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Sunday, 19 November 2017

IFR European ECM Roundtable 2015: Part 1

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IFR: So we should begin with a sense of where we are as we meet at the end of June. Suneel, how is the market right now?

Suneel Hargunani, Citigroup:  I think the word on everyone’s lips at the moment is Greece and related headlines moving the markets, but actually if you strip that back, the primary market has been pretty resilient and we are coming to the end of the pre-summer wave of IPOs with very little collateral damage.

The market volatility that you read about and see in the headlines and in the index moves haven’t necessarily impacted the primary markets, so as we all sit here we have all had healthy pipelines that we have been executing. The IPO market has been resilient. I’m sure we’ll talk about that in more detail.

But also the future looks bright, there’s a lot of origination and pitching going on. We see a lot of big cap IPOs coming in the second half and the beginning of next year, so in terms of the numbers I personally feel that it’s sustainable. We are halfway through the primary bull market, so to speak, so despite all the concerns in the market in terms of volatility, investors have been very receptive to the primary product. IPOs have not only priced and been comfortably covered, they have traded well, in light of the market volatility. That gives me comfort because it means the IPO product is serving what it is there to do, which is effectively being priced on a fundamental basis, and that fundamental discount versus public comps is being narrowed in spite of market volatility – so it feels good at the moment.

IFR: One thing that seems remarkable is that despite volatility there haven’t been any periods where nothing can happen. Last year there were closed periods, but this year it seems there is just a pivot between products, so accelerated bookbuilds this week, maybe a glut of convertible bonds for a few days and then we’ll switch to IPOs and then back to ABBs, but never actually a period where nothing can get done. The market seems to have been open for something all the time.

Steven Halperin, Barclays: Yes, I think that is right. I mean convertibles – there have been fewer transactions, but obviously a decent volume because there have been very large transactions. I think for those it will continue to almost always be open and, if anything, be an offset to the market, or an inverse to the market because they’re betting a bit on volatility picking up, a bit on yield and the defensive nature of the bond with downside protection.

The IPO calendar is obviously dictated by the length of the process, plus the summer slowdown and the UK elections earlier this year.

I think the two big differences are where you see rights issuances and block trades. Block trade volume was very high and running at 50% of the total volume in the first quarter and it has since trailed off materially. That is exactly a result of the risk that’s out there. Banks and investors don’t want to take that day-to-day risk at tight discounts to buy blocks, and I think sellers are not looking to hit the button with the recent weakness that we’re seeing. So I think that’s leading to that decline.

Then rights issuances and some of the capital increases are obviously driven by the M&A activity. It’s a bit of a lagging indicator, so we now have some acquisitions clearing through the market and in good shape, but then that will probably dissipate as you have this uncertainty unless there are other acquisitions announced.

So yes you are right they tend to come to the market at different times but they’re each episodic in their own ways in terms of the issuance drivers.

IFR: why is the market just so vibrant Sam?

Sam Kendall, UBS: I think there is better pricing at the moment where people are being more sensible about pricing risk – and when you’ve got sensible prices, deals clear.

Journalists love writing about Grexit, but Greece first impacted the capital markets in 2010. I remember working with Suneel on the IPO of Travelport [in February 2010] which was like a super tanker and this thing was going nowhere, and that was the first [victim]. [The deal cancelled in February 2010 citing volatility triggered by the first rumblings of the Greek debt crisis.] So we’ve been dealing with Greece for five years.

Markets are not now closed. The fundamentals are pretty strong, particularly in Europe and the US, and people are happy to buy equities – valuations are there when people want to sell equities.

The IPO market has been a bit quiet globally, down 20%, and that’s largely because private equity had a lot in their portfolios [in 2014] that were left over from the financial crisis and the new wave of investments are not quite ready to come out.

You will see the IPO market pick up probably towards the back end of the year globally and in to 2016, but IPOs have been a bright spot in Europe. There’s a lot going on.

IFR: Valeria are you seeing the same? When you talk to potential issuers are they asking just how quickly they can come to market?

Valeria Ceccarelli, SIX swiss Exchange: We have seen, including for Switzerland, a good year so far. We had one of the biggest IPOs in Europe and at the time globally [Sunrise Communications completed a US$2.5bn-equivalent IPO on SIX Swiss Exchange in February] and I think big IPOs are among the key themes of the first quarter this year together with PE-backed IPOs in Europe, that represented a relevant percentage of all IPOs. Sunrise was a successful big PE-backed IPO. We also have two SIX Swiss Exchange IPOs recently announced.

We are seeing more potential issuers considering the IPO market and of course they are asking how long the positive window is going to last. It is not easy to answer but in general I believe that the outlook is quite positive and people are still confident, if there is the right equity story there.

Private equity firms will keep their options open because M&A has also been quite active, and we have seen transactions that could have become IPOs not happen, but on the other hand we also saw increased follow-on and right issues [triggered by M&A], including on the Swiss market: a relevant example this year has been Dufry.

