A global credit squeeze has ravaged investor sentiment around the globe but bankers in Europe’s equity capital markets can hardly complain: they still expect this year to be one of the strongest ever for new share issues.
But there are some worrying signs about prospects in coming months. In the past month, stock markets in Europe and the UK have fallen sharply amid fresh worries in the stricken financial sector and concerns about slowing global growth.
The FTSE Eurofirst 300 has lost 6.85 per cent since the beginning of the month, leaving the index down 1.4 per cent on the year. In the UK, the FTSE 100 has fallen 6.76 per cent, leaving it 1.3 per cent lower since January 1.
“With poor market performance and deteriorating sentiment, combined with the year-end slowdown, it is getting more difficult to price deals,” says Louise Wilson, head of European equity capital markets at UBS.
With five weeks of the year left, companies conducting share sales in Europe and the UK have raised $98.3bn, far exceeding the volumes seen at the height of the dotcom boom in 2000, according to data from Dealogic.
The amount is still about $15bn shy of the record highs set last year.
Some bankers are optimistic. Nick Williams, co-head European equity capital market at Credit Suisse, says: “Despite the market volatility, issuance levels in recent weeks have remained high and for the remainder of the year and going into 2008, we expect this to continue.”
Mr Williams and other bankers say the robust appetite for emerging market assets has been a big factor helping to drive volumes.
“One of the noticeable differences in the recent uncertainty has been that deals from emerging markets have survived much better than in the past,” Ms Wilson says.
Companies in emerging markets are increasingly tapping the equity market to feed their growth and have largely remained resilient to problems in the US credit markets.
While investors have become increasingly selective in recent months, their appetite for new share issues appear to be strong.
“Even though the debt markets seem to be in a dreadful state, the equity markets still seem to be okay,” says Tom Troubridge, head of the capital markets group at PwC.
Mr Troubridge adds that it is unclear “how long the apparent disconnect [between debt and equity markets] will last”.
One of the most closely watched deals expected to price by the end of the year in Europe is the share sale by a subsidiary of Iberdrola, the giant Spanish utility, which could raise up to €5.9bn ($8.8bn).
In the UK, the Kazakh mining company Eurasian Natural Resources Corp (ENRC) is planning an initial public offering that could raise up to $3bn by floating up to a third of the company.
Over the past few weeks several smaller deals have been pulled, with investors increasingly discriminating in favour of large-cap, or more liquid, stocks. “In terms of the turbulence, smaller deals have a harder time than bigger ones,” Ms Wilson says.
John Crompton, European head of equity capital markets at Merrill Lynch, says: “Generally speaking, I think it’s fair to say that primary market appetite will mirror secondary market performance. For example, investment stories that rely on credit markets are clearly disadvantaged in this environment.”
Still, bankers say that some sectors, including energy and natural resources, have also attracted strong investor demand and are likely to continue to see deals done smoothly.
Some bankers remain optimistic over the long term, saying that equity capital markets could benefit from turmoil in the credit markets in at least two ways.
First, for financial sponsors seeking to exit investments made over the past four years, IPOs may be one of the only routes, as leveraged buy-outs and recapitalisations become steadily harder to execute, bankers say.
Second, financial institutions seeking to use rights issues to rebuild their shattered balance sheets may also drive volumes up.
Jeroen Berns, head of European equity capital markets at ABN Amro Rothschild, says: “Some companies in the financial sector may be forced to raise money to repair balance sheets in the same way that telecoms companies had to in the period between 2001 and 2003.”
Iberdrola Renovables to test water for European IPOs
A test of investor appetite for IPOs in Europe will come next month when renewables group Iberdrola Renovables lists about 20 per cent of the company to raise up to €5.91bn ($8.76bn), writes Rachel Morarjee.
The initial price range for the sale of the group, the renewable energy arm of Spanish utility Iberdrola, has been set at €5.3-€7 per share. Pricing is due on December 11. The renewables sector has become increasingly popular among investors. However, banks say investors are becoming more picky.
“Gone are the days when a renewable tag would generate automatic
interest,” says Michael Boardman, managing director of equity capital markets at Nomura.
“You need to be large and established like Iberdrola or have a very focused and executable strategy like [Danish windpower venture] Greentech.” The Italian wind power group Fri-El in October pulled its IPO, citing market conditions. Bioethanol shares have fallen out of favour, bankers say.
Given high oil prices, there is still growth potential in the sector as several European countries need to increase renewable energy production, but investors can now be more selective, says Mr Boardman.
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