock which will help Iceland with further sell-downs, the source added.

While deals like Hensoldt had to be sold to smaller groups of investors during the height of the Ukraine crisis, the calm over the last few weeks means blocks can now be sold to larger investor groups, two bankers said.

Hedge funds step up (at a price)

Islandsbanki was able to benefit form a confluence of specific factors, such as being a well flagged deal in a market where there is a large local investor base to support transactions.

One banker said that there is now a hierarchy of investors likely to participate in trades, starting with locals, like in the Islandbanki deal, then hedge funds and finally large global long-only investors.

Both bankers and investors speaking to ECM Pulse said they expected long-only investors to be absent from the EMEA blocks market for some time. This means most deals in Europe will primarily be driven by the hedge fund community.

“We are seeing from other blocks around the world that there is almost no long-only bid at all, but the hedge fund community is there albeit they are materially wider than you would imagine,” said the second banker. Deals are going to have to be smaller and even then, there are going to be high single digit discounts on notional trades, unless things are very well flagged. “But that is what will be required to re-open this market.”

The secondary blocks market is on track for its worst quarter since 4Q18. There has been USD 6.3bn of secondary follow-on issuance in the first quarter of this year, so far and not including Islandsbanki, according to Dealogic data. This is down 49% from the USD 12.5bn in the last quarter of 2021 and 66% below the first quarter of last year.

While 2021 was admittedly a boom year for ECM, the first quarter of 2022 is also well below the USD 16.6bn of issuance in the first quarter of 2020 as well as every quarter throughout a year beset by Covid-19 related volatility.

Several of the sources said that they expected potential blocks to come from sectors that have risen since Russia’s invasion of Ukraine, particularly energy and commodities. “There is no question the early movers will be sectors in favour, such as commodity-based stocks or energy,” said the second banker. “There are some opportunities there particularly in some names people haven’t seen for a while. Other stuff will take time.” 

Icelandic State Financial Investments did not respond to requests for comment