[Airport retailer Dufry raised SFr2.2bn (US$2.4bn) through an at-market rights issue in June to partly finance the acquisition of World Duty Free.]

IFR: Does it make it easier that Greece is a recurring issue which the market has shown it can digest? Interested clients can see weakness does not collapse the issuance window.

Ceccarelli, SIX Swiss Exchange: With a good number of transactions on the markets, on the one hand you have case studies that you can show, and of course people want to see concrete examples. On the other hand everybody’s asking ho1w long the window is going to stay open. Overall I believe the atmosphere is still quite positive.

Of course there’s a lot of uncertainty linked to geo-political issues, but we are more and more used to living with uncertainty. Maybe the bankers can comment on the fact that every day there is a new headline coming out.

Kendall, UBS: One of the things for the IPO market is that it is not whether markets are open or closed, but if you look at what’s going on in the US in pre-IPO private placements there’s so much cash floating around there that people can raise capital without coming to the public markets. I think that raises a question for all of us from the exchanges through to the banks as earlier stage capital raising is slightly delaying [IPOs].

If an investor is buying a company and it’s not in the public market, it hasn’t got a mark. As there is volatility, that’s quite attractive. You’re starting to see the embryonic stages of that happening in Europe, and a little bit in China, but it will be interesting to see if it does transition from the US.

Jens Voss, Commerzbank: Sam already mentioned earlier that Greece is perceived differently than back in 2010-2011 and we have a different environment: much lower interest rates, low oil price and low euro all are very supportive, so the fundamentals are there.

We currently see a very short-term jump in equity volatility in the European market, completely contrary to the US where it’s around historic lows. You see the switch in the sub-product so less overnight ABB transactions in recent weeks, but everything that has a longer horizon or has a wider bookbuilding range as in the IPO, the overall trends seem to be absolutely intact. Yes there is short-term uncertainty and everyone wants to see some type of solution, but it’s not perceived as the fundamentally big issue that it has been before.

IFR: One of the issues in previous years with IPOs is that waiting for the point where the market is good and the time it takes to launch and price an IPO means the market could turn again. If you are not, as Sam said, worrying so much about windows, presumably that makes it easier to keep the pipeline going.

Halperin, Barclays: Yes I think that’s true as long as the deals we bring to market are rational in terms of pricing and sizing, and the calendar continues to perform. The IPO calendar has performed recently so that keeps investors interested. Investors are out there looking for alpha and that’s a good way to find outperformance. So as long as that performance continues and we are rational in what we bring, it should work. The other thing that will help it to continue to work is the private equity bid that continues to take selective big deals out of the supply. One, it puts a floor on valuation and two, it does create some competition for the supply that’s lining up.

Luis Vaz Pinto, Societe Generale: I think one of the things that is different now in terms of how we do IPOs compared to two or three years ago is people start marketing to investors much earlier. For example on Europcar, which we are pricing tonight, one particular investor had three cornerstone/pre-IPO meetings before actually seeing them on the roadshow. Since you started with them at an earlier stage, that means if there is some volatility in the market the investors are less frightened because they’re that much more comfortable with the company at hand.

One of the nice things for the market is that you’ve had companies like Spie, which could not get past the finish line at the end of last year, got done very successfully despite fairly volatile conditions and part of the reason for that was the dialogue with investors that continued in to this year. As the company continued to tick boxes, despite the volatile environment, investors were much more comfortable engaging.

Apologies for my delay; [Vaz Pinto arrived late] we were actually launching a small block, so the markets are open despite what is happening in Greece. I hear that Greece has not had much impact, but actually if you look at the statistics where Europe is the only region around the globe that is actually down in terms of issuance, it has. European issuance is down 7%, the US is up 11%, Asia’s up 40%, and that’s despite massive quantitative easing – if things are so great, what’s the negative there? So I actually happen to think that the volatility has played against us in terms of issuance.

Kendall, UBS: Europe had a big issuance year last year and Asia didn’t. Asia looks great because it’s coming off a low base, Europe looks a bit sad, because it’s coming off such a high base.

Voss, Commerzbank: I would have argued along the same lines. When you look at the sub-products, rights issues were commanding last year, particularly with the big bank refinancings going on and that would explain quite a bit of that effect.

Kendall, UBS: The big rights issues last year were recapitalisations, if you look at the big issuance this year, Banca Monte dei Paschi di Siena is the only one which is a recapitalisation, everything else is acquisition financing and growth, and that’s one of the reasons I feel optimistic despite the drop year-on-year – Europe feels like it wants to raise money, it wants to spend money, and with M&A there follows equity issuance at some stage.

[BMPS raised €3bn through a rights issue in June to fill a capital hole identified in the asset quality review and stress tests in 2014.]

Hargunani, Citigroup: Yes I agree with that. Also if you look at the composition of the IPOs, and the point was made in relation to Sunrise, there haven’t been too many billion plus deals, whereas you can point to quite a few that are going to happen in the second half, be it Poste Italiane, the Italian privatisation, numerous spin-offs that have been announced from Bayer [spinning out its plastics unit MaterialSicence] and Amundi. All of these are going to be probably billion-plus raises. So in terms of volume a lot of the IPOs have been mid-cap flow, and I can see the average IPO size increasing in the second half given what’s in the public domain in terms of companies that are looking to IPO.

