Even as market volatility peaked, bankers said they were not postponing any deal launches planned for the first week of September, when ECM activity typically picks up again in Europe, after the August lull. That response came with one large caveat, however — that if stocks stabilise, it’s all go for what is expected to be a very busy month of primary issuance; but if they don’t, the viability of many IPOs, block trades and convertible bonds could well be jeopardised.
So far, which way markets will go is anyone’s bet. “Too early to say,” was one ECM banker’s blank assessment on Thursday.
But, in doubt, some still see reasons to remain optimistic. Craig Coben, global co-head of ECM at Bank of America Merrill Lynch, told GlobalCapital: “A lot of hedge funds have lost performance in the recent correction, but many funds are looking for buying opportunities whilst the long-onlys have dry powder to accumulate into any weakness.”
He added: “I think by and large investors are wearing their ‘can-do headsets’ when it comes to new deals, especially if the issuers are high quality and have relatively low emerging market or natural resource exposure.”
Though the ill spread far beyond EM and commodities, those two components of the financial markets caused, and indeed remain the core victims of, this week’s global rout. The Shanghai Stock Exchange Composite Index, which by Friday August 21 had already fallen 32% from its seven year high in mid-June, collapsed even more abruptly this week, falling 8.5% on Monday alone and sending shockwaves across exchanges in Europe and the US. Euro Stoxx 50, an index of the 50 largest and most liquid stocks in the eurozone, was down 5.4% that day.
Middle Eastern stocks also took a hit, with the resumption of the fall in the price of brent crude oil — to its lowest point yet, at $42.69 a barrel on Monday — piling extra pressure on already weakened markets.
The Tadawul All Share Index was down 6.9% on Sunday, an open day in Saudi Arabia, and a further 5.9% on Monday.
In a sense, though, this week’s crisis could not have come at a better time. Few among ECM bankers and investors had expected a substantial deal to come this week. A number of syndicate bankers will only return in early September, and some will only make their way back to the office after Labor Day in the US, on Monday September 7, one banker predicted.
In other words, the market meltdown did not derail ECM activity this week for the simple reason that, in late August, there is no ECM activity to derail.
As Luis Vaz-Pinto, global head of ECM at Société Générale, said on Thursday: “If a storm there had to be, it is better that it happened in August than in September, when transactions are already under way and issuers are already committed. Firms can now think about what their options are and go ahead if they wish to.”
Dark mood
But the crisis across stock exchanges worldwide over the past few days has darkened the mood in what is usually one of the most pumped up weeks of the year, when bankers build up momentum for a wave of new deals, and hope to add volume to an otherwise desperately quiet third quarter.
As a result, the tone is more tentative this time round. “If the volatility doesn’t last, which is a big if, the volume will be there in early September and people will forget about it,” said one ECM banker at a large French bank in Paris.
The banker added: “The question is will it or will it not last? Because there are a lot of reasons for it to last. I see no reason why it should improve. There is a slowdown of the Chinese economy.”
But even this banker, who defined herself as a pessimist, said she had not yet made any changes to her September pipeline.
Another ECM banker, in London, said her bank expected to launch a couple of IPOs in the first week of September, as planned. She said discussions with prospective issuers remained positive at this stage, focusing on how to make deals work in a potentially difficult environment rather than on altogether cancelling transactions.
The end of the third quarter, as well as the fourth quarter, of 2015 are widely expected to be busy, and to include some large IPOs.
Among the firms lining up are Worldpay, the UK payment processing company, which could float in London with an initial market capitalisation of £6bn, and Ferrari, which current owner Fiat Chrysler intends to spin-off in New York with an IPO valuation of about $10bn.
Just this week, NL Financial Investments, the organisation that handles the Dutch state’s shareholdings, selected bookrunners for the much-hyped Amsterdam listing of ABN Amro (see separate story). That IPO could fetch close to €5bn.
And the UK government could resume its sell-down of Royal Bank of Scotland shares before the end of the year. The first chunk, of just 5.4% of RBS stock, raised £2bn, and HM Treasury has much still to sell.
The Chinese connection
On the whole, bankers expect the deals they intend to launch in September to go ahead unimpeded by the recent crisis. But those prospective issuers that focus on natural resources, or rely largely on exports to China, could well be too far weakened to come to market any time soon.
China is one of the world’s largest consumers of commodities, and any reduction in Chinese consumption hits producers and manufacturers the world over.
One ECM banker listed natural resources, autos and luxury goods as three sectors that may struggle if they try to bring deals next month.
Asked if Ferrari’s IPO may be affected by the downturn, the banker said it could. A banker at one of the bookrunners on Ferrari's deal said it probably would not be affected, and that luxury products such as handbag or clothing makers would be more likely to suffer.
Other sectors, such as healthcare, look strong even in the face of Chinese market uncertainty, the first banker said. That could be good news for Georgia Healthcare Group, for instance, which intends to float on London’s main market in either September or October. That deal could value the healthcare group anywhere between $400m and $600m.
But bankers acknowledged that, if stocks don’t by next month recover all of the losses they incurred early this week, it could affect deals across the board. Blocks could raise less for the same amount of stock sold, and IPOs could muster lower valuations than hoped.
If bank stocks do not fully recover, for example, that could theoretically affect ABN Amro’s IPO valuation, as investors could point to depreciated stocks as benchmarks. ING, one of ABN Amro’s comparables, was down to its lowest level since February on Monday — at €12.47 a share. Another potential comparable, Belgian bank KBC, was down to €54.38, its lowest level since early March.
Luis Vaz-Pinto said: “I think it [this week’s volatility] will have some impact. Clearly people are going to be looking at valuations, and it’s clear that in certain markets, valuations are not what they were a month ago before people went on holiday.”
Rebound
On Thursday, markets rose once more — not back to their pre-collapse levels but up enough to restore some confidence. Shanghai was up 5.3% on the day, while in Europe, Stoxx 50 rose 3.5%.
S&P500, the American stock market index, was up 2.1% in the morning, aided in no small part by the US Department of Commerce release of better than expected GDP figures for the second quarter of 2015.
Even crude brent was up, to $46.6 a barrel, helping a partial recovery across Gulf exchanges. By Thursday evening, the Saudi exchange had recovered Monday’s losses, though not Sunday’s.
The slowdown of China’s economy and a persistently low oil price will continue to weaken Asian markets and oil-producing states in the Middle East and beyond, but with some positive data out of the US and Europe, ECM bankers think the fundamentals are strong enough to support deal flow.
Even on Monday, which was by far the worst day of the month, one banker in London had refused to rule out block trades this week. Perhaps encouraged by the last volatile period in European stocks — the height of Greece’s debt crisis in the early summer — during which some IPOs were cancelled but most pulled through, he remained bullish about the near future.
But so far this week, no one has yet attempted to sell a block of shares.
And so all eyes are still on September. As the ECM banker in Paris put it: “The big test is next week. There is quite a lot to come, so it is very important to see how things evolve.”