Corporate finance activity slides amid volatile markets and rising interest rates

Corporate finance activity across the country has fallen sharply over the past three months as volatile markets, rising interest rates and fears of recession reduced equity and debt subscriptions.

Canadian companies sold $2.8 billion worth of stocks in the second quarter of 2022, down 78% from the same period a year ago, according to statistics released Wednesday by data service Refinitiv. . Corporate debt offerings fell 67% quarter-over-quarter to $7.7 billion.

The slowdown in domestic underwriting mirrors a global slowdown, with activity in global equity markets falling 67% in the first six months of 2022, setting a 17-year low.

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The only bright spot for capital markets is mergers and acquisitions, which are continuing at a breakneck pace. Canadian companies participated in takeovers worth $62.8 billion in the second quarter of 2022, up 7% from the same period in 2021. Globally, the year last set records for M&A activity.

The decline in equity and debt financings follows two years of record underwriting activity, leaving Canadian companies brimming with cash. When interest rates started to rise and stock markets fell – the benchmark S&P/TSX Composite Index is down 12% year-to-date – investment bankers said companies had the ability to weather the storm.

“While raising capital is certainly possible, most companies have strong balance sheets and will wait until valuations normalize and interest rates stabilize,” said Peter Miller, managing director of BMO Capital Markets. .

In the first six months of the year, Bank of Montreal’s securities brokerage arm, BMO-T, was the top underwriter of equities in Canada, raising $952 million for its clients in 16 deals. . BMO’s deals included one of the few initial public offerings (IPOs) completed this year, a US$169 million launch of mining company Ivanhoe Electric Inc.

“Our message to clients is to be nimble and be ready to act quickly if the markets are right,” said Miller, head of equity capital markets at BMO. He said corporate clients are realizing that many of the factors underlying recent market weakness – the prospect of an economic slowdown, Russia’s war in Ukraine and supply chain disruptions – are long-term economic problems that will take time to resolve.

In a sign of little activity, Morgan Stanley MS-N and Goldman Sachs GS-N rounded out the list of the country’s top five stock underwriters year-to-date, although Wall Street dealers did not lead only one transaction, an amount of $913.5. -million IPO of contact lens manufacturer Bausch & Lomb Inc. BLCO-N

In debt markets, investor demand far exceeds the supply of bonds from companies facing rising interest rates. Patrick MacDonald, co-head of debt capital markets at RBC Capital Markets, said that over the past three months, investor orders for new issues have been up to four times the amount of product available – a demand well above the long-term average.

“The market is open, don’t draw the wrong conclusion from the drop in new issues,” said Mr. MacDonald, an executive in the investment brokerage arm of Royal Bank of Canada RY-T. RBC Capital Markets was the top debt underwriter in the first six months of the year, raising $19.3 billion in 75 deals for corporate and government borrowers.

Faced with volatility in the credit market this spring, MacDonald said many CFOs have turned to bank lines or commercial paper programs for their borrowing needs. Looking ahead, he said companies should adjust to a new interest rate environment and resume issuing corporate bonds to pay for acquisitions and capital expenditures, and to refinance debt coming due. deadline.

Over the past three months, mergers and acquisitions activity has seen large companies snap up smaller competitors that have become cheaper when stock markets have fallen, Telus Corp. TT acquiring LifeWorks Inc. and Gold Fields Ltd. making an offer for Yamana Gold Inc. – M&A volume can only continue if the economic and geopolitical outlook stabilizes.

“Uncertainty is never good for mergers and acquisitions,” said John Emanoilidis, partner at law firm Torys LLP. which focuses on redemptions. He said trading activity to date has been “resilient,” in part because private equity funds and pension plans see opportunities to put capital to work.

JP Morgan was the top financial adviser for M&A deals in the first six months of the year, with roles in 12 deals valued at $33 billion. Torys ranked first for M&A law firms, working on 21 deals worth $29.2 billion.

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