It may come to your point in that the IPO window is definitely open, Europe’s normally a bit slower and private equity firms are quicker to hit it, whereas governments or corporates that are doing spin-offs are a bit slower.

Kendall, UBS: On Luis’ comment earlier about earlier-look marketing, I think we’re all doing it. We floated a company in Hong Kong for CVC, Hong Kong Broadband (HKBN), and the CFO was on the road for two years before the IPO. That’s one bookend. I’m not suggesting we all move to two years of early marketing, but he’d seen 400 investors by the time of the IPO, and it just meant that everyone was more comfortable. I also think that we’re less worried about pulling an IPO at some stage, and journalists write about it less, too. So there’s less stigma from investors and in the press about IPOs at some stage being put back on the shelf.

You talked about Sunrise, we went and saw investors on that at the back end of last year. If we thought the window was there we probably would have pushed the button. It wasn’t, but there was no stigma about bringing it back. There wasn’t this, “Okay, we need a bigger discount” response, and I think that’s also led to the windows being open. We’re taking a lot longer, and because of that we have a little bit more flexibility about trying to find that window because we’re not trying to compress it into four weeks and hoping the market’s open when we push the button.

IFR: We referenced Spie there, that deal was cancelled at the end of last year, came back with a very different structure yet ended up being not that dissimilar to what it was before. [Secondary selling by existing shareholders was scaled back upon re-launch but much of this had been reinstated by pricing.]

At one point in June there were 32 IPOs live in EMEA employing 44 different banks as bookrunners, yet we’ve had just a handful of cancellations. I think it’s therefore fair to say those were fairly specific situations rather than systemic weakness.

How have so many deals been able to coexist without more being squeezed out? Have IPO structures improved? Valuations improved? Or is this thanks to the early-look meetings? Or is it just the market is great, and when it’s great people will pay for, you know, people can find the right price?

Kendall, UBS: It’s a little bit of everything. I think because we’re engaging earlier we’re able to get it right on structure, right on valuation and I think because valuations are high sellers are a little bit more forgiving around discounts. They’re not trying to squeeze out the last dollar because the absolute return that they’re getting is actually quite high. Where markets are rallying, inflows into equity funds is big and if someone can buy something at a 10% discount, or a 5% discount, when chasing alpha, that’s attractive.

Hargunani, Citigroup: I agree with that. One key thing that needs to remain is price discipline. The IPO market unravels quite quickly when you see a raft of deals that have been postponed, or trading down, because the IPO product, by definition, is a confidence and momentum product as well. What we saw last year, for example, with all the UK mid-cap deals was a lack of proper understanding, you could argue, and more of a momentum liquidity event where deals were getting covered on day one, pricing at the top, and surprise, surprise not necessarily trading that well.

So this year there has been price discipline from the buyers, and also recognition from the sellers that there needs to be realistic ambitions on price. Whilst that maintains, in addition to the fact that we are seeing quality assets coming to market in an environment where there are good companies that are offering growth or yield, or both, the IPO market will continue to stay strong.

But I actually think the summer break is coming at a good time, because I do feel that everyone is looking at IPOs as a portfolio approach and that could become quite dangerous, but at the moment things feel healthy, and people are actually investing on fundamentals, which is good.

Vaz Pinto, SG: The French market is a good example of that. There were three cancellations, admittedly not very large ones and the equity stories were not very strong, but it was too early stage for those companies to come. Yet that has not affected the flagship deals moving ahead, and pricing and trading very successfully. So, as Suneel says, there’s been much more discipline – from the investor side as well, in terms of looking at things and saying, “No thank you. We’re not going to go for this one”.

IFR: When there has been so much out there, and very little of it could be argued to be a must have, has it been in any way challenging to get investor attention to smaller, but maybe more interesting deals? Jens you have German Startups which falls into that category.

Voss, Commerzbank: Yes I do actually believe it’s more driven at the moment by the continued theme of hunt for yield. You do see more general interest in the asset class, and that is across any sector or region. We see periphery doing as well as core Europe. So in the end it looks like more fundamental strength.

Now, of course, it has been a little bit disturbed by Greece discussions, but nevertheless, as I said before, people look at equities overall, and we saw again in the last few weeks in particular a mini rotation with new money flowing in to equities, just for that reason.

Halperin, Barclays: Yes and I’d say Banca Sistema, that we’re in the market with right now, is a good example of that. That deal is going very well despite being a niche sort of business and a small size, but investors are very engaged, and it’s well covered so I think investors will look at everything that’s out there to find the right transactions that work.

[Italian debt factoring company Sistema successfully completed its €146m IPO in early July and had traded up 15% by mid-July.]

 

To see the digital version of this roundtable, please click here.

To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com

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