Covid fuels feverish deal activity for bankers
The virus crisis has been both good and bad for the big banks
● When SA’s big banks report financial results this month there will be red ink all over the virtual pages, with profits falling sharply as they hike their loan loss provisions in anticipation of the devastation the Covid crisis is wreaking on their customers.
But one bright spot this time around could be their corporate & investment banking arms.
Like some of the big Wall Street investment banks that posted record second quarter trading profits, local banks’ global markets and risk management businesses will have done well amid the dramatic market volatility that erupted when the impact of the Covid crisis began to become clear in late March.
It’s been an extremely busy time for corporate bankers as their clients have had to reposition their businesses, restructure their debt and shore up their balance sheets. And the story they tell of how the drama has evolved over the past four months highlights the way the crisis has impacted SA’s larger corporates — as well as the challenges and opportunities for their bankers.
“We went from complacency regarding Covid-19 to emergency from mid- to end-March,” says RMB CEO James Formby, while Standard corporate & investment banking CEO Kenny Fihla describes an “avalanche” of requests from clients in those early days of the crisis to allow them to breach the covenants written into their loan agreements.
With the economy shut down almost completely, and even big, strong companies unable to comply with the terms of their loans through no fault of their own, almost all of their clients came with covenant-waiver requests, and no banker was going to call a default.
Absa corporate & investment banking head Charles Russon reckons his bank helped about 260 corporate clients with funding pressures. Most were robust, but for some companies that were already teetering on the edge, Covid was the last straw.
“As banks we had to get our heads around which companies were the survivors and which not,” says Russon. And Fihla says that while normally banks charge fees when they do debt restructuring, during this period Standard didn’t charge for most of the debt deferrals it did. He credits the Reserve Bank too for lightening up on regulations to make it easier for banks to do so.
At the same time there was a rush for liquidity — clients simply wanted to be sure they had cash on hand, often pre-emptively. In many cases, says Formby, they drew down on the facilities they already had but deposited the cash straight back with the bank, “so we grew both sides of our balance sheet”.
But the emergency period has stabilised, says Formby, and banks are now into the “new normal”.
Investment bankers are being kept busy restructuring debt for clients. They are also seeing deal-making activity picking up in their advisory businesses, with more capitalraising and merger & acquisition (M&A) activity ahead as South African corporates pivot from the first phase of the Covid crisis to position themselves for the next phase.
Bolstering balance sheets is one big theme, Formby notes. Companies such as Pepkor, Sun International, City Lodge and the Foschini Group are among those that have gone to the market to raise equity capital.
Figures from the JSE show R16.6bn of capital was raised on the equity market from March to mid-July, of which R14.6bn was through rights issues and share placements.
That activity is expected to increase. Bankers such as Jonathan Penkin, CEO of Goldman Sachs SA, have recently urged institutional investors and the JSE to make it easier for companies to go to the market more quickly to raise large amounts of capital.
Formby also points to consolidation as a theme that is starting to play out — the Foschini Group’s acquisition of Jet from Edcon is one example, though the consolidation won’t necessarily be in the listed company space, says Formby. Often it will involve smaller businesses in industries where larger players have the muscle to take opportunities presented by the Covid crisis.
Law firm Baker McKenzie reported M&A activity in SA was down 60% in the first half of this year as the crisis saw many deals called off, according to a report in Business Day.
‘We are seeing increased deal action … M&A activity will increase by the fourth quarter’
But that is expected to change.
Says Fihla: “We are seeing increased deal action not just us as Standard Bank but across the investment banking space. The trend can only increase in the next six months and we are convinced M&A activity will increase by the fourth quarter. In any crisis, companies that are substantially stronger and healthier and can act quickly and identify opportunities to further their market share will look to acquire weaker companies.”
Private equity is another area where deal activity is likely to pick up, bankers say. While many private equity firms have been more internally focused during the crisis, helping the companies in which they are invested to restructure debt and operations, they will start to look at new opportunities.
The Southern African Venture Capital and Private Equity Association said in its annual survey, released this week, that there had been a significant increase in funds under management, to R184bn at the end of December 2019, and the first half of this year had been a “whirlwind of activity”.
Russon also predicts increased activity related to the “Davos agenda”: “Sustainable business and sustainable finance will be put on steroids, especially when we start to see government’s infrastructure programme start to happen.”
There are high hopes for the government’s long-awaited infrastructure drive, which would mean plenty of project-finance and other deal-making activity for the banks, while supporting SA’s economic recovery.
The presidency said on Thursday, following a meeting of the Presidential Infrastructure Co-ordinating Commission, that the government would in coming months expedite the implementation of at least 50 infrastructure projects, with a total investment value of more than R340bn.
SA’s investment bankers would be happy if even a few of those projected deals can actually get done.
“Infrastructure now needs to be a priority for SA. Even just physically executing on eight to 10 projects could really make a difference,” says Formby.