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We happy few: TUI cash call breathes life into ECM after CS implosion, other sellers hold back

As the dust settles from the share collapse and rescue of European banking giant Credit Suisse [SWX:CGSN], some issuers have been able to move ahead on pre-announced deals showing all is not lost for the pre-Easter window.

The whipsawing in indices on the back of fears of mounting pressure on the global financial system has led to sudden bursts of volatility over the last fortnight, keeping sellers away from the accelerated market which had been heating up following huge block trades in Heineken [AMS:HEIA], LSEG [LON:LSEG] and BNP Paribas [EPA:BNP]. Accelerated deal volume in Europe dropped to USD 322m-equivalent last week, the worst week for the continent since January, following the announcement of Credit Suisse’s rescue by UBS [SWX:UBS].

With much of the focus on Europe, the VSTOXX volatility index remains up around 14% year-to-date at around 23.6 on Monday, but down from a high of 32 last week. Despite the drop, bankers are predicting a quieter run-up to Easter than many had expected just a few weeks ago. “Accelerated trades are very tricky, the market remains ridiculously volatile, and things are changing so quickly,” said one senior ECM banker. “You can start a wall-cross and within half an hour everything has changed.”

Since the resumption of fears over the health of global banks, the few deals materialising have been smaller, almost club-like with only a few pre-sounded investors, or have been pre-announced well before launch.

Case in point was Siemens Energy’s [ETR:ENR] EUR 1.2bn capital raise on 15 March, launched just as bank stocks had started to churn, with the company having long announced its intention to partially refinance a cash tender offer for its Spanish arm Siemens Gamesa Renewable Energy [BME:SGRE]. The raise was effectively covered before launch and, therefore, went ahead despite the turmoil.

“When we started everything was fine and then throughout the day the world began to fall apart,” said a banker on the deal. “It shows that if you launch a wall-crossing process and investors still commit at the levels they did at the start of the day, you should push on, but as soon as you start to feel a reaction to a bad market day then in these conditions you just need to pull the plug, there is no point putting the client in danger”, he added.

Both bankers said there are plenty of potential deals on the sidelines, where owners of large non-strategic equity cross holdings have been in dialogue with banks. But more blocks are unlikely before markets begin to show a modicum of calm.

Signs of life

There are, however, some shoots of activity beyond blocks. On Friday, 24 March, German travel operator TUI [ETR:TUI1] launched a EUR 1.8bn rights issue, part of pre-flagged financing to pay back government support from the COVID-19 pandemic.

The deal, although large, is thought to have a strong enough thematic to survive macro pressure. “Despite everything that is going on, inflation, financial instability, folks are travelling and planning holidays and TUI’s bookings are performing well,” a source close to the deal said.

However, the source confirmed that the deal had been pegged for launch as early as two weeks ago but it had been delayed because of the underlying market. A second source said that the 39.85% discount to TERP on the 8-for-3 deal was likely wider than the company would have offered were equity markets not so turbulent.

The banks must also find the money for TUI without participation of sanctioned shareholder Alexey A. Mordashov, who indirectly holds 30.91% of the company.

Rights issues have already proven to be resilient throughout market stress, with French renewable energy company NEOEN [EPA:NEOEN] completing a EUR 750m rights issue with an oversubscription rate of 162.4%.

The first banker said that although well-flagged rights issues were clearly possible, even in a difficult market, the Tui trade might prove trickier than NEOEN’s given German shareholders cannot oversubscribe like they can in France, and the banks must find EUR 1.8bn entirely from the freefloat, without the participation of the major shareholder. “That is a proper underwrite,” he noted.

In addition to rights issues, French private equity firm Wendel [EPA:MF] issued an exchangeable bond last week worth EUR 750m, convertible into existing ordinary shares of Bureau Veritas [EPA:BVI].

The transaction, which was multiple times oversubscribed, benefitted from benchmark inclusion meaning investors were tempted to buy given it would later be bolstered by index fund purchases.

But even this, perhaps one the safest of ECM deals, could not be launched at the start of last week as the CS fallout raged across European markets, said a source close to the deal.

While transactions of the less risky sort are now possible, even they have had to wait for a window. And for most, the market risk is still just too high.

TUI and Wendel declined to comment for this piece.

Author's note: 

Since the original publication of this piece on the morning of Tuesday March 28, market volatility dropped substantially with stock markets trading up in Europe and the US. This allowed for a EUR 1.4bn selldown in Mercedes Benz, sold by Kuwait's sovereign wealth fund, on the evening of March 28 and then a EUR 200m trade in JDE Peet's, sold by IPO seller MondelÄ“z International. As sources told the ECM Pulse, conditions in Europe's equity capital markets continue to change at a rapid pace, on the upside as well as on the downside.