Why Poloz — not just Trump — will be driving deal flow
Corporate Canada’s financing decisions in the first half of the year were partly influenced by U.S. President Donald Trump’s outbursts, but they were also driven by the level-headed, lowkey pronouncements of the Bank of Canada governor Stephen Poloz.
Debt issuance jumped nearly nine per cent in the first half to a record $105.8 billion as debt seekers, spurred by Poloz’s hawkish tone, looked to beat rising interest rates.
“Broader economic trends are driving deal flow,” says Michael Innes, a Toronto-based partner and co-chair of corporate finance and securities group at Osler, Hoskin & Harcourt LLP. “Rising interest rates had a huge impact on debt markets — they know rates are rising and they want to lock in interest rates now. Companies need funding even if Donald Trump talks NAFTA, even if there is some risk adjustment — people see through the bluster a little bit.”
The debt-raising trend has been going on for a few years, but many companies that are expecting to see debt maturities in 2019 and 2020 are moving quickly to secure rates at current levels.
Andrew Parker, co-head of national capital markets at McCarthy Tetrault LLP, believes companies have, for the most part, carried on despite the trade noise. “While there has been some uncertainty in the markets, windows have been opening to do very significant financings . ... I don’t think it’s a function of business deteriorating in Canada — it’s a function of companies being pretty well-capitalized.”
However, according to Financial Post Data, ownership equity issuances recoiled 32.2 per cent, preferred equity slipped 37.4 per cent and structured equity products fell 27.8 per cent as companies retreated at the prospect of a White House determined to re-order the global trading system.
Combined, debt and equity financings in the first six months of 2018 were down by about six per cent compared to the previous year, to $205.7 billion, FP Data shows.
McCarthy Tetrault led the Canadian league counsel issuer table on equity and debt offerings in the first half of 2018 in terms of value of deals, helping finance $11 billion; Osler was second with $10.8 billion, narrowly edging out Blake, Cassels & Graydon LLP, which clocked in at third place with $10.4 billion, the data shows. Blakes was involved in the largest number of deals, 26, during the first six months, followed by Stikeman Elliott LLP, with 23, and McCarthy, with 17.
Combined, legal counsellors helped finance $58.5 billion across 244 deals in the first half of 2018, compared to US$68.1 billion deals over 236 deals in the first half of 2017.
In many respects, 2018 was always going to pale in comparison to 2017, a breakout year as roaring equity markets, at least two mega mergers in a resurgent energy sector and a slew of initial public offerings shook off the oil-induced lethargy of the previous three years.
Meanwhile, Corporate Canada’s 2018 plans were blown away as the U.S. served up a double-whammy of tariffs on domestic steel and aluminum on top of Trump’s grumblings over the North American Free Trade Agreement.
The slowdown was perpetuated by moderation in the energy and financial services sectors that historically have been prime deal drivers in the domestic market.
But other sectors — most notably cannabis — picked up the slack, notes Eric Moncik, partner at Blakes. “Consider the breadth of industries represented in the Top 20 equity deals of the first half of 2018,” Moncik said. “It’s not like a few years ago when it would have been resources, energy or financial services companies.
Cannabis is one that’s a lot in the headlines. Outside of cannabis, while it may not have been a robust first half of the year, issuers from many industries were active in the capital markets.”
Public offerings were especially rare in the first half after 2017 that saw Canada Goose Holdings Inc., Roots Corp. and Kinder Morgan Canada Ltd. get on the Toronto Stock Exchange ticker chart.
“The IPO market was also not as robust as 2017, although we are seeing a few in the pipeline now; so we are optimistic that the second half of 2018 will produce more IPOs,” Moncik said, noting that “uncertainty is not great for capital-raising activity.”