National Post (Latest Edition)
Feeding frenzy hits new peaks
COMPANIES AROUND THE WORLD RUSH TO RAISE FUNDS
Capital markets have never been so hot. Companies across the globe have tapped investors for trillions of dollars in debt and equity this year, taking advantage of rallying stock markets and rushing to exploit the easiest borrowing conditions in decades before the Federal Reserve and other major central banks start to withdraw their support.
The feeding frenzy, including more than Us$1-trillion worth of share sales and nearly US$4 trillion of bond issuance, involves the biggest names in the corporate world, including Apple, Walmart, Baidu and Volkswagen. And even though bankers are racing to ink loans and finalize initial public offerings, the backlog of deals still to be done remains daunting.
“People are flat out right now, whether that be equity capital markets bankers, M&A bankers, lawyers — the City is definitely full with transactions,” said Duncan Smith, head of European equity capital markets at RBC. Smith compared the intensity of work on initial public offerings and secondary share sales to the dot-com boom and the years before the financial crisis.
Some US$8.7 trillion has been raised across equity sales, bond offerings and loan deals — including loans syndicated and held by banks — at a record pace, according to the data provider Refinitiv. The ferocious pace has exhausted the fund managers who must decide if they are willing to invest, but it has not yet sated their demand, even though markets wobbled at the end of September.
In the U.S., traditional IPO volumes for the first time eclipsed the peak set in 1999 before the dot-com bust as companies like brokerage Robinhood have come to market. Banks including Citi, Bank of America and Goldman Sachs, which are poised to take in record investment banking fees this year, are adding or moving staff to their underwriting and syndication teams so they do not lose work to rivals.
Global equity issuance is now within striking distance of the full-year record set last year, boosted by US$504 billion of secondary share sales by publicly listed groups like China Telecom and U.K. insurer Prudential. And with the listings of companies like FWD Group, the insurer owned by Hong Kong billionaire Richard Li, and electric-vehicle maker Rivian expected before the end of the year, dealmakers say that the tally could soon eclipse that record.
The figures are striking even when excluding the deluge of shell companies known as SAPCS that listed early in the year — a trend that captivated Wall Street as hundreds of organizations with no real businesses went public with a view to buying other businesses and launching them on to stock markets.
Nearly 500 special purpose acquisition companies have raised US$128 billion this year, including US$15.7 billion in the third quarter. The number of SPACS going public has dropped considerably from the start of 2021, and stabilized in recent months, particularly as earlier listed shell companies found private companies with which to merge.
“In the first quarter it was an enormous portion of the IPO market, which couldn’t last ... but I do think there’s a sustainable level going forward that is quite a bit higher than what it was,” said Jeff Bunzel, Deutsche Bank’s global co-head of equity capital markets.
SPACS have not been the only alternative option that companies have used to go public. Direct listings have moved further from the fringes, as well-known companies like eyeglass maker Warby Parker and cryptocurrency exchange operator Coinbase have used it as a way to go to market. The option is primarily for companies that do not need to raise new capital, instead allowing existing investors the ability to sell their stock. Six of the listings have been completed in the U.S. so far this year.
The boom in capital markets has not yet been rocked by the creep higher in volatility, even though investors are growing wary about slowing economic growth, tightening monetary policy, a potential debt shock in China and a fight over the debt ceiling in the U.S.
In September, the S&P 500 suffered its first monthly loss since January, while the FTSE All World Index recorded its largest monthly decline since the nadir of the crisis in March last year as investors were spooked by the prospect of higher interest rates.
Nonetheless, in the final weeks of September, banks hit the road to market a roughly US$15 billion bond and loan package to finance the biggest leveraged buyout since the financial crisis. Even with a surge of volatility over several trading days when stock and bond markets declined, orders for the deal poured in, according to people briefed on the matter.
By the time the package was wrapped up to fund the acquisition of medical supply manufacturer Medline by a private equity consortium this week, banks had totted up so much demand that they were able to slash the interest costs the group of buyers ultimately had to pay to secure the cash.
Vivek Bantwal, the global cohead of financing at Goldman Sachs, said new deals had been surprisingly resilient despite the swings in the stock market. He noted that last week, 38 junk bond and loan deals had been completed in the U.S. and all but one of them priced with yields that were at or better than what underwriters had expected.
“We’re in an environment where gross domestic product is growing and companies are doing well and the cushion they have in terms of interest coverage and leverage statistics are getting stronger,” he said.
Recent volatility may prompt some issuers to pull forward deals given that it raises “question marks over future liquidity ... therefore providing impetus for corporates to act now,” according to Jeff Tannenbaum, who runs capital markets in Europe, the Middle East and Africa for Bank of America.
That is why so many bankers have their eye on financial conditions indices. The barometers often measure changes in credit conditions, stock markets and currencies to gauge how easy it is for companies and governments to finance themselves. At the start of September a closely followed U.S. measure produced by Goldman Sachs hit an all-time low, indicating that it had never been easier. But in the intervening weeks it has started to show signs of weakness.
Monica Erickson, a portfolio manager at Doubleline Capital, is one of the many portfolio managers in the U.S. scrutinizing new debt sales, deciding where to invest on behalf of her firm’s clients. She said that even as deal after deal crossed her desk, some debt offerings had been as much as 10 times oversubscribed, in a sign of the strong demand.
“You see how new have traded and how much has been absorbed into the market and it shows you there is massive demand for the asset,” she said. “Fund flows have been really strong this year.”
Investment grade bond sales — the safest end of the corporate debt spectrum — are one of the few areas of the market to cool, although it does not feel slow by any means.
Last year, borrowing through bond markets swelled as companies issued debt and stockpiled cash to weather the pandemic. This year, while investment grade volumes are down 15 per cent at US$3.4 trillion, the number of companies borrowing through debt markets has increased.
The decline has been offset by big increases in junk rated issuance, driven by a spurt of dealmaking by private equity groups as well as a move by many of those buyout shops to pay themselves dividends funded by new bonds and loans.
In September, one particular deal caught the market’s attention: a triple C rated loan from software company BMC that priced with a yield of just 6.3 per cent. It marked the lowest borrowing cost for a loan judged to be that risky by the major credit rating agencies since at least 2010, when S&P Global Market Intelligence unit LCD began tracking the data.
As private equity firms raise ever larger pools of funds, dealmaking could keep the foot on the accelerator in terms of debt and equity issuance. More than US$800 billion worth of leveraged buyouts have already been clinched this year, eclipsing the all-time record set before the global financial crisis for the first time.
“We get ourselves in to lots of conversations where we go to a client and talk about M&A financings before there’s even an opportunity. If you needed to finance a US$10 billion takeover, how would you do it? A US$50 billion financing?” said John Chirico, the global co-head of banking and capital markets at Citi. “It is very rare you get all financing markets working on every front.”