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ECM Highlights 1H23: Still Waiting

Powered by Dealogic data, ECM Highlights reviews ECM activity across Americas, EMEA and APAC in 1H23. All data correct as of 1 July 2023

Global ECM: A bull no one trusts 

A global rebound in stocks has not fed through to equity capital markets issuance, with volumes in 1H barely hovering above the second half of last year.

US equity indices entered new bull markets in 2Q after rising 20% from previous lows in October 2022 but global ECM volume failed to move in line with this exuberance.

Total global deal volume of USD 320bn was higher than the USD 304bn in the first half of 2022, in itself a tame year, yet still in stark contrast from the heady days of 2021 when almost USD 1trn was printed in the first six months of the year alone, according to Dealogic data.

On a quarterly basis, global ECM saw almost 1600 deals worth USD 163.5bn, higher than the previous quarter which saw 1494 transactions worth USD 155.6bn. The quarterly uptick was driven mainly by American issuers, with 424 deals worth almost USD 63bn, up from the previous quarter’s 371 transactions worth USD 41.2bn.

Rising interest rates around the globe are yet to translate into a flood of companies seeking equity finance to bolster balance sheets and bankers say there are fears of a draw-down in markets after summer, amid the threat of global recession.

IPOs, once the bellwether product for ECM, remain the main casualty of this lack of investor confidence. There was only USD 64.2bn worth of global IPO activity in 1H, down from USD 78.5bn in 2H last year and USD 97bn in 1H22.

Despite this IPO malaise, the USD 4.4bn listing of Kenvue [NYSE:KVUE], the second largest transaction of the last six months and the largest deal of the quarter, has raised some hope of IPO greenshoots, with the stock trading around 20% above its listing price.

A USD 9bn-equivalent sell-down in Japan Post [TOL:7182] remained the largest deal of 1H, retaining its crown since March.

European mega blocks were another highlight of the quarter, following on from 1Q. A USD 3bn-equivalent sell-down in London Stock Exchange Group [LON:LSEG] showed continued demand for the stock, following another block earlier this year.

The takeaway from the numbers is that equity capital markets are working for those who need to use them, but lots of issuers are declining to do so. From an investor perspective, the willingness to take risks in mega block trades shows investors are happy to put money to work, but only in highly liquid situations where positions can be quickly exited in the event of a downturn.

This means IPOs must be “too-cheap-to-miss” to get away successfully. There is no sense of FOMO among investors who are happy to skip deals if they do not offer what their firm feels is compelling value.

The high-profile IPO cancellation by Turkish-owned soda ash company We Soda in London showed that issuers unwilling to trade at the heavily discounted rates demanded by investors are unlikely to press ahead with a deal.

But issuers that are willing to engage with the market on price, like pharma giant Johnson & Johnson was with Kenvue, can successful cross the IPO finish line.

With interest rates set to remain high in the face of stubborn inflation, issuers - just like investors - must learn to adapt to the new market reality.

Americas: Pause in rate hikes offers investor relief 

Hope and optimism returned to the region’s equity capital markets in the first half of 2023.

Total 1H23 deal volume stood at USD 104.1bn for the region’s issuers across 795 ECM transactions, higher than the USD 74.3bn seen from 605 deals in the second half of 2022 and the USD 79.3bn raised via 660 deals in 1H22.

The US saw 588 deals worth USD 93.3bn in the first half of 2023, followed by Canada with 205 transactions worth USD 4.1bn, Brazil with 21 deals worth USD 3.7bn and Mexico with six worth USD 1.4bn, according to Dealogic.

After a prolonged dry spell of IPOs, Kenvue, the consumer health carve-out of Johnson & Johnson, raised USD 4.4bn in May, making it the largest US IPO since late 2021.

While the Kenvue listing demonstrated demand for fresh equities from profitable, established businesses, Cava Group [NYSE:CAVA] turned heads when its stock price doubled on its debut in June, proving there is also investor appetite for emerging growth stories, profits be damned.

