Mining was a bright spot, but trade tensions and prospects of higher interest rates sucked the life out of deal flow in the first half of 2019
Bay Street’s top dealmakers blamed trade headwinds and prospects of higher interest rates for disappointing issuer activity in the first half of the year, but expect the outlook for the second half to be considerably brighter as at least one of the key concerns recedes into the background.
“Issuance volumes languished early in the year given the weak hand-off from 2018 as market sentiment suffered from trade headlines, Brexit uncertainty and fear of tight monetary policy crippling economic growth,” said Rob Brown, co-head of debt capital markets at RBC Capital Markets, which led both debt and equity issuances in Financial Post’s Dealmakers league tables in the first half of the year.
Overall, corporate and government debt and equity deal count, at 516, was off 12.7 per cent compared to the first half of 2018. Volume, however, fared better, with the $215.1 billion in issuances up just 4.1 per cent over the previous year.
More specifically, prospectus offered, debt and exchange traded equity offerings saw a 7.7 per cent drop in numbers, to 228 deals, but 2.5 per cent growth in value, which stood at $60.5 billion for the first half.
“We’re still seeing a lack of desire to do large acquisition transactions that require extra capital, something that has impacted both debt and equity issuance activity,” said Desmond Lee, who focuses on equity financing transactions in his capital markets practice at Osler, Hoskin & Harcourt LLP in Toronto.
Financial Post Data’s statistics show that the first half of the year produced only one merger and acquisition transaction that exceeded $10 billion, with Newmont’s Mining Corp.’s acquisition of Goldcorp Inc. valued at $13.3 billion. Two other deals were in the $5-10 billion range, namely Brookfield Asset Management Inc.’s acquisition of Oaktree Capital Corp. at $6.3 billion and Onex Corporation’s purchase of WestJet Airlines Ltd. for $5 billion.
“We’re busy but the deals aren’t making headlines, although there have been signs of life in terms of megadeals,” said Eric Moncik, a corporate finance partner in Blake, Cassels & Graydon LLP’s Toronto office.
The weakest capital market performers in the first six months of the year were equity offerings, which counted 240 deals valued at $15.3 billion, off 21.1 per cent and 29.0 per cent, respectively, for the same period in 2018.
Unlike this year’s kickoff, however, 2018 had featured a good start for the issuer market.
“Equity started to melt down in November of last year, and the next few months were very slow,” Moncik said. “But things settled down toward the end of February and we’ve been busy since — so much so that activity has been equal to or greater than H1 2018 in the last few months.”
Nitin Babbar, head of RBC Capital Markets’ Canadian equity markets business, expects the uptick to continue.
“Going forward, we see an environment where Canadian equities have performed largely in line with U.S. markets,” he said. “So not only are more issuers looking to the markets for growth capital and refinancing, but the offerings are becoming larger as well.”
Roman Dubczak, managing director and head of global investment banking at CIBC Capital Markets, notes that the first half saw only two equity transactions over $500 million: Northland Power Inc.’s $862 million secondary offering and Corus Entertainment Inc.’s $548 million secondary offering.
“Large deals are a significant market driver, and they just didn’t emerge in the last six months,” he said. “In any given year, we’d usually expect to see one or two transactions at $1 billion or $2 billion.”
Private equity markets were also “really strong” in the first six months of the year.
“There’s a drift to the private market in equity issuances,” Dubczak said. “So some deals that might normally be done in the public markets now go the way of private equity.”
Also contributing to a somewhat disappointing first half, according to Dubczak, was “a bit of a rough patch in oil and utilities.”
And for all the talk about the impact of trade wars, some observers say that industry sectors are the primary drivers of Canadian capital markets.
“Weakness in key sectors like energy and utilities is by itself enough to have an impact on overall deal counts, perhaps more so than political, trade or economic issues,” Lee said. “And other industry sectors, including cannabis, haven’t really made up the difference so far this year.”
Lee observes, however, that there have been “more deals” in the mining sector in 2019.
“That’s a bright spot that sometimes gets overlooked,” he said. “And if gold prices keep rising, it could help drive some additional capital-raising activity in the mining space.”
Corporate debt deal count also fell off, with 128 deals representing a 13.5 per cent decline compared to last year. But the value of the transactions was $105.8 billion, down a mere 0.1 per cent.
Patrick MacDonald, co-head of debt capital markets at RBC Capital Markets, says his bank’s statistics, which track only the Canadian domestic market, show that corporate supply is 17 per cent off from last year’s record pace.
“However, that’s in line with the average experienced since the global financial crisis,” he said.
Almost all the decline, MacDonald says, stems from a 26 per cent reduction in financial sector issuances.
There’s a drift to the private market in equity issuancesRoman Dubczak, CIBC Capital Markets
“Wholesale funding requirements have been more modest, and banks have been active in sourcing competitively-priced funding outside of Canada,” he said. “Non-financial sector supply is actually eight percent higher, driven by elevated levels of activity from CMT (communications, media and technology), energy and utility sector issuers.”
The Maple market — Canadian-dollar denominated issuances by foreign companies —, however, languished in the doldrums, as RBC statistics indicated that supply declined markedly with only two bank deals totaling $2 billion so far this year, as compared to full year totals of $9 billion in 2018 and $15.7 billion in 2017.
On the other hand, Financial Post Data tables indicate that government debt was up significantly, with 148 deals worth $94 billion representing increases of 6.5 percent and 18.7 percent, respectively.
“Interest rates were really low, so why not borrow, especially because the low rate meant investors were looking to buy longer-dated bonds, which governments like to issue,” Dubczak said.
As well, offshore supply has been more modest than last year.
“The funding arbitrage hasn’t been there to entice issuers to look at currencies other than the Canadian dollar,” Brown said.
Going forward, the forecast is bright, particularly on the corporate debt side, where favourable central bank commentary contributed to what Patrick Scace, global head of debt capital markets at TD Securities Inc., called “a jolt in risk sentiment” that saw supply reach $16.6 billion in June, making it the most active month on record in the Canadian bond market.
A dovish tilt by global central banks, including the Bank of Canada, has brightened prospects for continued economic growth in the face of ongoing trade tensionsPatrick MacDonald, RBC Capital Markets
“Issuance picked up significantly in June to comprise over 55 per cent of total new issue supply,” Scace said.
According to MacDonald, the prospect of lower interest rates fuels much of the optimism.
“A dovish tilt by global central banks, including the Bank of Canada, has brightened prospects for continued economic growth in the face of ongoing trade tensions which, along with reduced supply year-over-year, has improved funding costs by more than 100 bps year-to-date,” he said.
Richard Sibthorpe, head of debt capital markets at BMO Capital Markets, is of similar mind.
“We are expecting debt issuance to be active in the second half of the year fuelled by capex, re-financing and acquisition-related financing activity,” he said in an email. “Moreover, market fundamentals have been exceptional, fuelled by a very attractive interest rate environment that has continued to drive opportunistic issuance by a number of corporates which has been very well received by investors.”
The wild card, of course, is the coming federal election.
“If there is volatility or the prospect of strange outcomes, that’s going to be a key factor, especially in the equity markets,” Babbar said.