Canadian markets cool equity capital in first half of 2018
Slowdown attributed to fewer issuances in energy, pipelines and utilities
Unless Canadian companies raise their game in the second half of the year — and raise considerable amounts of equity capital — 2018 will end up as one of their lowest fundraising years in recent times.
Canada’s publicly listed companies raised $17.58 billion of equity capital in the first half of 2018, a 32.2 per cent drop over the previous year, and at least a five-year low primarily due to global trade uncertainty and volatility in financial markets, according to information prepared by Financial Post Data.
Over the past four years, on average $26.2 billion has been raised in the first six months of the year in the ownership equity space, with the first half of 2015 holding the record for the largest amount of capital raised — a very healthy $29.80 billion. In other words, new equity issuances in the first half of 2018 were below par based on a number of yardsticks.
Even preferred shares, which pay a yield and typically come with a repayment of principal at maturity, were affected by the malaise. In the first half, $2.48 billion was raised — the second lowest in 10 years after $2.31 billion garnered in 2011.
On the other hand, corporate debt was strong, with $105.72 billion raised — the most over the same period in five years, and up 8.8 per cent over 2017.
So what’s going on?
Sante Corona, head of equity capital markets at TD Securities, said a dearth of new issues by the energy sector led to a lacklustre first half. “The decrease is largely attributable to the energy sector which was almost half of last year’s issuance, but only six per cent of total issuance in the first half,” he said.
The energy sector’s contribution would have been bigger had the large secondary offering of Canadian Natural Resources Ltd. by Royal Dutch Shell Plc been included. That $4.3-billion sale was excluded because it was not done via a prospectus offering. Instead, the 97 million shares — acquired when Canadian Natural purchased Shell’s stake in the oilsands — were sold via a block trade. If the rumours pan out, future league tables on public deals will suffer a similar result when ConocoPhillips sells its 208 million Cenovus Energy Inc. shares.
Roman Dubczak, head of global investment banking at CIBC Capital Markets, attributes the slowdown to fewer equity issuances in energy, pipelines and utilities. “Each are down in excess of 80 per cent when compared to average annual volumes during the past five years,” he said.
Peter Miller, head of Canadian equity capital markets at BMO Capital Markets, says Canada “is out of sync” with the U.S and the rest of the world, where new issue activity has been strong.
Power, utilities and infrastructure group, led by TransCanada Corp. and Enbridge Inc., have often represented the largest portion of new issue activity in Canada, with typically about one-third of all issuance. “Year to date, it’s four per cent,” Miller said. Perhaps with good reason, given that utilities are the “the worst performing sector.”
The sector has slumped, in part, because of rising interest rates and utilities are viewed as yield plays. In such an environment, issuers are loathe to sell new equity because they can’t achieve a high enough premium to net asset value. “That has been a negative impact on the deal flow,” noted Miller.
For pipeline issuers, the other negative is that Canadian oil and gas prices remain at a discount compared to global prices, although they are better than they were a year back.
“The energy companies have been out of vogue, until recently,” said Miller.
RBC Capital Markets led the overall FP Data league table, helping raise $29.2 billion in 124 deals, followed by TD Securities Inc., with $25.2 billion facilitated across 105 deals.
Canadian banks dominated the top 10 slots, with CIBC World Markets Inc. ($19.9 billion over 92 deals), National Bank Financial Inc. ($17.6 billion over 77 deals), BMO Capital Markets ($17 billion over 79 deals), and Scotia Capital Inc. (66 deals over US$15.8 billion) comfortably ahead of international banks Citigroup Global Markets Inc., HSBC Securities (Canada) Inc. and J.P. Morgan Securities LLC.
Canadian banks shared the spoils, with RBC also leading in corporate debt, National Bank in government debt and preferred shares, Scotia Capital in ownership equity and CIBC in structured products.
While energy was missing in action, the Canadian numbers were somewhat boosted by financings for cannabis producers. In all, about $3 billion, or around 17 per cent, has been raised by the cannabis sector — about six times what it raised in the first half of 2017. A $600-million private placement of five-year 4.25 per cent convertible debentures by Canopy Growth Corp. was the largest in that group of issuers.
The reality is that the Canadian economy isn’t as diverse as the U.S., which has a steady stream of technology and manufacturing giants entering the fray.
For the six months, the four largest Canadian incorporated company IPOs were a $178-million deal by IPL Plastics, two financings — both for $172.5 million — for Pinnacle Renewables and BSR REIT, $178 million; and a $132-million issue by Green Organic Dutchman Holdings. Delaware-incorporated firm Ceridian HCM Holding Inc.’s $462 million IPO is not included in the Financial Post data.
The second half started well with two IPOs, Minto Apartment REIT raising $230 million, and MAV Beauty Products raising $242 million, closing in July. Recently B.C.based Tilray’s cross-border IPO raised US$153 million and listed on Nasdaq, the third Canadian cannabis producer to list south of the border.
The $1.73 billion common share offering by Bank of Nova Scotia is the largest deal this year. There were also two large cross-border secondary offerings — a US$950million financing by The Stars Group and a US$630-million offering by Canada Goose Holdings Inc. Aside from Bank of Nova Scotia, the two largest treasury offerings were a US$657-million deal by Shopify Inc. and a $638-million equity deal for Bombardier Inc.
As for what lies ahead, Miller noted that while activity has been “picking up,” the big difficulty is whether things have normalized. Given the recovery in energy prices and with investors wanting to finance those who need capital, “our expectation is that there will be a demand for equity.”