“There is more vibrancy in the exchanges,” said Will Braeutigam, US capital markets transactions leader at Deloitte. “Some of the unknowns and uncertainties have changed,” he said, pointing to the Federal Reserve’s pausing of interest rate hikes in June and a widespread belief that inflation will settle down.

With a firmer grasp of where interest rates are going, the spread between buyers and sellers of equities that prevented dozens of deals from getting done in the first quarter grew considerably closer in the second quarter, according to Braeutigam, and that has paved the way for new stock issuance.

A rally in stock markets, driven in part by overwhelming interest in artificial intelligence, has also created a more favourable environment for companies to consider publicly listing shares, he added.

In all, 43 American companies priced IPOs in the first half of the year, collectively raising USD 10bn, according to Dealogic. That’s double the amount of capital raised through IPOs in 2H22, but down from USD 18.25bn in 1H22 and a far cry from the hundreds of billions of dollars raised in 2021.

Follow-ons generated the most activity in 1H23, with 434 deals raising more than USD 53bn in total on US exchanges. GE HealthCare Technologies’ [NASDAQ:GEHC) USD 2.2bn offering in June was the largest follow-on offering, trailed closely by agilon health [NYSE:AGL], which raised slightly more than USD 2bn.

Convertible debt deals also produced positive results, with 59 transactions netting more than USD 26.1bn. Southern [NYSE:SO] and Duke Energy [NYSE:DUK] led the way, each raising more than USD 1.7bn via converts. Utility companies historically fare well during prolonged economic downturns, advisors noted.

Despite the modest progress made in equity markets, Megan Penick, public securities chair at law firm Michelman & Robinson, still described the first half of the year as “a little rough.” The failure of Silicon Valley Bank and other banks created market instability and put pressure on start-ups, she noted.

Moreover, special purpose acquisition companies, which helped prop up equity markets in recent years, fell out of favour after coming under intense regulatory scrutiny, Penick added. There were only 14 new American SPAC offerings in the US markets in the first half of the year and they raised about USD 1.8bn in total.

There are a handful of companies, mostly in energy and manufacturing, that are expected to launch IPOs this summer, according to advisors. How they perform may set the tone for the rest of the year. A larger group of companies are busily preparing for IPOs in the fourth quarter and in 2024, Braeutigam said.

“I don’t want to call the IPO window open quite yet,” he said. “But there is a lot of hope and optimism.”

EMEA: Banking on blocks

Across the pond, EMEA’s mood music isn’t quite as upbeat. Protracted economic uncertainty, rising interest rates environment and fresh geopolitical challenges continue to hinder ECM issuance, but the success of big block trades and the pricing of a few well-flagged IPOs show glimmers of hope for the rest of the year.

In 1H23, EMEA issuers raised USD 75.5bn across 756 deals, slightly higher than the USD 71bn coming from 705 deals during the same period in the previous year.

Issuance pales against volumes for the 2019-2021 period, with USD 198bn of ECM paper printed in 1H21 from almost 1200 deals.

Market uncertainty meant short-term risk products like blocks and other follow-ons were the predominant driver of activity with several USD 1bn+ high-profile deals done. Deal volume reached more than USD 58bn against USD 47.7bn in 1H22.

“High valuations on liquid stocks drove accelerated bookbuilds,” said Loic Chenevier, head of strategic equity capital markets for France and Benelux at Natixis. The secondary ABB market has been active since the beginning of the year and his team expects it to remain so as long as valuations offer opportunities for sellers, he added.

The UK was the most active market in terms of follow-ons (USD 11.4bn in deal volume), followed by France and Germany.

Notable deals included two multi-billion-pound blocks in the London Stock Exchange Group, whose second USD 3.3bn sell-down in May has been the largest European ECM deal of 2023 so far. There was also a sell-down in Haleon [LON:HLN] by GSK [LON:GSK] in May, the first dual tranche sell-down of Heineken NV and Heineken Holding NV in March, and a EUR 2.2bn sale of BNP Paribas [EPA:BNP] in the same month.

