Our first priority during the outset of the coronavirus pandemic in March was helping our clients secure the liquidity they needed — whether that was from drawing down on facilities they have with us or working with them to access emergency loans from various government support schemes. It was imperative that we stayed close to our clients and had a clear understanding of their capital needs. Fast forward to the end of 2020 and the speed of change has been remarkable. So, from the rise of green convertible bonds to balance sheet recapitalisations, here are five themes to keep watch for in the new year.
1. Equity-linked set for green growth
The equity-linked market was one of the first to reopen after the pandemic began. A big factor in that was that the temporary unavailability of the Schuldschein market, which is of particularly importance to unrated and non-investment grade borrowers in Germany and Italy. We saw the same sort of pipeline that had built up in the conventional bond market on the equity-linked side, with a number of first-time and repeat issuers coming to market.
But the big theme was ESG’s debut in European equity-linked through five green deals. If I was to nail one prediction to the wall, it’s that a green theme will become as prominent in equity-linked as it now is in the straight bond market. Some of these deals have been one-off transactions, but this trend is not innovative structuring, rather it’s simply adapting existing structures to the demands of the EU Taxonomy. Convertible bond funds are now setting aside pockets of capital to invest in green bonds which is providing additional momentum in bookbuilding and creating price tension.
That’s good news for everyone — for us, for companies, for people and the planet.
2. Opportunity knocks for capital raisers
When the market began to reopen, we were expecting a high volume of capital raising through sizeable rights issues and mandatory convertibles. That didn’t happen, as there was still too much uncertainty and a sharp decline in a company’s share price would have meant too high a dilution for its shareholders.
That said, we’ve seen a number of large rights issues since the summer, although several, like the €4bn we helped manage for Cellnex, were opportunistic acquisition related deals. Rights issues will continue to be a theme in this quickly shifting landscape, as leading companies in their sectors will look to consolidate.
But we do not foresee widespread need for equity among corporates, as companies have taken on a lot of loans during the pandemic causing leverage to rise, although for many this was just precautionary funding. Broadly speaking, the leverage increase we were expecting earlier in the year did not come to fruition.
We believe that big recapitalisations will be a theme for the first half of next year, with good companies that have been under balance sheet pressure due to lockdowns raising equity.
3. Stay on standby for bank recaps
Looking towards the second half of 2021 and beyond, we may also start to see banks and other financial institutions tapping equity capital markets to cover Covid-related loan losses. Despite limited visibility at this stage, we think that small financial institutions will be more affected by the crisis, as many of their larger counterparts have already made provisioning efforts over the course of the year.
4. Mind the IPO queue
The pandemic has changed the face of IPO marketing, shortening timings and driving efficiency gains. Now that everything is digital, the marketing period has shrunk and we are able to reach up to 100 investors in three days. Previously, using the usual road shows, we’d have needed two weeks to hold the same number of meetings. Clearly, this is a welcome development and since conditions are so buoyant, many companies, especially those in e-commerce and technology spaces, are willing to approach the market.
This is one reason why we think that that next spring will see a crowded market window for IPOs. While the big stories will continue to hold investors’ attention, our strategic alliance with Kepler Cheuvreux, the broadest pan-European equity distribution platform, will allow us to tap all pockets of demand for the smaller clients that make up the backbone of Europe’s economy.
5. March memories will matter in the risk game
A key feature of the market during 2020 was that there had not been a single overnight transaction backstopped by bookrunners until November. That theme will continue to a lesser extent, as in a bull market we’ll see strong issuers in a position to dictate terms. That will be a challenge, because it puts different stresses on the way we push things through the system, with the memory of March and April still front of mind.
For us, working on a best-efforts basis plays to our strengths as we can credibly demonstrate our strong distribution capabilities, which, combined with our local presence and product expertise, give us a deep understanding of both our clients’ needs and industry trends.