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Famine to feast: ECM rebounds after torrid 2016

Gareth Gore

22 May 2017

White Bengal tiger. Photographer: Jaime Saldarriaga
White Bengal tiger. Photographer: Jaime Saldarriaga

Equity capital markets bankers are breathing a collective sigh of relief after a flood of recent deals produced a welcome turnaround for the asset class that last year suffered its worst year for underwriting fees since 2003.

A flurry of deals including a €13 billion rights issue from UniCredit and the US$3.4bn listing of Snap have swelled ECM team coffers, earning banks US$5.3bn in underwriting fees for the quarter — almost double what they brought in a year ago.

“ECM is a notoriously lumpy business, but this year we are off to a flying start,” said Craig Coben, global head of ECM at Bank of America Merrill Lynch.

ECM visual quotation

“It’s been a perfect storm of strong markets, low volatility and better economic data. A few issuers delayed stuff last year, and that has been coming through.”

A rebound in the United States, where optimism over Donald Trump’s tax reforms has spurred a rally in equity prices, has driven much of the rise in fees.

IPO proceeds at US$10.3bn are 20 times what they were a year ago, with bankers saying the market has come alive.

ECM offerings over the past 21 years
Q1 Overview: ECM offerings over the past 21 years

U.S. turnaround

It is a big turnaround for issuance from the country. New York has traditionally been the pre-eminent location for companies from all corners of the globe to list, but last year not a single one of the biggest 10 IPOs chose it as a venue.

ECM visual quotation

Much of that was down to bad luck, as volatility hit markets at the worst times last year, right in the windows where companies could list. With stock markets buoyant again, however, many companies that had delayed deals are coming out of the woodwork.

“The rebound in U.S. activity has been the story of the quarter,” said Mark Hantho, global head of ECM at Deutsche Bank.

“A year ago was a real low point for the industry and, although none of us had any doubt it would come back, to have a market that is so receptive is a big relief.”

“The recovery has been extremely broad based, it hasn’t just been a tech story,” he said. “We’ve seen a number of big IPOs across various sectors and plenty of follow-on activity from the energy sector. In addition, SPAC issuance has really picked up.”

Q1 2017 Top 10 IPO choices

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UK weakness

But activity has not been strong everywhere.

UK business has been hit by uncertainty around Britain’s decision to leave the EU, with companies seemingly reluctant to list with so much yet unknown. The country has had its worst start to any year for IPO proceeds since 2012.

Fees are up in all regions — by a whopping 70% in both the Americas and the Asia-Pacific region including Japan. In EMEA, fees are double what they were a year ago, although a big chunk of the rise is down to the UniCredit fees, which are over €300 million.

UK IPO proceeds and deals over the last seven years

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Indeed, with chunky fees on Deutsche’s own €8bn rights issue and a mooted multi-billion Swiss franc equity raise from Credit Suisse, EMEA could be set for a strong second quarter. Once-dormant markets such as Spain and Poland are also coming back.

Fees ($MM) over the last five years

“The second quarter historically is the strongest for equity issuance as you can launch on the back of not only full-year numbers, but first-quarter numbers too, which can help the deal,” said Coben. “We’re expecting recent levels to continue over coming months.”

Quarter performances of proceeds and deals

Challenges ahead

But there are potential challenges to that view.

The rally in equity markets seems to have stalled as investors begin to wonder whether Trump will be able to enact hoped-for reforms. The S&P500 has struggled since hitting a record on March 1, including its biggest one-day fall in eight months.

In addition, the pipeline of deals may not be as strong going forward. Many of the deals that were delayed last year have since come to market, and recent exuberance has brought forward many deals that had been expected later in the year.

Hantho expects the second quarter to slow slightly, with a possible pick-up in the second half.

“The market has been so strong that we aren’t just seeing deals that were delayed last year coming through, but we are also seeing a number of deals being pulled forward,” he said.

“Issuers are keen to take advantage of these conditions while they last.”

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