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Investors back for blocks but liquidity is key

As European equity markets rebound slowly from the depths of the sell-off following Russia’s invasion of Ukraine, block trades and their aftermarkets are starting to tick up.

Some sellers have seized the emerging window of opportunity already, with initial performance encouraging Europe’s fundamental investment community back to ECM. But investors remain wary, and bankers cannot be overly ambitious in what they bring to the table, buysiders speaking to the Pulse warn.

There has been roughly USD 4bn of block paper sold in Europe during March, generating USD 306m of profit for investors, a weighted average return of around 7%, Dealogic data shows.

Strong performance for recent trades will lead to more transactions, bankers said.

“There are definitely opportunities for blocks in certain names,” said one banker. “The broader outlook is uncertain, but volatility is down to normal levels and recent blocks have performed well which is giving investors’ confidence.”

Several sources said that they have been encouraged by the level of investor participation in deals, including in two large Glencore [LON:GLEN] and London Stock Exchange Group [LON:LSEG] blocks in the week of March 21. The momentum continued with a USD 1.2bn trade in UK bank Barclays [LON:BARC], conducted by Goldman Sachs [NYSE:GS] last week.

Both the Glencore and Barclays deals were the only two USD 1bn+ transactions in EMEA in 2022, according to Dealogic data. The two deals show that trades can be done if priced attractively, with stocks that are in the right thematic, which both were, and if highly liquid names, said a second banker.  

GS did not publicly disclose the seller, but a Reuters report speculated that it may have been Capital Group that sold the shares. Capital declined to comment at the time.

A banker away from the deal suggested that the transaction had been conducted through Goldman’s trading desk rather than as a traditional accelerated bookbuild, as would normally be the case in a big stake sale, which would be remarkable for a USD 1bn+ deal.

Goldman Sachs did not respond to requests for comment.

Both trades showed that sellers can dispose of big positions in highly liquid names. On Tuesday (5 April), as the Pulse was going live, a trade in Airbus [EPA:AIR] launched by Morgan Stanley added to the trend.

Fundamental buyers return  

One of the notable dynamics in recent block trades has been a return of long-only fundamental investors to deals.

One investor at a large global asset manager said his firm had been selectively taking part in blocks again and cited both the Glencore and London Stock Exchange deals as strong transactions.

His firm remains highly stock specific but would continue to engage on blocks, a stark contrast to earlier in March, when the market saw little interest at all from the long-only community.

According to a third banker, around 20% of the order book on an average deal was now coming from long-only investors and, because subscription levels have been so high, syndicates could now roughly allocate 50% of the book to those names.

However, the investor said he expected at some point banks might become “over aggressive” and try to push too large a position at too tight a discount which would be given short shrift by the buyside.

“Liquidity is everything and investors don’t want more than a few days trading in this market,” the third banker said. “People are still very concerned, and we are one bad headline away from a sharp pullback.”

He added that investors he spoke to were more worried about the broader economic headwinds hitting the market, such as high inflation, central bank tightening and cost-of-living pressures on consumers, than the war in Ukraine.  

A fourth banker said, however, that the war in Ukraine had meant that discounts over the last few weeks had been several basis points wider than they likely would have been before the war.

Sectoral bias

Banks, commodity, and energy stocks – which have traded well in recent weeks – will be among the most likely names for accelerated bookbuilds, bankers said.

This news service has previously reported that there has been strong investor demand for a second trade in Commerzbank [ETR:CBK] by private equity firm Cerberus Capital Management, following on from a previous EUR 189.75 deal in January.

Investors have also shown interest in Deutsche Bank [ETR:DBK] and Austrian bank Bawag [VIE:BG] in previous trades this year and could be again, should another slice in those names hit the tape.

There is some possibility for state sell-downs too, like the Icelandic government’s stock disposal in Islandbanki [ICE:ISB] in March. This news service reported that the state could do another sale in the name once its lock-up expires on June 21.

In defence, Germany’s Rheinmetall [ETR:RHM] remains one of the best recent performers in the Stoxx 600, with sources previously telling this news service that trades in utilities such as Energias de Portugal SA (EDP) [ELI:EDP] would be popular with investors.

There is still some demand for certain technology names among investors, bankers said. Dealogic likely-to-issue data predicts a high chance of a trade in Polish e-commerce company Allegro [WSE:ALE] in the next six months.

Shares in the stock are up 24% in the last month but remain well below IPO price and the last block trade done by Cinven, Mid-Europa Partners and Permira.

Even so, the firms might look to take some gains after a solid run for the e-retailer. In a year rattled by volatility, it remains unclear how long will windows of opportunity last.