Fewer convertible bonds than expected priced in 1H; still this first half recorded USD 7.9bn in deal volume from 38 deals, a silver lining when compared to 1H22, when only 11 deals priced raising a measly USD 2bn.

CB expert Ivan Nikolov noted while issuance was better than last year, it remains far below record levels, especially against a backdrop of rising rates and tight credit environment. In this sense, the banking sector turmoil which led to the collapse of Credit Suisse earlier this year did not help, he added.

Convert issuance in 1H was mainly driven by opportunistic issuers as well as some early refinancing moves due to high interest costs in the credit market. Potential M&A deals could also spark a new wave of deals. “Post-covid issuance as well as expectations for a peak in rate hikes” are reasons for corporates to ponder their next moves, he said.

IPOs still face significant hurdles, with issuers awaiting better market conditions to launch deals. The year started with a low mood after the flop of IONOS [ETR:IOS], but a few successful mid-size listings improved sentiment. The usually safe oasis of Middle East has slowed down and did not cushion EMEA issuance thus far.

Most recently, We Soda’s IPO cancellation has prompted serious questions around IPOs' viability as a tug-of-war valuation scenario pits issuers against investors. The three deals in the market, Romania’s utilities giant Hidroelectrica,
Thyssenkrupp [ERE:TKA]’s hydrogen division Nucera and emerging markets payments provider CAB Payments may prompt a more positive attitude if they close successfully and price up in H2.

A lot rides on the early days of July for Europe.

APAC - Another disappointing quarter closes

Investors pinning hopes on a meaningful recovery of China’s consumer story ended another quarter with deep disappointment. And that continued to pinch hard deal activity in Hong Kong, China and even China’s global depositary receipts market, which was shut by and large for almost the entire first half.

Total APAC ECM issuance in 1H23 came to USD 140bn across 1539 deals, down from USD 152bn across 1789 deals in 2H22. The MSCI Asia Pacific Index closed the second quarter at 163.14, up negligibly from 162.10 at the end of March, gaining 4% in the first quarter.

China continued to lead the pack in terms of IPO activity across the region, followed by Indonesia. Hong Kong’s struggles to find its way out of the abyss continue.

In the first half of the year, the APAC region printed USD 45.8bn worth of IPOs, versus USD 64bn seen during the same period in 2022, based on Dealogic data. But the regionwide picture was rather misleading, as China alone priced USD 30.8bn worth of IPOs in 1H23, down from USD 38bn in the second half of last year.

Quarterly Chinese A-Share IPO volume was the only glimmer of hope, with 2Q23 issuance hitting USD 17.9bn over 81 deals, up from USD 13bn across 60 transactions in 1Q23.

China's A-share IPO continued to march forward in the second quarter from the January-March period despite persistent gloom in other listing venues for Chinese stocks - including Hong Kong, Switzerland and the US.

Hong Kong priced only USD 2bn worth of listings, flat on 1H22, Dealogic data shows. The latest half year reading remains a far cry from a record of USD 28bn hit in the second half of 2020.

A steady recovery in IPO filings within the Hong Kong exchange should hopefully pave the way for a gradual uptick in the city’s primary share issuance momentum toward the end of the year at the earliest, bankers say, dashing hopes for a Hong Kong comeback in the third quarter.

Indonesia, thanks to its huge reserves of raw materials used for electric vehicle batteries, was the region’s runner-up. But even so, secondary performance is something investors are still cautious about, especially as the global economic outlook gets increasingly bleak.

Nickel miner PT Trimegah Bangun Persada Tbk, which raised the country’s second largest new-share listing in late March, at USD 659m, has fallen 25% since the stock’s debut. PT Merdeka Battery Materials, which fetched USD 614m from its IPO priced on 5 April, has gained barely 2% since listing.

With US and China ties remaining on the edge, while China continues to get its economic formula right, public equity activity will likely continue to take a back seat as corporates hold their breath for the global economy to land – soft or hard.

Analytics by Raj Saiya